Keep your friends close – Part 2

Originally posted on November 30 on Inside Edge 2, my blog for Inside Housing

Part 1 of this blog looked at the apparent winners and the big losers from George Osborne’s announcements last week. But there is one more group lurking on the edges of the playground, ostracised by virtually everyone. What happened to George’s well-heeled former chums should be a warning to everyone else.

Buy-to-let landlords and second home owners thought they had worked hard, done the right thing, bought a house and then another (and another). Contrary to what everyone said about them driving up house prices and destroying local communities, they thought they were providing desperately needed homes and helping pay for local services. They thought the Conservatives were on their side after they blocked a Labour tax rise on second homes in 2010 and kept buy to let out of European mortgage regulation in 2013.

They thought George was ‘one of us’. After all, he made £450,000 profit on his taxpayer-funded second home and rents out his main home for £10,000 a month while he lives in Downing Street. And they voted Conservative in May when those horrible Labour oiks planned rent regulation and a mansion tax.

Their thanks for all this? Sand kicked in their faces with cuts in tax relief in July and the Chinese Burn of hikes in stamp duty and capital gains tax in November. The fate of these entrepreneurs and investors turned enemies of aspiration should be a warning for all those who are currently part of the Osborne in-crowd.

The smarter housebuilders have already realised that they are now on the spot. All those previous billions have delivered a modest increase in housebuilding but a much bigger rise in margins, profits and share prices. Now they really have to deliver on numbers and on quality (the recent Despatches documentary could be just the start of a media backlash and it wouldn’t be beyond George to rat on them to the teachers).

Most immediately, two of their main sources of forward finance for development (off-plan sales of apartments to landlords and section 106 sales to housing associations) could be about to disappear and the third (sales to overseas investors) is deeply unpopular.

As for the longer term, they remember the boom and bust of the 2000s only too well, when they were stuck with homes they could not sell and sites they could not develop. Government intervention saved them then but the industry is already dependent on Help to Buy for around a third of its sales of new homes. As that dependency increases, will that level of support stay forever?

As house prices rise, so too do the risks of another crash. Brandon Lewis may say that home ownership is being extended to the poorest households through a combination of Help to Buy and Starter Homes but many people will remember the contribution that stretching home ownership too far made to the financial crisis  Housebuilders are going to have to decide how much risk they want to carry.

As for housing associations, they’ve already seen what can happen if they try to say No to George. Doing what they’re told seems to have paid off so far but they know the Treasury still has its beady eye on salaries and surpluses and inefficiencies. The more ambitious will hope for more more commercial freedom and the chance to grow and diversify under the government’s deregulation plans.

They will also worry about the risks and their prospects as landlords with falling rents and restricted housing benefits. And they will wonder how they will be able to fulfil their social purpose and deliver homes for people excluded from the market.

The more cautious will look at the fine print of the Spending Review and worry about that ‘doubling’ of investment. They will note the conclusion of the school inspectors (the Office for Budget Responsibility) that: ‘Grants are now back-loaded, with cuts in 2016-17 and 2017-18 offset by increases in subsequent years – particularly 2020-21.’ This amounts to a promise of more grant but not a guarantee and note that there will almost certainly be another Spending Review before that increased funding comes through. And will all of the grant be new money for housing, rather than the recycled proceeds of forced council house sales?

After a Spending Review that was better than most of them feared, these points should make the current members of the in-crowd wonder whether it is quite as good for them as it seems. For all George’s extravagant claims about the biggest housebuilding programme since the 1970s, the OBR also concludes that housing associations will build 34,000 fewer new affordable homes as a result of his decisions this year.

Everyone in the playground knows that if (when?) George’s latest housing revolution fails, he will want somebody to blame. And he won’t be looking in the mirror.