The price of everything and the value of nothing

Originally posted on April 27 on my blog for Inside Housing.

Sometimes a conjunction of different news stories shines a new light on things and makes the obvious more obvious.

That’s exactly what happened this week when two excellent long read features on housing and a select committee report made me see familiar issues in a slightly different way.

The first was in Tuesday’s Guardian, an investigation by Holly Watt into the scandal of the privatisation of Ministry of Defence housing.

The big picture is that in 1996 the MoD sold its housing stock for military personnel to Annington Homes for £1.67bn and then rented them back at a big discount to market rates for 25 years.

That may have made short-term financial sense but the long term is a different matter altogether. The homes are now worth £6.7bn and the 25-year discount runs out in 2021. After that there is nothing to stop Annington charging full market rents.

The article is well worth reading for the details of how the financiers ran rings around the civil servants negotiating the deal and for the method they used to avoid affordable housing contributions when they wanted to demolish an estate and build new homes.

But what struck me really powerfully was that this was an extreme version of what’s happened with housing policy as a whole over the same period.

As with the sale of military social housing, Right to Buy sales, failing to invest in replacements and relying on housing benefit to take the strain of higher private rents may have generated short-term receipts for the Treasury but come at a huge long-term cost to the taxpayer.

The second long read was an investigation in the Financial Times on Wednesday about an epidemic of borrowing by local councils.

Inside Housing readers will be familiar with the way that councils have used arm’s length companies to move into residential property for sale and private rent. This was once frowned on by ministers but is now tacitly encouraged.

But what the article makes clear is this is just part of an even bigger splurge on commercial property. Up and down the country councils have bought shopping centres, offices, retail parks, warehouses, solar farms and country clubs. Some are even buying property outside their area.

That investment – £1.2bn last year and another £221m in the first quarter of 2017- is being driven by austerity as desperate councils seek ways to plug gaps in their budgets.

They can borrow from the Public Works Loans Board (PWLB) at around 2.5 per cent to buy properties with a yield of (they hope) 6 or 7 per cent.

John Plender’s article highlights the way that Spelthorne council in Surrey has borrowed £377m to buy an office park. With gross assets of only £87.7m, he says it has effectively become a property company with a sideline providing local government services.

But what if it all goes wrong? One fund manager says councils are ‘punting like drunken sailors’. Another says it’s ‘an accident waiting to happen’.

A downturn in the commercial property market could leave councils with assets worth less than their borrowings and having to repay loans for longer than the leases on them.

Residential property may seem less risky but a housing market downturn could leave them with homes they cannot sell or a glut of private rental homes they cannot rent.

I’m not sure about some of the details – for example, I don’t know that it’s really true that councils can borrow more cheaply than the private sector and this sounds like very imprudent prudential borrowing – but again what struck me was a wider point.

It is councils that are going on a credit binge but the process is being driven by Treasury decisions on austerity and facilitated by the rules it sets for the PWLB.

And the irony that will escape nobody here is that while the government tacitly encourages gambling on the property market it caps borrowing for one of the safest investments any council could make.

Investment in social housing would not just pay for itself over the long term, it would also cut the costs of homelessness now and save money in housing benefit in future.

Exhibit Three is Wednesday’s report on free schools by the Public Accounts Committee (PAC).

Most of today’s headlines are about the contrast between the splurge of spending on free schools and the squeeze in investment in crumbling existing ones but one particular bit caught my attention.

The Department for Education (DfE) plans to spend £2.5bn on sites for 500 more free schools between 2016 and 2022. Land buying on that scale puts it in the same league as the top five housebuilders, according to the PAC.

Up to now, the DfE has been spending well over the odds for sites, including ones that could have been used insead for housing. It’s since set up a specialist company paying people with property expertise more than civil servants to do the buying.

Another housing angle is that – surprise, surprise – housebuilders have been finding loopholes in Section 106 rules to avoid making financial contributions towards extra school places in areas near their developments.

But again a wider point struck me. Spending on that sort of scale raises all sorts of questions about what government is doing about land.

On the one hand it’s overpaying for sites for free schools and approving their construction even in areas that do not need more school places.

On the other it’s intent on selling off the land it already owns for housing. Previous PAC reports have expressed little confidence in the whole process. At one stage the Department for Communities and Local Government was not even monitoring how many homes were built on sites that were sold.

And even now, for all the airy promises about releasing enough public land for thousands of new homes, there is no focus on getting long-term value from a finite public resource and no attention paid to how affordable the homes built will be.

Those three different stories in the space of two days may be about very different things involving different government departments but the underlying theme is the same in every case.

When it comes to housing we continue to see the price of everything and the value of nothing.


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