Who gets the most subsidy in housing?

Originally posted on November 21 on my blog for Inside Housing. 

A report out this week comes as close as we are probably going to get to answering one of the most vexed questions in housing: who gets the most subsidy?

Feather-bedded home owners sheltered from the tax paid on all other forms of investment? Social housing tenants who don’t know how lucky they are to get a tenancy for life at a subsidised rent? Fat-cat landlords lining their pockets with housing benefit? Housebuiders trousering huge Help to Buy-financed bonuses? The answer has changed over time.

From the 1960s right through to the 1990s the focus was on home owners as billions of pounds worth of mortgage tax relief was paid out, despite the fact that the tax it was relieving (on imputed rental values) was abolished in 1963.

For supporters of council housing and independent analysts alike, mortgage tax relief became a symbol of everything that was wrong with housing finance, an indiscriminate subsidy that benefitted the better-off and inflated house prices.

For Conservatives and supporters of a home owning democracy, it was a symbol of their commitment to extending the benefits of ownership and the independence and security that were said to go with it.

In 1986 the abolition of mortgage tax relief was the key recommendation of an independent inquiry into British housing chaired by the Duke of Edinburgh but prime minister Margaret Thatcher firmly rejected the idea.

It was only after she left office that the Treasury finally began to cut the value of a relief that peaked at almost £8 billion in 1990 and it was phased out before finally ending in 2000.

But that was not the end of the argument about who gets the most subsidy in housing.

The level of so-called economic subsidy paid to social housing tenants (basically the difference between social and market rents) was one of the justifications for moves to increase social rents from the 1970s right through to the 2000.

And it became one of the driving forces for coalition policy after 2010 as right-wing think tanks argued for market rents and fixed-term tenancies for everyone except the elderly and most vulnerable.

The assumption behind all of that was that housing benefit would ‘take the strain’ of higher rents but as the bill steadily escalated attention turned to the huge sums paid to private tenants that were effectively subsidising their landlords.

Unlike home owners, landlords pay capital gains tax when they sell their properties as well as income tax on their rental income, but they can also offset their costs against tax. Successive Budgets have now cut the amount they can claim.

As for housebuilders, former Persimmon chief executive Jeff Fairburn became the public face of the controversy over Help to Buy with a bonus that could have been worth up to £100 million but plenty of other executives have climbed aboard the gravy train along with shareholders in the leading companies.

Put all that together and you will see that the task that Steve Wilcox and Peter Williams set themselves of assessing government intervention in housing in the round is far from straightforward.

They only claim to have come up with a crude answer in a new report published by the Chartered Institute of Housing (CIH) but it is still a startling one.

Over the five years to 2020/21, private housing will benefit from £83 billion worth of government support or £16.8 billion a year

Of that, £39 billion goes to affordable home ownership and private renting via a range of different schemes including the different versions of Help to Buy – although three-quarters of this is in loans and guarantees rather than grant. Another £44 billion will come from housing benefit

By contrast, support for social housing and social tenants will run at around £20 billion a year, with three-quarters of that coming in housing benefit.

However, that is not the end of the story and you have to include tax and tax reliefs for a broader answer.

Home owners paid just under £11 billion in inheritance tax and stamp duty in 2016/17 but they got back almost £40 billion in tax reliefs (by being exempt from tax on capital gains and imputed rents), leaving them receiving a net tax gain of £29 billion.

By contrast, private landlords paid net tax of around £8 billion. Even when you add around £1 billion in loans and guarantees for development and £9 billion in housing benefit, that means the private rented sector is almost in a financially neutral position and could become a net contributor as new taxes are introduced.

A broader assessment for social housing concludes that adding housing association borrowing and the economic subsidy from social rents would take total support to around £30 billion a year.

However, that contrasts with total support for the private sector of £38 billion a year.

If the answer to the question I posed at the start of this blog seems clear — home ownership is the most subsidised tenure – the bigger question is what this should mean for housing policy in the future.

Arguably, even the figures in the report do not give the full picture: all that subsidy has helped deliver house price gains for existing owners that make ownership more expensive for new ones; and record low interest rates have reduced mortgage costs, with ministers justifying cuts in housing benefit in the name of keeping them low.

The irony is that home ownership has shrunk since what was seen as the biggest subsidy to home owners (mortgage tax relief) was abolished.

And Peter Williams and Steve Wilcox conclude that the long-term decline in ownership could lead to a tripling of the number of retired households in private renting in receipt of housing benefit at a cost to the government of £3 billion a year.

Their point is that the continuation of current tenure trends is not cost-neutral for the government because of the costs that go with them.

That means that looking at supply alone will not be enough to fix ‘the broken housing market’ – we also have to look at the whole range of subsidy and taxation arrangements and consider the way that the government supports housing in the round.

And that in turn raises the question of whether we are spending resources and raising taxes on housing as effectively and fairly as we can.

At a time when, as the CIH’s Terrie Alafat points out, just 21 per cent of government investment is going to affordable housing, the answer to that one seems pretty clear too.