Four decades of failure

Posted: January 19, 2023 | Author: julesbirch | Filed under: Housing benefit, Rent control, Social housing |Leave a comment

Originally written as a column for Inside Housing.

Why has housing become so unaffordable over the last 40 years?

The answer, according to new report for the Joseph Rowntree Foundation (JRF), is cuts in housing subsidy that represent ‘a massive shift in who pays market housing costs, from government and landlords onto tenant’ since 1979.

It’s the scale of the shift, rather than the shift itself, that is striking.

Back at the start of Margaret Thatcher’s first term, social and private renters alike were paying around 10 per cent of their incomes on rent. By 2020 that had risen to 25 per cent for social renters and 30 per cent for private renters.

The shift is represented in a graph that Ian Mulheirn, who co-authored the report with colleagues James Browne and Christos Tsoukalis from the Tony Blair Institute for Global Change, calls ‘one of the most striking’ in public policy:

They calculate that if housing subsidies had been maintained at 1979 levels as a share of total housing costs they would have been worth £45 billion 2019/20 rather than the actual £31 billion.

This ‘generational housing costs squeeze’ is the result of massive change in three elements of housing subsidy: social housing; housing benefit; and rent controls.

That is the result of the accumulation of many different policies over time: cuts in investment in council housing and higher council rents; private finance and higher housing association rents; the deregulation of the private rented sector; and rapid increases in housing benefit to ‘take the strain’ of all that followed by the cuts imposed under austerity.

By looking at subsidy as a whole (though not that for home owners), the analysis also shines a light on government claims that housing benefit has been ‘out of control’. It’s true that the spending has risen rapidly but this is as a direct result of reductions in the other subsidies that have driven up rents. This graph of subsidies as a share of total rent makes the point clearly:

The impact has been felt across the income distribution. This graph shows the change in the distribution of the three subsidies for renters in each income decile as a share of their market rent:

The elimination of subsidies for the richest households thanks to the end of rent controls and richer council tenants exercising the right to buy is striking but the impact at lower income levels is just as stark.

As they point out: ‘A reduction in the subsidy received by the second income decile [ie the next to poorest 10 per cent] from 86 per cent to 70 per cent of the market rent represents a doubling in the housing costs they have to pay out of their own pocket. This explains why housing has become significantly less affordable for lower-income groups over the past 40 years.’

Two conclusions flow from all this. The first is that the squeeze on housing subsidies fully explains the deterioration in affordability for renters over the last 40 years and ‘that the crisis of housing affordability is one of redistribution, not a lack of anything’

That’s important because it contradicts the case put forward by successive governments that an inadequate rate of new housing supply is to blame for pushing up the cost of housing.

If that will be controversial for those wedded to supplyist solutions, it was always unlikely that supply would increase by enough to make a material difference to affordability on its own.

Bear in mind too that the government has all but abandoned its target of 300,000 new homes a year by the mid-2020s in response to the Tory backbench rebellion on planning and that housebuilders are already scaling back their production in response to the housing market slowdown. 

The second conclusion flows directly from the first: if the fall in subsidies is to blame then ‘there is no credible route to significantly improving affordability that does not involve rebuilding some of these support systems’.

So what is the best mix for housing subsidy? They reject the reintroduction of rent controls on the basis that this would recreate many of the problems they caused but argue strongly for more social housing and more generous housing benefit.

And they say that subsidy should be considered in terms of the impact on stability of tenure, work incentives, tenant choice and cost to the exchequer.

For lower-income families with children and many disabled people and pensioners, stability will be a key consideration and social housing most appropriate.

Our current system does not remotely deliver that. This graph shows the changing tenure of of the lower-income half of households since 1979:

For some, like pensioners, the growth in home ownership has been marked but the share of working age households with children below median income who are renting privately has risen from one in ten to one in three as home ownership and social renting declined.

The report calculates that there were 1.9 million households in the private rented sector who would benefit from the stability of social housing.

An extra 500,000 social homes would be needed to get back to the 1979 level of social renting among lower-income families with children and an extra 225,000 social homes would be required to bring the share of working-age disabled people living in the private rented sector below 10 per cent.

Social housing is seen as the cheapest way to provide housing services and the best way to enhance work incentives but other considerations ‘put limits on its appropriate scale’.

Housing benefit can help households better suited to the private rented sector for whom choice and labour mobility are more important considerations – but only with reforms to reverse some of the cuts introduced since 2010 and introduce the ‘fairer private rented sector’ promised in the white paper. . 

Clearly few people reading this column will disagree with a report calling for more social housing and more generous housing benefit. What makes this one different, I think, is that this is being made as much on economic grounds as it is on the social grounds more familiar from studies of housing need.

What the report does not do is attempt to quantify the costs and benefits to the Treasury of such a large increase in subsidy or of the implicit switch from benefits to bricks – the cuts in subsidy were the whole point from that perspective and the mere mention of an additional 700,000 social homes will be enough to cause apoplexy.

But that way of thinking over the last 40 years is what has led us to our unaffordable housing, rising poverty and a failed housing system.

Maybe not by deliberate design – as the report points out, the plan in the late 1980s was to improve rental supply for young people and job movers, not for the private rented sector to become home to so many families with children – but as the result of an accumulation of individual decisions based on value for money that led to the opposite.   

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