Why housing fits the bill for Labour investment

Posted: December 8, 2023 | Author: julesbirch | Filed under: Affordable housing, Energy efficiency, Social housing | Tags: Labour |Leave a comment

Originally written as a column for Inside Housing.

The prospects for housing investment look bleak whoever wins the election – and that is looking on the bright side – but there was an interesting comment this week from the frontrunner to be the next prime minister.

The Autumn Statement found money for tax cuts from an implausible sounding freeze in future capital investment and squeeze on departmental budgets after 2025. This seems designed both as a pre-election bribe and as a trap for Labour.

Labour leader Keir Starmer duly refused to fall into it in a speech at the Resolution Foundation think tank in which he said that anyone who expects the party ‘to quickly turn on the spending taps’ if it wins power will come away disappointed.

That will trigger bad memories for anyone who can remember the early years of the last Labour government, when Tony Blair and Gordon Brown pledged to match Conservative spending plans in its first two years.

That was disastrous for the social housing budget since those plans included deep cuts that seemed unrealistic even to the outgoing Tories.

Labour has not been so specific this time around but the leadership is determined to show the same iron discipline about spending commitments as the party did before 1997.

The one exception is the pledge of £28 billion of green investment, some of it earmarked for home insulation, though even that has been steadily scaled back.

Keir Starmer was speaking at the launch of a Resolution Foundation report that details the scale of the economic stagnation seen since the financial crisis and steps needed to return to economic growth.

The report backs the case for homes and argues that high housing costs hold down living standards and push up inequality: ‘Unless more homes are built and housing support linked to rent levels, rising housing costs risk eating up many of the gains from growth: The share of income families dedicate to housing has doubled since 1980.’

It also points out that construction of social homes for rent fell from 40,000 a year in the 1990s to just 8,000 over the last decade.

That means expanding housing supply ‘needs to be part of any renewed economic strategy’ with the Tory and Labour targets of 300,000 new homes a year ‘a good starting point’ and reforms to the planning system a necessary precondition.

Returning to growth will mean higher rents and housing costs without building at sufficient scale in the right areas – but the paradox for Labour is that investment will be needed to kick-start that growth.

So far at least, the Labour logic seems to be that planning reform plus a new generation of new towns will lead to more market homes that will in turn generate more funds for affordable housing via a reformed Section 106 process.

This seems to me to be how deputy leader Angela Rayner could pledge ‘the biggest boost to affordable and social housing for a generation’ at the Labour conference without promising any new investment.

If that seemed implausible even at the time, it seems even less so after the scorched earth offered in the Autumn Statement even if Labour’s fiscal rules still leave room to borrow for investment.

But this brings me back to the interesting thing that Keir Starmer said this week. During the Q&A after his speech, he was pressed about the key role of public investment in boosting productivity and generating growth.

He was asked if he was still committed to the £28 billion green investment plan and increasing public investment.

‘I’m not going to shy away from the challenge when it comes to public investment,’ he replied. ‘We need to create the conditions for both public and private investment and that goes for the £28 billion as well.

‘What we want to do is have investment that triggers, and Rachel Reeves has set this out, a sort of three to one ratio with public investment triggering private investment by a ratio of three to one. That isn’t happening at the moment, it hasn’t happened for a very long time, because we haven’t created the conditions for it.’

This is, I think, a reference to the national wealth fund that is part of Labour’s green investment plans, with Rachel Reeves saying every £1 invested in the fund will have to attract at least £3 in private investment.

That seems quite a high bar and it sounds like another a way to dampen expectations about Labour’s spending plans.

But it immediately made me think about an example of public investment that already triggers the three to one ratio on private investment and has done for at least the decade. The public-private ratio on the grant that enables housing associations to raise private finance has comfortably exceeded 4:1 in England in the last three years and has been over 3:1 since 2012/13 (see figures here).

The obvious caveat to that is that this ratio is partly a consequence of cuts in public investment and making grant go further by replacing social rent with affordable rent.

However, ahead of the last election, under a very different prime minister and Labour leader admittedly, the National Housing Federation published a report modelling the capital grant required to meet social housing need in England between 2021 and 2031.  

Obviously we will be halfway through that period by the next election and the scale of the housing need identified – 145,000 social homes a year including 90,000 for social rent – will only have increased in the last four years.

The £14.6 billion in public grant required to meet it seems a distant prospect in today’s economic climate but the NHF calculated that it would unlock a total housebuilding programme worth £46.2 billion a year, paid for by a combination of private finance, private sale cross-subsidy, Section 106 subsidy, land subsidy and shared ownership first tranche sales.

The investment ratio is 3.2 to 1 and the modelling argued that the programme as a whole would deliver wider economic benefits of between £78.5 billion and £120 billion a year.

Perhaps the numbers can be disputed but the general thrust of the argument fits with the Resolution Foundation’s diagnosis and works within Labour’s rules on public investment.

Thinking back to the last time Labour looked set to win power in 1996/97, the Affordable Homes Programme had already more than halved in real terms since the highs of 1992/93 (when it included substantial funding for housing associations to buy unsold homes).

However, thanks to that decision to stick to Tory spending plans, grant funding fell by another 47 per cent in Tony Blair’s first two years (figures here). The new homes budget did not recover to the level Labour had inherited until part way through its second term and it did not beat the Tory highs of 1992/93 until after the financial crisis.

True, there was also substantial investment in existing social housing via the release of capital receipts and the Decent Homes programme, but the Labour leadership seemed to doubt the case for investment in new social homes, influenced by low demand for some new schemes in the north in the mid-1990s.

They can have no such excuse for repeating that mistake now given the scale of housing need across the country.

The leadership may be understandably focussed on avoiding anything that will give ammunition to the Conservatives ahead of the election but housing has to be central to moving from stagnation to growth after it.

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