Time for a subsidy shift

Posted: October 21, 2024 | Author: julesbirch | Filed under: Housing benefit, Social housing |Leave a comment

Originally written as a column for Inside Housing

With the days counting down to the Budget and all eyes on the tax increases to come, you’d have to be quite an optimist to expect an immediate boost for housing. 

There may be scope for redistribution of some existing budgets but the first fiscal event of the new government is taking place against a gloomy short-term backdrop, with cabinet ministers for unprotected departments reportedly protesting about the cuts they are being expected to take.

The real question for October 30 – and for the Spring spending review to come – is a more long-term one: a shift in thinking about the value of housing investment.

There have already been some hopeful signs on this, with chancellor Rachel Reeves said to be considering a shift in the measure of debt to take account of the value of the assets created by investment as well as the costs. This could create room for billions in extra public investment, but housing would have to join the queue alongside health, education, transport, prisons and all the other government priorities. 

If you’re looking for reasons to invest in housing specifically, there is plenty of timely evidence in the new UK Housing Review Autumn briefing paper published this week. 

The best place to start is with the fact that – counter-intuitively for many people after years of austerity  – government spending on housing is now at its highest ever level in real terms.

This graph based on figures calculated by Ralph Mould shows the comparison between 2021/22 and 1975/76, when investment in council housing had reached a peak:

The difference lies of course in the breakdown of the spending, with 88 per cent now going on housing benefit compared to 95 per cent going on buildings in the 1970s.

As the graph shows, that long-term shift from bricks and mortar to personal subsidies saved money in the last century but is costing steadily more in this one as housing benefit ‘takes the strain’ of higher rents.

Ralph Mould argues that the only way to stabilise overall spending in the long term will be to increase supply subsidies but making that case to the Treasury is challenging given the higher initial capital costs. 

Another in favour of more investment is the contribution that will be needed from affordable housing to meet the government’s manifesto target of 1.5 million new homes over the next five years. 

As John Perry points out, even if (a big if) housebuilders succeed in boosting their output from 170,000 in 2022/23 to 260,000 by 2029/30, that will still leave a shortfall of 90,000 homes to be made up from elsewhere.

That should be food for compulsory thought ahead of decisions on the next Affordable Homes Programme that will be made in the 2025 spending review.

Another piece of evidence might come from valuing the assets created as well as the costs incurred. 

All that previous investment has helped to create a social housing stock worth more than £500 billion (at a conservative estimate by Savills) and generated Right to Buy receipts of more than £50 billion on top of that. Not a bad return. 

The return from the billions spent on housing benefit is harder to assess. Some of it has supported the development of new social homes by covering higher rents and has perhaps given confidence to build-to-rent investors. 

But it has also helped to create a private rented stock worth £1.6 trillion, all of it owned by private individuals and companies, some of it former council homes sold under the Right to Buy. Private renting may play a crucial role in our broken housing system but where is the return on all that public spending?  

On current forecasts, the housing benefit bill will rise to more than £35 billion by the late 2020s, the exact five-year period that is the focus of current Budget calculations. 

That’s despite all the cuts and caps brought in to reduce it, one of them the focus of fierce debate ahead of October 30.

A renewed freeze in Local Housing Allowance (LHA) is already baked in to spending plans from April 2025 and any thaw to allow uprating will mean spending extra money.

But official figures released this week show that private rents rose by 8.4 per cent in the year to August, five times the rate of general price inflation, so failing to uprate LHA will leave claimants with instant and significant shortfalls against their rent. 

Research by the Joseph Rowntree Foundation published this week shows that private renters are already an average of almost £700 a year worse off as a result of freezes and restrictions in LHA since 2011 and could lose another £243 if rates are frozen next year. 

Costs will also spiral for local authorities, some of whom have already been pushed to the brink of bankruptcy by rising costs for temporary accommodation.

As Francesca Albanese points out, one short-term fix in the Budget would be an increase in the TA subsidy cap that has itself been frozen since 2011 but that again would mean more money. 

The solution may seem obvious but, as Mark Stephens argues, social housing supply will have to increase before the pressure on housing benefit is eased.  

Read the briefing paper in full for a review of all those arguments and more but the final decisions are now being taken inside the Treasury.

The mood music ahead of October 30 is hardly encouraging but does it really want more of the same or is it ready for reform for the long term? 

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