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«high aspirations, sound foundations: a discussion report on the centre-ground case for building 100,000 new public homes By John Healey MP THE SMITH ...»

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swathes of ‘no go’ areas for families on low incomes – unable to buy, unable to access a depleted stock of social housing, and unable to make ends meet in the private rented sector either.

The second big decision in the last Parliament that stands out is the significant cuts in social housing investment, including the resulting shift to so-called ‘affordable’ social sector rents at up to 80% of the market rate. It is evident that this will have a serious inflationary effect on future housing benefit spending.

This was a big change from the situation the Coalition government inherited. In the three years from 2008, the Labour government committed some £2.8bn a year in capital investment as part of the National Affordable Housing Programme. But this was cut to just over £1bn a year in the Chancellor’s first budget.

By constructing a counterfactual scenario where this investment had been maintained we can estimate the housing benefit effect of the reduction of this funding stream. We model that the loss of new affordable public homes over the four year funding period from 2011-15 is equivalent to an Exchequer cost of some £7.7bn over 30 years in additional housing benefit payments.15 Even after the additional upfront capital costs the public purse loses out by nearly £1bn in real terms compared to a scenario where this investment had been retained and used to build new homes. And, all this as the result of a measure designed only to cut costs – a truly false economy.

Combined with this move to cut back central grant investment was the government’s decision to row back on the more favourable devolution settlement for council housing revenue accounts that I had agreed with the Treasury as housing minister. This roughly halved the number of new homes councils were projected to build over the 2010-15 Parliament.

Plugging this into our housing benefit model, we estimate a higher housing benefit bill of about £0.9bn over 30 years as a result.

But perhaps most damaging to future housing benefit inflation of the individual changes that ministers have made to social housing is the shift away from social rents calculated by reference predominantly to local incomes, to one set by reference to the private market.

These so-called ‘affordable rents’ are not affordable now, and over time will become significantly even less so. We model that over thirty years, the affordable rent units built in just this Parliament will add some £8bn to the housing benefit bill compared to the 15 For comparability, all figures expressed after inflation in 2015/16 prices.

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counterfactual in which the homes built and converted since the inception of the affordable homes programme had been built or retained at traditional social rents.

Importantly for the on-going discussion about the viability of the near-market affordable rent type of social housing, we model that a social rent unit built this year will pay back the extra up-front capital expenditure needed compared to an affordable rent home within 20 years, in housing benefit savings alone, and is clearly better value for money in the long run. This is concurrent with the Department for Communities and Local Government’s conclusion in its own impact assessment that the affordable rent model would end up costing more in housing benefit in the long run, even when the lower up-front capital investment required was taken into account.16 Alongside these big steps backwards in policy, the tale of the last five years is partly an organisational and administrative failure – a failure to join the dots across government.

Any government that has one department – DWP - pledging to cut down on benefit spending, while another – DCLG – makes policy changes which increases it (like the shift to near-market social rents which actively and deliberately inflates the benefits bill) is not functioning properly.

I know from my experience in government that achieving effective joint-working between departments can be tough. In my year as housing minister, I didn’t have a single bilateral meeting with any Work and Pensions minister despite the close interplay between housing and housing benefit. That has to change.

Administrative changes such as shared departmental priorities, a new Cabinet sub-committee or appointing a Minister to sit jointly in the CLG and DWP teams to take responsibility for this area all have merit, but the best guarantor of joint-working is an explicit and substantial commitment to a new financial relationship between the Departments.

One option would be to create a reciprocal relationship between DCLG and DWP formed of two strands. First, for DCLG to commit to changing the remit of the Homes and Communities Agency so that in addition to delivering the number of affordable units required, it also takes into account the impact on housing benefit when allocating social housing grant.

In practice, this may mean a bias towards lower rents, and to those regions of the country (principally, our modelling suggests, London, the South East and East of England) where the potential housing benefit saving is the greatest, even given the higher grant costs. There would be some issues of design to overcome to assess that relative saving, and to cope with 16 DCLG (2011) Impact Assessment for Affordable Rent https://www.gov.uk/government/uploads/system/uploads/ attachment_data/file/6021/1918816.pdf

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the lag between Homes and Communities Agency approval and the unit being occupied, but these seem soluble.

The second strand would be a commitment from the Treasury that housing benefit savings resulting from any major labour market interventions would be transferred directly to the Homes and Communities Agency to finance additional affordable house-building. This could prove to be a significant - our modelling suggests that a back-to-work programme like the ‘jobs guarantee’ suggested by Labour before the last election would yield a housing benefit saving in the region of £1.2bn over this Parliament.

A more comprehensive extension to this proposal would be to recycle the housing benefit savings from affordable housing investment as well – returning the housing benefit savings from investment to DCLG as additional spend for new affordable homes, at least for a limited period. But whichever route is chosen, the most important thing is that the way decisions about housing and housing benefit are made within government is changed.

Could we build 100,000 social rented homes between 2015 and 2020?

Whatever the history of the last five years, the urgent task now is to set out what an alternative on public housing looks like for the five years of the Parliament ahead.

One option, which I detail here, would be to build 100,000 homes for social rent by the end of this Parliament. It can be done. And what’s more it can be done with a public spending commitment of around the same magnitude as when I was housing minister 2009/10.

Significantly, because this up-front spending would be a genuine investment on the part of the Exchequer, it can be done in way that pays for itself, purely through lower housing benefit payments, over 26 years – well within the time-frame for a return that many businesses, and public sector bodies plan for.

There are a number of ways that a programme to build the public homes we need could be delivered. For illustrative purposes, we model one potential set of changes that a

government minded to revive affordable public housing could take. These changes would:

• Give councils the freedom to borrow against their assets, just as businesses are able to do

• Tighten the obligations of commercial developers to fund more new social homes through the planning system, reconfiguring the ‘viability review’ policy

• Reform right-to-buy to actually deliver one-for-one replacements

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• Use the power of the government balance sheet to bring down the cost of finance for housing associations by extending the guarantee scheme

• Fund a significant HCA grant programme to allow councils and housing associations to build at scale, and lever in private finance Figure 11: Illustrative build forecast 120,000 100,000 80,000 60,000 40,000 20,000

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N.B.: Numbers on left hand side refer to units Source: author’s calculations based on the illustrative interventions mentioned above Together these policies could bring about a step-change in the number of public homes we build, and are all almost all tried, tested and ready to go.

Give councils the freedom to borrow against their assets.

Currently councils are restrcuted in their ability to borrow and build up to established prudential limits. This change would allow councils to be run like the uniquely accountable, enterprising public institutions that council leaders of all political colours want to be. When we helped councils get building again after the global economic crisis we found councils were able to gear up quickly. We model 60,000 additional homes over five years as a result of this policy change, half of which would require grant funding.

Tighten the obligations of developers to fund more social rented homes In the last Parliament, the planning system was blamed for the lack of new homes, and the government made it easier for developers to get away with building fewer affordable

THE SMITH INSTITUTE

homes by introducing a test of project viability. No substantial adjustments to this test were introduced as the market recovered. The granting of planning permission can be hugely profitable for developers, and it’s essential that some of this added value is retained for the wider public benefit. It’s also a vital way of putting private finance to work in building public homes. Rather than running down the number of homes provided as is set to happen in this Parliament, increasing the number of homes delivered through developer obligations to their pre-2010 peak would enable 16,000 new homes a year. We model that 20% of these are delivered grant free.

Reform right-to-buy to actually deliver one-for-one replacements Right-to-buy has been a boon for some council tenants, but has had a huge negative impact on the stock of public homes and proved a big disincentive for social landlords to develop. Instead of the nine-to-one replacement ratio achieved so far, we model a policy of a genuine one-to-one replacement. This would reduce the number of homes sold, and bring in 6,000 additional replacement homes per year compared to the status quo.

Use the power of the government balance sheet to bring down the cost of finance for housing associations One of the good innovations that has become established in this country, though used for some time abroad, is the use of government guarantees to help bring down the cost of finance for private and charitable organisations. We model a modest extension of the current guarantee programme to build an additional 2,000 homes per year. We also model the capitalisation of a housing investment bank which enables around 5,000 additional units in the final year of the Parliament only.

Fund a significant HCA grant programme to allow councils and housing associations to build at scale, and lever in private finance In addition to the grant funding for the programmes above, we model a significant additional contestable amount of grant funding to be disbursed to councils and housing associations through the Homes and Communities Agency and the Greater London Authority. We model the grant per home needed as £60,000 per unit, the same level as under the National Affordable Housing Programme from 2008-11. This enables an average of 30,000 additional units per year, weighted towards the final years of the Parliament to enable the sector to gear up for this level of building.

Implementing this set of housing policy changes would result in the following capital costs and savings to housing benefit.

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Source: author’s calculations This is then, a ready-to-go set of housing policies which could feasibly see the building of 100,000 affordable public homes. It could not only pay for itself but deliver a public saving of almost £6bn over a 30 year period. And this is only considering an alternative for the current Parliament alone. If this sort of build programme was sustained the savings would be multiplied.

What’s more, this sort of public investment can be a lever for private investment – multiplying its effect. The record of this government has shown the relationship in reverse: alongside the cut in public housing investment over the last four years, there was £1.4bn less private housing investment in housing association homes last year than in 2010/11.17 If they are to built to a good standard then these homes will be here for decades to come. Much of the Garden Cities, early public housing blocks built by the Greater London Council and the government’s early New Towns are still here and with adequate maintenance will be housing people for many years to come. So the rental income above the costs of repair on those public homes can continue to be reinvested.

This illustrative policy programme is of course not the only set of options available.

As well as recognising the need to depend upon ways of directing new building that have been or are currently used by the government, we should also look to learn from other countries where affordable homes are funded in different ways, and which may be applicable here. Like France where the introduction of popular tax-free savings accounts now provides the source for a good deal of the country’s social housing finance, or Denmark, where there is a national mechanism for pooling and recycling housing association surpluses.18 17 UK Housing Review 2015 18 Good recent work on new ways of funding new affordable homes can be found in JRF (2013) Innovative Financing of Affordable Housing; CCHPR (2012) Funding Future Homes; and Capital Economics (2014) Increasing Investment in Affordable Housing

THE SMITH INSTITUTE

And some of the best ideas for action I hear come from practitioners themselves - council and housing association staff who are at the coalface building new homes and providing services for tenants. It is to them too that campaigners and politicians must now look, as we seek to show how public homes can be built at scale once again.



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