At the moment, the construction industry is in trouble, with a fall in output of 4.8% in Q2 2012 as the UK goes back into recession. The Housing report for 2012, compiled by National Housing Federation, Shelter and Chartered for Institute of Housing identifies rising overcrowdedness and homelessness, and cuts to housing benefit see many hundreds of thousands at risk of being unable to afford their homes, including over 11,000 families in Birmingham. On top of this, there is identified a growing demand for housing which will not be met at current rates and locally the Labour Party has said 70,000 new homes will need to be built by 2026 – we are currently building around 1,000 a year (Labour Party Local Election Manifesto, PDF, page 13).
Has there ever been a clearer example of market failure? Here we have a situation where there is spare capacity in the industry and excess demand in the marketplace, but supply is not increasing to meet demand – so all that happens is prices go up and quality goes down.
Although there are specific issues around availability of land that will restrict the supply of housing, the biggest issue is that private investors are nervous, and they are concerned that there will be a further crash in the housing market, perhaps looking at Ireland where years of austerity have devastated the construction industry and left many half built houses and estates.
On it’s own, this market failure would be a good argument for the public sector to intervene and build to provide new homes directly, but in fact it is only a starting point for the case for this investment.
Right now the government can borrow at astonishingly low rates – 0.5% for long term gilts. This is far lower than the private sector can borrow, and makes good sense to do. As the linked article states, we could raise £30bn, paid for by the pasty tax.
Now there are many things that £30bn could be used for, but an investment in housing would not only fulfill a growing need, it would be a profitable investment for two reasons.
The first is that council housing makes a profit. Although it is widely believed that council houses are subsidised because they are so much cheaper than private rentals, in fact, council housing made the taxpayer £194m profit in 2008/9, and that figure is expected to rise to nearly £1bn/year in the next ten years. In fact, as this article explains, more subsidies are paid to the private sector than the public sector. The investment made in housing will pay itself back over time.
There are many reasons why council housing is cheaper than private rentals – longer pay back times for the investment, a large amount of housing stock which has already paid for its investment cost, a lack of profit motive, and the rise of buy-to-let mortgage rentals as investments which contributed to and came alongside sharp rises in house prices which meant that rents needed to be higher to cover larger mortgages.
All of this happened without the downward pressure on rents of large scale social housing because demand has exceeded supply – especially in the south east.
However, one thing is for certain, council housing is not cheaper because it is subsidised by the tax payer – it is cheaper because it is council housing.
The second reason is to reverse the rise in cost of housing benefit. Time to dispel another myth. Housing Benefit is not just paid to people who are unemployed. In fact, in 2007/8 only 12.5% of people who claim housing benefit were unemployed. This had risen to 22% by 2010, but 26% of claimants were employed in low paid jobs often at minimum wage, and many in London where £6.08 an hour (or less for younger people) is a real struggle to get by. Other claimants include pensioners (over a quarter of claimants in 2012), disabled people and carers. In fact it is in-work housing benefits payments that have increased recently, accounting for 93% of new claims – another sign that wages are being pushed lower as rental costs increase.
Housing Benefit costs £21bn/year, much of which goes to private landlords – the same private landlords who charge more than council housing. If we build council housing, and rent it at affordable levels to people on housing benefit, then that cost will be reduced, directly through the provision of cheaper housing and indirectly by putting a downward pressure on private rental cost as supply of housing comes up to meet demand. In this way it will benefit those who remain in the private rental sector.
This is another policy area in which this investment would produce positive results. Right now house prices are at a record high, out of reach to buy for most people and expensive to rent. It is no coincidence that these price rises have come alongside the sell off of council housing and deliberate decision not to build new stock. We can bring down rental prices for everyone, and this would particularly help those most affected by austerity – those on low incomes, as Shelter tells us that 55% of local authorities have rents which are (on average) considered to be unaffordable, costing over a third of the median wage for the area. Birmingham is considered to be slightly unaffordable, with rent costing an average of 34%-39% of wages (PDF, Page 35)
The money that is saved on rent would no doubt be spent quickly in other areas of the economy, providing a further stimulus effect, as the cash flows through the productive economy rather than to landlords and banks.
Alongside achieving all of these positive outcomes, the investment would also help government finances indirectly. By stimulating the economy – both directly in the construction industry, and indirectly through savings made on rent payments, it will create growth, which increases tax revenue and decreases benefit claimants. Doing so in the construction industry primarily would be an ideal place, as it is shrinking fast, and has spare capacity right now. This is where the investment becomes part of a strategic alternative to austerity – one which is focused on creating jobs in a direct manner, all working towards a sustainable, zero-carbon economy, and at the same time reducing the deficit in the medium term – something which austerity is set to fail to do.
Moving towards a zero-carbon economy is absolutely vital, and housing produces 26% of the UK’s carbon emmissions. The government could lead the way in building a new generation of zero-carbon and carbon-positive housing, designed around our needs in a post-oil future.
So by investing in social housing we can stimulate the economy, create a long term revenue stream to pay back that investment, reduce rental costs for everyone and housing benefit costs for the taxpayer, make serious moves towards transitioning to a zero-carbon, post-oil economy and all at the same time as meeting a rising demand that the private sector cannot meet for the homes people need to live in, where they need to live, and all at the same time as tackling our economic woes.