building new social rent homes an economic appraisal

Justin ChalonerAlexandra DreisinMark Pragnell

AN ECONOMIC APPRAISALEvaluating the economic case for building 100,000 new social rent homes each yearA report by Capital Economics for SHOUT and the National Federation of ALMOs | June 2015

B U I L D I N GN E W S O C I A L

R E N T H O M E S

2 | BUILDING NEW SOCIAL RENT HOMES

This report has been commissioned by SHOUT and the National Federation of ALMOs. The views expressed remain those of Capital Economics and are not necessarily shared by SHOUT, the National Federation of ALMOs or their respective member organisations or sponsors. Likewise, Capital Economics does not necessarily share the views of those who have commissioned this report. While every effort has been made to ensure that the data quoted and used for the research behind this document is reliable, there is no guarantee that it is correct, and Capital Economics Limited and its subsidiaries can accept no liability whatsoever in respect of any errors or omissions. This document is a piece of economic research and is not intended to constitute investment advice, nor to solicit dealing in securities or investments.

A number of organisations have generously supported the commissioning of this report and SHOUT’s wider work:

Bushbury Hill Estate Management Board; Campbell Tickell; Coast & Country; Contour Homes; EMH Group; Endeavour Housing Association/North Star Group; Grand Union Housing Group; Human City Institute; Leeds and Yorkshire Housing Association; Leicestershire & Rutland Tenant Participation Forum; Liverpool Housing Trust; Luminus Group; Riverside; Soha Housing; South Liverpool Homes; South Yorkshire Housing Association; Thrive Homes; and Wellingborough Homes.

D I S C L A I M E R

A report by Capital Economics for SHOUT and the National Federation of ALMOs | 3

C O N T E N T S

31IMPACT OF

100,000 NEW SOCIAL RENT HOMES

EACH YEAR

61APPENDIX:

SENSITIVITY TESTS

39SOCIAL HOUSING AND AUSTERITY

68CONTACT

DETAILS

14HOUSING TENURE AND THE BENEFITS BILL

20THE BUSINESS CASE FOR NEW SOCIAL HOUSING

44BROADER KNOCK-ON SOCIAL WELFARE BENEFITS

47APPENDIX: ADDITIONAL ANALYTICAL DETAIL

7INTRODUCTION

4EXECUTIVE SUMMARY


Capital Economics has been commissioned by SHOUT and the National Federation of ALMOs to evaluate the fiscal and economic impacts of additional social housing development funded in part

through a larger social housing grant programme.

E X E C U T I V E S U M M A R Y


Currently, more and more low-income families are being housed in the private rented sector at an increasing cost to the welfare system, while the number of dwellings available on a lower cost social rent tenure is falling. The current allocation of public expenditure to housing does not take into account the future costs to the welfare system of meeting higher rents in the private rented sector and ‘affordable rent’ social housing. It is therefore a form of fiscal myopia: saving pennies in the short term only to waste pounds in the future.

From our analysis, we have a stark and clear finding: the government would achieve better value for taxpayers’ money, as well as improve the living standards of many low-income households, if it were to part fund the delivery of 100,000 new social rent homes each year rather than continue with its existing policy.

There is broad agreement that the rate at which homes are being built is at least 100,000 units lower per annum than is needed to keep pace with rising demand. The misalignment of supply and demand is causing housing costs to become increasingly unaffordable for households across all tenures. This has not always been an issue. From the late 1940s to the mid 1970s, support by government for the construction of social rent homes played a major part in the economy sustaining much higher levels of housing development.

Meanwhile, current housing policy — under which, at best, little housing is being built at traditional social rents, and only very modest levels of build for so-called ‘affordable rent’ is taking place — is unsustainable. Even leaving aside the additional cost to the welfare system of supporting tenants paying affordable rents, the total amount of social housing being built is not matching demand, with the consequence that growing numbers of low-income households live in private landlord properties, typically requiring much higher levels of housing benefit. (See chapter 1.)

The lack of homes for social rent is creating additional strain, not just for households’ finances, but also for the public sector’s £24.4 billion housing benefit bill. On average, tenants in the private rented sector receive £110 per week compared with £89 per week

in the social rented sector. Almost always, taxpayers pay more to families in private rented accommodation than in a social rent tenure. (See chapter 2.)

With an increasing proportion of welfare claimants accommodated privately, the overall bill for housing benefit payments is set to accelerate – worsening the government’s structural deficit now but also into the longer term.

If trends over the past parliament were to continue, total expenditure on housing benefits in the United Kingdom would increase to £197.3 billion by 2065-66, up from £24.4 billion today — with households in the private rented sector accounting for 63 per cent of the total, compared to 37 per cent today.

Investment in new social rent housing offers a solution that is fiscally sustainable and economically efficient.

Increasing the stock of social rent housing — through either acquisition or, most sensibly, new construction — requires investment by social landlords, and some level of upfront contribution from the state. In almost all circumstances, construction of social rent housing is viable economically and fiscally once future savings to the government’s housing benefits bill are taken into account properly. By disbursing grant that permits the building of new social rent housing, the government can achieve savings in its future expenditure on housing benefits – as well as providing a home for a low income family and meeting other possible objectives, such as urban regeneration and renewal. Once built, the debt service, management and maintenance of properties can be met from rents, and a social asset is created, which will endure for decades, if not centuries. (See chapter 3.)

Building more social rent homes is a realistic and practical policy. Given current conditions in labour and materials markets, and the need to secure sites, there cannot be a step change in residential construction overnight — but our analysis suggests that a steady build-up to 100,000 new homes annually by 2020-21 is reasonable. This gives adequate time


for the construction industry and its supply chain to develop the necessary capacity. Likewise, social rent housing providers, and their investors, will have sufficient time to plan properly new housing developments under any new funding regime. Meanwhile, additional construction activity will provide a fillip to the economy and to tax revenues. Every additional pound of investment in construction is estimated to stimulate an extra £2.84 of economic output in supply chains and through the higher spending of employees, and an extra 56 pence of new tax revenues for the exchequer. (See chapter 4.)

A programme of building 100,000 new homes each year for social rent part-funded by government grant will deliver a sustained structural improvement to public sector finances — by reducing spending on welfare payments and stimulating higher tax receipts from a more vibrant home building industry. By 2065-66, the horizon for the Office of Budget Responsibility’s long-term fiscal projections, we estimate that, under current policies public sector net debt would be 86.0 per cent of gross domestic product compared to 80.8 per cent under this proposal, a cost of £0.9 trillion in nominal terms; public sector net borrowing would be 4.7 per cent of national output rather than 4.2 per cent, an annual cost of £91 billion. This is equivalent to four fifths of current spending on the National Health Service in England.

In the initial years, the incremental welfare savings and new tax receipts will be less than that needed to fund the government’s contribution to the new homes — so additional public sector borrowing will be required. On cautious assumptions, we estimate that the net impact on public sector net borrowing will peak in 2019-20 at no more than 0.13 per cent of gross domestic product. (See chapter 4.)

While an increase in borrowing in the near-term would be necessary, the policy will be creating a net surplus for public coffers by 2034-35. The improvement to government finances will be particularly welcome then as the United Kingdom grapples with an ageing population and growing pension demand.

Nevertheless, given the aftermath of the 2007/8 financial crisis and subsequent recession, the government has quite rightly focused on reining in its expenditure and reducing the public sector deficit and debt. In applying ‘austerity’, policymakers must exercise fiscal common sense. Government expenditure isn’t all the same, and not all borrowing is equal. Indeed, borrowing to invest in assets that will reduce future public expenditure is not only efficient fiscally, it is likely to be welcomed by financial markets. Increased grant funding for social rent housing must be seen in this light. (See chapter 5.)

And, there are further socio-economic benefits to increased social rent housing that we have not captured in our fiscal arithmetic. There are wider knock-on impacts that touch areas of public interest such as health, wellbeing and education. New social rented homes are built to decent home standards with good energy efficiency ratings. Families aren’t forced to underheat their homes due to constrained budgets, significantly helping to improve health outcomes. What’s more social rent homes typically provide a more secure tenure for households. Children are less likely to move schools in-year or miss lessons due to illness, which improves their educational attainment and future mobility. Housing which better meets the needs of older people should mitigate the pressures on public service budgets which will grow as the population ages. (See chapter 6.)

The economic and fiscal case for building new social rent housing is unanswerable.


In this section, we outline the background and context to the funding difficulties facing the social housing sector. In particular,

we set out briefly the role of social housing within the overall context of Britain’s housing shortage and review how the

changing nature of government priorities has affected its funding over recent years.

I N T R O D U C T I O N


1 . 1 B R I TA I N ’ S H O U S I N G S H O R TA G E

In Britain, there are simply too few homes in the right locations – and we are not building new properties fast enough to catch up. Growth in demand for accommodation is outstripping any increases in supply; after the 2008 financial crisis, rates of new home completions have tumbled from what were already mediocre levels historically.1 (See Exhibit 1.)

Exhibit 1: Permanent dwellings completed in England, thousands

There is broad agreement that the rate at which homes are being built in England is at least 100,000 units lower per annum than is needed to keep pace with rising demand. (See Exhibit 2.)

Exhibit 2: Current housing completion rates against required completion rates to meet housing demand in England, thousands per annum

Sources: Capital Economics and Department for Communities and Local Government

Sources: Capital Economics, Datastream; Kate Barker, Review of housing supply (HMSO, Norwich), 2004; Alan Holmans, New estimates of housing demand and need in England, 2011 to 2031 (Town and Country Planning Association, London), 2013; Matt Griffith and Pete Jefferys, Solutions for the housing shortage (Shelter, London), 2013; National Housing and Plan-ning Advice Unit, Meeting the housing requirements of an aspiring and growing nation: taking the medium and long-term view (National Housing and Planning Advice Unit, Titchfield), 2008

0

50

100

150

200

250

300

350

400

1946 1951 1956 1961 1966 1971 1976 1981 1986 1991 1996 2001 2006 2011

England average(2000-14)

Impliedshortfall

in housingcompletions

Barker review(2004)

TCPA(2013)

Shelter(2012)

NHPAU(2008)

0

50

100

150

200

250

300

1 Although the number of homes built has risen in recent quarters, indeed the data for Q1 2015 are the highest since 2008, the 125,000 homes built over the twelve months to 31 March 2015 are still below the 2000-14 average and significantly below generally accepted required completion rates.

n Local authorities n Housing associations n Private enterprise


The misalignment of supply and demand is causing housing costs to become increasingly unaffordable for households across all tenures. Property prices have gone up at a much higher rate than incomes. In 1997 the average home was sold at a multiple to average incomes of 3.5. During the subsequent housing boom this rose to a peak of 7.2 in 2007 and remains not far off that level. (See Exhibit 3.)

Exhibit 3: Ratio of lower quartile home price to lower quartile earnings in England and ratio of median home price to median earnings in England

Sources: Capital Economics and Department for Communities and Local Government

Meanwhile tenants renting from private landlords have seen rents rise by 4.6 percentage points more than average earnings in the last ten years. For lower income families, the stretch is even further. Families in the lowest quintile of income spend 27 per cent of their earnings on housing rent; this would be 73 per cent without housing benefits, rebates or allowances.2 (See Exhibit 4.)

Exhibit 4: Private sector rents in England and earnings in the United Kingdom, index, Jan 2005 = 100

Sources: Capital Economics and Office for National Statistics

3.5

4.0

4.5

5.0

5.5

6.0

6.5

7.0

7.5

1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013

100

110

120

130

140

2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015

Private rents have increasedby 4.6 percentage points more

than average earnings overthe last ten years

2 Office for National Statistics, Family Spending, Edition 2014 Tables 2.10 and 3.11. Data for 2013.

–– Median house price to median earnings

–– Lower quartile house price to lower quartile earnings

–– Private rents –– Average earnings


1 . 2 T H E R O L E O F S O C I A L H O U S I N G

In this context, social housing has an important role in ensuring accommodation for individuals and families who might otherwise be priced out of the market.

Registered providers, such as local authorities (directly managed or via arm’s length management organisations) and housing associations provide low cost rental accommodation at sub-market rents and low cost home ownership. Tenants either pay a social rent, for which there is a ceiling that limits both the current rate and future increases3, or more recently ‘affordable rents’, which can be set at up to 80 per cent of market value.4 The social landlord uses this rental revenue stream to cover maintenance, renewal, management and other business costs. Social landlords also use this rental revenue to help fund new investment in social housing, in stark contrast to revenues received by private landlords which are not re-invested in a social context. (See Exhibit 5.)

Exhibit 5: An overview of social housing rental tenures

What issocial housing?

Low cost rental accommodation (sub-market rents) and low cost home ownership

Who provides it?

What rents dothey charge?

Registered providers – i.e. Registered with the Homes and Communities Agency

Social rent

Affordable rent

Up to 80 per cent ofmarket value

Since 2002 each property has a target rent. This is the same asthe formula rent. The target rent is calculated using a formula that takes into account the value of the property (as at January 1999), the size of the property and the average worker’s earnings in the local area. This guideline limit is a ceiling, but there is no catching up if full increases aren’t implemented other than at a re-let.

The initial aim was to achieve alignment of social sector rents by 2012, so rents were permitted to increase by £2 a week more than the formula. The ending of rent convergence in 2015/16 means some landlords won’t be able to charge the target rentin future under current policy other than at a re-let. However most have reached target

Local authorities (directly managed or viaArm’s Length Management Organisations)

ALMOs can provide new social housing either on behalf of their LA parent, which will be council housing at social oraffordable rent, or in their own right as registered providers or through LA prudential borrowing and land (social rent if desired)

Housing associations

Independent, provide low-cost social housing on a non-profit-making basis

Previously referred to as Registered Social Landlords when they were formerly funded and regulated by the Housing Corporation (ceased operation in November 2008 and its functions were transferred to the Homes and Communities Agency and Tenant Services Authority)

3Set out in detail in Department for Communities and Local Government, Guidance on Rents for Social Housing (Department for Communities and Local Government, London), 2014.

4 The ‘affordable homes’ programme has replaced the provision of new social housing with rents set at up to 80 per cent of market rents. ‘Affordable rents’ are typically higher than social rents.

Source: Capital Economics


1 . 3 T H E C H A N G I N G N AT U R E O F G O V E R N M E N T P R I O R I T I E S

Investment in new affordable housing has been funded through a mix of sources, primarily coming from central government grants, but also including debt secured on existing stock and future rental income streams, ‘planning gain’ negotiated by local authorities from private property developers, and proceeds from the sale of existing housing stock.

Until recently, new affordable housing was funded largely by central government grants – initially directed to local authorities and latterly more likely mediated via a government agency to a housing association or similar organisation. In the early 1990s, social housing grants provided for around 75 per cent of the total cost of developing new affordable homes.

By 2010, grants had fallen to 39 per cent of the overall cost of development. Under the current affordable homes programme for 2011-15, they provided only 14 per cent.

What’s more, the current programme states that grant would only be available for homes of social rent tenure in ‘exceptional cases’.5 (See Exhibit 6.)

Exhibit 6: Grant funding as a percentage of total development costs

5Homes and Communities Agency, 2011-15 Affordable Homes Programme framework (Homes and Communities Agency, London), 2011

Sources: Capital Economics, Andrew Heywood, ‘Investing in Social Housing’ (The Housing Finance Corporation, London), 2013 and National Audit Office, ‘Assessing the viability of the social housing sector: introducing the Affordable Homes Pro-gramme’ (The Stationary Office, Norwich), 2012

0

20

40

60

80

Affordable HomesProgramme (2011-15)

National Affordable HousingProgramme (2008-2011)

Early 1990s


6HM Treasury, Charter for Budget Responsibility: Autumn Statement 2014 update (HM Treasury, London), 2014

The change in government policy is in part down to efforts to deal with the legacy impact of the 2007/8 financial crisis on government finances. Since the budget of June 2010 the coalition government’s finances have been constrained by the so-called ‘fiscal mandate’. The primary requirement of the mandate today is to achieve cyclically-adjusted current balance by the end of the third year in the current rolling five-year forecast period. This objective focuses on controlling the public sector’s current expenditure alone; it does not limit capital expenditure. In principle, borrowing to invest is permitted. However, there is a supplementary target for public sector net debt as a percentage of gross domestic product to be falling at a fixed date of 2016-17.6 (See Exhibit 7 and Exhibit 8.)

Exhibit 7: Cyclically adjusted current budget forecasts as a percentage of gross domestic product

Sources: Capital Economics and Office for Budget Responsibility March 2015 forecast

-6.0

-5.0

-4.0

-3.0

-2.0

-1.0

0.0

1.0

2.0

3.0

200

7-0

8

200

8-0

9

200

9-1

0

2010

-11

2011

-12

2012

-13

2013

-14

2014

-15

2015

-16

2016

-17

2017

-18

2018

-19

2019

-20

Fiscal mandate – to borrow onlyfor investment, adjusting for the

state of the economy, appliesin 2017-18


7 Department for Work and Pensions statistics for November 2014 available at: https://stat-xplore.dwp.gov.uk/

This objective does not distinguish between current and capital expenditure, and is concerned only with controlling the overall level of state debt. As such, it places a constraint on public sector borrowing regardless of whether that borrowing is being used to fund investment or current expenditure. Meanwhile, both targets relate to the public sector as a whole, i.e. including central and local government, and public corporations. One consequence of the mandate is further under-investment in new social housing.

With an under-supply of social rent homes, more low-income households are housed at higher ‘affordable rents’ in the social sector, or at even higher rents in the private rented sector. Although the government pays housing benefit (or its equivalent) to tenants regardless of tenure, it typically has to pay more to a claimant in private rented accommodation. The average award paid to a tenant renting from a social landlord was £89 per week in November 2014, compared with £110 per week in the private sector.7 Housing more tenants in homes for social rent would reduce the government’s welfare bill.

Exhibit 8: Public sector net debt as a percentage of gross domestic product

Sources: Capital Economics and Office for Budget Responsibility March 2015 forecast

0

10

20

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40

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60

70

80

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7-0

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0

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-11

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-12

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-13

2013

-14

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-15

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-16

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-17

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-18

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-19

2019

-20

Fiscal mandate year – publicsector net debt to fall as a

percentage of gross domesticproduct in 2016-17


In this section, we examine the consequences of housing tenure in the context of the government’s expenditure on welfare benefits.

H O U S I N G T E N U R E A N D T H E B E N E F I T S B I L L


2 . 1 H O U S I N G B E N E F I T A N D T H E G O V E R N M E N T ’ S W E L FA R E B I L L

In 2014-15, welfare payment by the state reached £167.8 billion. Although the largest component of this is the state pension, which accounts for more than half of the total bill, the amount paid out for housing benefit, a regular payment to help tenants pay their rent, was still a considerable £24.4 billion. (See Exhibit 9.)

Exhibit 9: Real government expenditure on welfare in the United Kingdom, 2014-15 forecast, £ billions (2014-15 prices)

There were 4.9 million recipients of housing benefit in Great Britain in November 2014, receiving on average £93 per week.8

Of these housing benefit recipients, 67 per cent were tenants in the social rented sector, while 33 per cent lived in private rented accommodation. Over the last decade, there has been a marked decline in the proportion of housing benefit recipients who live in local authority accommodation, while the proportions in social and private rented housing have both risen. (See Exhibit 10.)

Sources: Capital Economics and Department for Work and Pensions

0

10

20

30

40

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60

70

80

90

100

Incomesupport

Unemploymentbenefits

Pensioncredit

Incapacitybenefits

Disabilitybenefits

Housingbenefit

Tax creditsand child benefit

Statepension

8 Department for Work and Pensions statistics for November 2014 available at https://stat-xplore.dwp.gov.uk/


9 Department for Work and Pensions statistics for November 2014 available at: https://stat-xplore.dwp.gov.uk/

Exhibit 10: Housing benefit claimants in Great Britain by tenure type

Sources: Capital Economics and Department for Work and Pensions. Note: sub-components may not add up to catergory total due to rounding.

It does not matter for a tenant’s housing benefit eligibility if they are in the private rented sector or if they rent from a social landlord. It does however affect how much the government pays out.

In almost all circumstances, taxpayers pay more to keep families in private rented accommodation than in a social rent tenure. Indeed, on average, private sector tenants receive £110 per week in housing benefit in England compared with £89 per week for those renting from a social rent landlord.9 Payments to private sector tenants now make up more than a third of the housing benefit bill. (See Exhibit 11.)

Proportion of housing benefits claimants living in: 1995 2000 2005 2010 2014

Social rented accommodation 76% 80% 80% 69% 67%

Of which:

Local Authority tenants 63% 57% 45% 32% 28%

Registered social landlords 13% 23% 35% 38% 39%

Private rented accommodation 24% 20% 20% 31% 33%

Of which:

Private regulated 6% 4% 2% 1% 1%

Private deregulated 18% 16% 18% 30% 32%


Exhibit 11: Real government expenditure on housing benefit in the United Kingdom, £ billions (2014-15 prices)

If trends over the past parliament were to continue unabated, total expenditure on housing benefits in the United Kingdom would increase to almost £200 billion in 2065-66 — with households in the private rented sector accounting for 63 per cent of the total, compared to 37 per cent today. (See Exhibit 12.)

Exhibit 12: Expenditure on housing benefit assuming continuation of last parliament’s trends, £ billions (nominal terms)

Sources: Capital Economics and Department for Work and Pensions

Sources: Capital Economics and Office for Budget Responsibility

0

5

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203

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31-

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n Local authority tenants n Registered social landlord tenants n Private rented sector tenants

n Local authority tenants n Registered social landlord tenants n Private rented sector tenants


2 . 2 A N A LY S I N G R E P R E S E N TAT I V E H O U S E H O L D S

Of course, the benefits system as a whole is complicated – and one must be careful about generalising. The amount of benefits received by a specific individual or household will depend on a wide variety of different factors – such as level of income, employment status and number of dependent children in the household. The average, or even what’s most typical, may not be representative; indeed, they may be misleading.

Nevertheless, the treatment of support for housing costs specifically within the benefits system is less complicated. By and large, the amount received by a household as contribution to these costs is based on the actual rent paid. There are exceptions – such as for younger single occupancy households or for those close to the benefits cap, but generally the higher the rent, the greater the payment by the state.

We have calculated the benefits payable to a wide and representative range of exemplar households, and their details are reported in their entirety in the appendix. For the sake of clarity and brevity, we illustrate the point here with reference to only one example.

We consider a couple with one child aged eleven years old in a two-bedroom property in Leeds. One parent is employed with an annual income of £12,000.

This family would likely pay rent of £127.29 per week if they lived in private rental accommodation, and would receive benefits totalling £204.21. In the equivalent social rent home, they would pay a maximum of £85.41, whilst receiving £176.84 in assistance from the state. (See example 3 in Exhibit 13.)

It’s a win-win if the household is accommodated in a social rent property. In this scenario, the government pays £27.37 per week less in benefits if the family rents from a social rent rather than private landlord. Meanwhile, the family themselves have £14.51 per week more in spending money after paying their rent.

This illustrative scenario is representative of almost all of the cases we examined. Out of 36 cases, 29 are win-win; like our Leeds example, being accommodated in social housing means a lower benefits bill for the government and higher disposable income for the family.

There are substantial variations in the arithmetic for different households. The key factors are:

n Location – Our family would receive £384.18 in benefits in Camden for a private rented home and £230.57 for social rented

n Bedroom requirement – A retired couple in a one-bedroom home in Leeds would yield a saving of £20.69 per week for the government whilst a single parent with three children in a three-bedroom home would save £57.04 for the state, compared with £27.37 per week for our family in a two-bedroom property

We estimate that for 81.5 per cent of all households in England receiving housing benefit (or equivalent) and living in private tenure, both the state and the families would be better off in a social rather than private tenure. These households represent 30.6 per cent of the government’s current total housing benefit bill in England or £7.4 billion each year.

There are few instances where social tenure does not provide the same win-win advantages over private.

One is when we consider a single person of working age over 35 in Allerdale, a local authority in rural northern England. Here the social rent of £81.71 per week for a one bedroom home is greater than the cost of renting in the private rented sector, £75.16. The other examples relate to single retired people in Allerdale or single childless households aged under 35 years old in Brent, North Devon, Leeds and Leicester. (Full details are in the appendix).

There is, of course, a third tenure in addition to social rent and private rent: ‘affordable rent’. But even here the results are similar. In 24 of our 36 examples the government would spend less on benefits if the household was paying social rather than ‘affordable rent’ but only five of these are win-win where the household saves as well. In one case, a single childless person in Brent, the household is worse off after benefits under social rent than ‘affordable rent’ even though the government would make a saving. (See appendix for further details.)


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In this section we look at the business case for new social housing – in particular we assess the cost of building new homes, calculate

the value of the asset’s future income stream and consider the welfare savings the government can make if tenants are housed in

a social rent tenure.

T H E B U S I N E S S C A S E F O R N E W S O C I A L H O U S I N G


3 . 1 A S T Y L I S E D M O D E L F O R R E M U N E R AT I N G S O C I A L R E N T H O U S I N G D E V E L O P M E N T

In order to evaluate the business case for building new social housing, we have developed a stylised economic viability model. (See Exhibit 14.)

To keep things simple, we assume that there are only two sources of funding for a new social rent home:

n Social landlord — which can raise finance in the markets against the future revenue stream from renting out the property at the applicable social rent rate (less ongoing maintenance, renewal and managements costs). In our calculations, we either take account of: only the first 25 years of future net rental revenues; or the first 25 years of net revenues plus the likely market value of the property at the end of 25 years assuming it remains in social rent tenure

n Government — which, for the purposes of this analysis, we assume will only contribute funds up to the present value of the future savings in housing benefits expenditure it will accrue from moving a family out of higher cost private rental accommodation. We apply the Treasury’s Green Book discount rate of 3.5 per cent, which is recommended by them for evaluation of government investment projects

We test the viability of new building in a range of locations and for different sizes of home by comparing the potential for these two sources of funding to pay for the building and land costs of a new home.

This stylised approach is a tough test.

In reality, there are other sources of funding for new social rent housing, which we are not taking into account. Contributions can be sought by local authorities from private developers through ‘Section 106’ agreements. Government departments, local authorities and other agencies can gift (or sell/lease at below market rates) their surplus or under-deployed land to social landlords in order to reduce land costs of new social rent homes. The government may wish to increase its contribution to take account of other positive impacts and knock-on benefits — such as urban regeneration and renewal. Moreover, currently, government grant is seen (inaccurately) by many as a deadweight subsidy payment to social landlords. In our tests, there is no subsidy, in that sense, whatsoever. The government is only contributing money on the basis that it is fiscally efficient for them to do so.

Meanwhile, our stylised model is silent on the process and mechanisms of the government’s contribution. It could be delivered through reforms to the existing grant regime and institutions; it could be a new regime. This is an issue for others to deliberate on.


Exhibit 14: A stylised economic viability model for the development of new social housing


Building costs

Construction costs

Land costs

Government contribution

Social landlord contribution

Welfare savings from paying reduced housing benefit if tenants pay social rents

and not affordable or private rents

Income stream from social rents

Recognition of asset value

Costs

Sources ofdevelopment funding

Viability of new social housing

+

-

=

Ongoing costs

- Maintenance and renewal costs

Management and risk costs

3 . 2 A S S E S S I N G T H E B U S I N E S S C A S E

Our analysis shows that, even using our tough test, in almost all circumstances, construction of new social rent housing is viable economically and fiscally once the future savings to the gov-ernment’s housing benefits bill are taken into account properly.

Landlords will struggle to fund the building of new homes for social rent on the basis of their likely future revenues alone. For example, a one bed flat in Milton Keynes will cost a social landlord around £74,000 to build plus an extra £19,000 to acquire the land for the block — a total of £93,000. (See Exhibit 15.) Once built, they can let the property out under a social rent tenancy for up to £90 per week. Over a 25-year period and allowing for maintenance, renewal and management costs, this would allow the landlord to borrow up to £54,000 now against the future rental income stream. (See Exhibit 16.)


Exh

ibit

15

: Est

imat

ed

bu

ild

ing

co

sts

for

dif

fere

nt

size

d p

rop

ert

ies

acro

ss d

iffe

ren

t re

gio

ns

in E

ng

lan

d, 2

015

-16

, £ t

ho

usa

nd

s

So

urc

es: C

apit

al E

con

om

ics,

Val

uat

ion

Offi

ce A

gen

cy, S

avill

s an

d h

ou

sin

g a

sso

ciat

ion

dat

a. N

ote

: th

e co

st o

f la

nd

is a

ssu

med

to

be

50

per

cen

t le

ss p

er s

qu

are

met

re f

or

a fl

at t

han

a h

om

e.

Inne

r Lo

ndo

n,

e.g

. Cam

den

O

uter

Lo

ndo

n,

e.g

. Bre

nt

Ho

me

coun

ties

, e.

g. O

xfo

rd

Sout

h ur

ban

, e.

g. M

ilto

n K

eyne

s

Sout

h ru

ral,

e.g

. No

rth

Dev

on

No

rth

rura

l, e.

g. A

llerd

ale

No

rth

urb

an,

e.g

. Lei

cest

er

No

rth

met

rop

olit

an,

e.g

. Lee

ds

No

rth

east

m

etro

po

litan

, e.

g. G

ates

head

Bu

ildin

g c

ost

s in

to

day

’s p

rice

s (£

th

ou

san

ds)

1 bed

flat

(4

7m2 )

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stru

ctio

n 74

74

74

74

74

74

74

74

74

Land

37

33

31

19

24

22

12

11

10

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l 11

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5 93

98

96

87

85

84

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ed fl

at

(60

m2 )

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stru

ctio

n 95

95

95

95

95

95

95

95

95

Land

4

8 4

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0

25

30

29

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14

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125

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stru

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4

6 4

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0

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180


So

urc

es: C

apit

al E

con

om

ics,

Ho

mes

an

d C

om

mu

nit

ies

Ag

ency

, Dep

artm

ent

for

Co

mm

un

itie

s an

d L

oca

l Go

vern

men

t an

d O

ffice

fo

r N

atio

nal

Sta

tist

ics

Exh

ibit

16

: Pre

sen

t va

lue

of

a so

cial

lan

dlo

rd’s

ne

t in

com

e s

tre

am o

ver

25

ye

ars,

£ t

ho

usa

nd

s

Inn

er

Lo

nd

on

,e

.g. C

amd

en

Ou

ter

Lo

nd

on

,e

.g. B

ren

t

Ho

me

cou

nti

es,

e.g

. Oxf

ord

So

uth

urb

an,

e.g

. Mil

ton

Ke

yne

s

So

uth

ru

ral,

e.g

. No

rth

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evo

nN

ort

h r

ura

l,e

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lle

rdal

eN

ort

h u

rban

,e

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eic

est

er

No

rth

Me

tro

po

lita

ne

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ee

ds

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rth

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tM

etr

op

oli

tan

e.g

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esh

ead

So

cial

lan

dlo

rd

con

trib

uti

on

P

rese

nt

valu

e o

ver

25 y

ears

at

a d

isco

un

t ra

te o

f 4

.7 p

er c

ent

per

an

nu

m (

£ t

ho

usa

nd

s)

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at(4

7m2 )

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me

fro

m s

oci

al r

ent

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0

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nd

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ain

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ance

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ain

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m s

oci

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4

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ain

ten

ance

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d

man

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ent

cost

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l 10

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82

7

4

66

5

9

61

62

5

9

56


With building costs totalling £93,000, plus £54,000 that a landlord can borrow up against the future rental income stream, this leaves a shortfall of £39,000 to fund construction of the new home. If construction is to proceed, the shortfall has to be made up if the new home is to be built through some combination of government grant and/or local authority contribution.

The latter may include ‘Section 106’ requirements on private developments or the deployment of council-owned land. Government grant available for new social rent housing has fallen markedly over the last 25 years. In the early 1990s grants provided for around 75 per cent of total cost of developing new social homes; this has reduced to fourteen per cent under the current affordable homes programme for 2011 to 2015 or an average of £16,989 for each new home.10 What’s more, this limited grant is now only available for housing let on an ‘affordable rent’ rather than social rent tenure other than in ‘exceptional cases’.

These levels of grant reflect a fiscal myopia; the government saving pennies in the short term only to waste pounds in the future.

As we have shown, by disbursing grant that permits the building of a new social rent housing, the government can achieve savings in its future expenditure on housing benefits – as well as providing a home for a low income family. In most cases, these future savings are more than enough to remunerate the original outlay of grant – using the government’s own investment appraisal criteria.

In the case of the one-bedroom flat in Milton Keynes, if it were occupied by a couple eligible for housing benefit who would have otherwise been housed in

private accommodation, the government would save £32 each week through lower welfare payments (and it would free up an extra £700 annually of spending money for the recipients). These future savings alone would justify the government contributing up to £51,000 towards the construction of the property — which more than covers the £39,000 shortfall. (See Exhibit 17.)

In other words, it is fiscally and economically efficient for the government to meet the social landlord’s shortfall on the construction costs of the one bedroom flat in Milton Keynes.

It is important to reiterate: our calculations of the government’s contribution is based only on future savings to welfare expenditure through reduced housing benefit liabilities. There are other reasons why the state may help fund social rent housing that we have not included. While our analysis has found that there are many areas where the benefit to the exchequer through housing benefit savings is greater, such as in London, the home counties or flats in other cities, such as Leicester and Leeds, there may still be a strong case for investment in other areas. There is a case for public sector investment in social housing in parts of the country with historically weaker economies and lower property values in order to help rebalance the British economy — while locally there may be strong logic for public intervention to help kick-start regeneration and renewal, or to mitigate other socio-economic ills.

There are substantial variations in the fiscal arithmetic — mostly dependent on location and the size of dwelling. But across our 36 exemplars, fourteen are like the Milton Keynes property. (These are highlighted in green in Exhibit 18.)

10 Homes and Communities Agency, Affordable Homes Programme 2011 to 2015: quarterly updates summary report (Homes and Communities Agency, London), 2014


Exh

ibit

17

: Pre

sen

t va

lue

of

go

vern

me

nt

we

lfar

e s

avin

gs

fro

m p

ayin

g r

ed

uce

d h

ou

sin

g b

en

efi

t if

te

nan

ts p

ay s

oci

al r

en

ts a

nd

no

t p

riva

te

ren

ts o

ver

25

ye

ars,

£ t

ho

usa

nd

s

So

urc

es: C

apit

al E

con

om

ics,

Ho

mes

an

d C

om

mu

nit

ies

Ag

ency

, Dep

artm

ent

for

Co

mm

un

itie

s an

d L

oca

l Go

vern

men

t an

d O

ffice

fo

r N

atio

nal

Sta

tist

ics

Go

vern

men

t co

ntr

ibu

tio

n

Pre

sen

t va

lue

ove

r 25

yea

rs a

t a

dis

cou

nt

rate

of

3.5

per

cen

t p

er a

nn

um

(£

th

ou

san

ds)

1 b

ed f

lat

(47m

2 )

Val

ue

of

futu

re n

et

wel

fare

sav

ing

s 16

6

107

84

5

1 22

1

12

36

28

2 b

ed f

lat

(60

m2 )

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ue

of

futu

re n

et

wel

fare

sav

ing

s 20

8

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0

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8

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ou

se(7

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alu

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f fu

ture

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w

elfa

re s

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gs

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s 20

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3

0

Inn

er

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nd

on

,e

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amd

en

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ter

Lo

nd

on

,e

.g. B

ren

t

Ho

me

cou

nti

es,

e.g

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ord

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uth

urb

an,

e.g

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ton

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yne

s

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uth

ru

ral,

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rth

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evo

nN

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ura

l,e

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rban

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eic

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tro

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lita

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ee

ds

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tM

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tan

e.g

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esh

ead


Exh

ibit

18

: Sch

em

e v

iab

ilit

y as

sess

me

nt

of

bu

ild

ing

a n

ew h

om

e f

or

soci

al r

en

t ra

the

r th

an h

ou

sin

g t

he

te

nan

t in

th

e p

riva

te s

ect

or

So

urc

es: C

apit

al E

con

om

ics.

No

te: G

reen

= v

iab

le t

hro

ug

h c

on

trib

uti

on

s fr

om

go

vern

men

t an

d s

oci

al la

nd

lord

s; y

ello

w =

via

ble

wit

h r

eco

gn

itio

n o

f th

e as

set’s

res

idu

al v

alu

e; li

gh

t ye

llow

= v

iab

le w

ith

ou

t th

e p

urc

has

e co

sts

of

lan

d

Pre

sen

t va

lue

ove

r 25

yea

rs (

£ t

ho

usa

nd

s); a

dis

cou

nt

rate

of

3.5

per

cen

t p

er a

nn

um

is u

sed

fo

r g

ove

rnm

ent

con

trib

uti

on

and

4.7

per

cen

t p

er a

nn

um

els

ewh

ere

1 b

edfl

at(4

7m2 )

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ildin

g c

ost

(in

clu

din

g la

nd

) -1

11

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05

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vern

men

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ntr

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n

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28

Rev

enu

e co

ntr

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n f

rom

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cial

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rds

(fir

st 2

5 y

ears

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9

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54

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9

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8

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b-t

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l 14

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Rec

og

nit

ion

of

soci

al la

nd

lord

s’ a

sset

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ue

in y

ear

25

100

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9

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5

4

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5

6

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5

0

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l 24

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2 )

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ildin

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ost

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clu

din

g la

nd

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42

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34

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19

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23

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What we haven’t considered so far is that the landlord still has a working and valuable asset at the end of the 25-year appraisal period.

In a further fifteen of our 36 cases, government welfare savings and the landlord’s net rent income over 25 years are not adequate by themselves to fund construction and land acquisition — however, if the residual values of properties after 25 years are also taken into consideration, they are. (These are highlighted in bright yellow in Exhibit 18.)

We have taken a cautious view of residual asset values — i.e. how much each property could be sold for after the 25-year appraisal period. We have not considered private open market prices but, instead, have assumed that all properties remain within the social rent sector with any future landlord only able to access a social rent tenure income. (See Exhibit 19.)

Our earlier example of a family occupying a two-bedroom property in Leeds falls into this category. A new two-bedroom flat will cost around £108,000 to build, including the purchase of the land. Discounting over 25 years at housing associations’ average cost of capital, the maximum social rent of £85 per week (less maintenance, renewal, management and other business costs) should allow the landlord to raise £51,000 towards the development costs — leaving a shortfall of £57,000. Taking into account future savings on housing benefits alone, the government should fund up to £37,000 of the shortfall — so £20,000 remains.

Nevertheless, building a two-bedroom social rent flat in Leeds is viable if the social landlord can access the future value of the property. Assuming that the property remained in a social rent tenure, we estimate that its residual

value after 25 years should be worth the equivalent of £57,000 today when discounted back at housing associations’ average cost of capital. (See Exhibit 19.)

In this example, if the social landlord can borrow £20,000 today against the residual value of the home after 25 years, construction can proceed. In theory, the markets should be willing to offer finance for such a reliable and long-term income generating asset. In practice, there may be difficulties putting together deals where the business plan extends beyond 25 years.

If so, there may be a role for the government either to provide these longer term loans to social landlords or, more pragmatically, to offer some form of partial guarantee for them to encourage private sector lenders. The latter has the advantage of not adding to public sector spending or borrowing except in the unlikely event of any such guarantee being called upon.

In a small minority of cases, some of the shortfall will remain even after both government welfare savings and the residual value of the property is taken into account. This occurs in seven of our 36 examples, typically larger properties in locations outside the southeast of England. (These are highlighted in pale yellow in Exhibit 18.)

In all of these examples, the various funding sources would be adequate to cover construction costs but not all of the costs of acquiring the land. Here, construction can proceed if under-utilised public land could be (part) gifted to the social landlord, or if the government provides grant in recognition of other social benefits arising from the new homes, such as urban regeneration and renewal.


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19

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3 . 3 S O C I A L V E R S U S A F F O R D A B L E R E N T T E N U R E S

So far, our analysis has focused on the welfare gains to be made from moving housing benefit recipients out of private tenure and into social rent. Of course, recipients of housing benefit (or its equivalent) may also be tenants in ‘affordable rent’ properties. The government can still make substantial savings from housing a tenant in a property for social rent rather than affordable rent, even though the difference between the rents payable is smaller than with the private sector.

We estimate that the government’s contribution would be sufficient to cover the construction shortfall in twelve of our 36 cases, for example a three-bedroom home in Oxford.

If the residual value of the social landlord’s property asset after 25 years is recognised, an additional thirteen examples would be covered, such as a two-bedroom flat in Milton Keynes or our two-bedroom home in Leeds. In eleven cases though, for example a two-bedroom flat in Allerdale or a four-bedroom home in Gateshead, the welfare savings would fall short.11 In seven of these cases, the various funding sources would be adequate to cover construction costs but not all of the costs of acquiring the land. In the remaining four cases, the various funding sources would be adequate to cover at least 89 per cent of construction costs but not the costs of acquiring the land.

11 See the appendix for further details


In this section, we evaluate the impact of constructing 100,000 new social rent units each year for government finances, the wider

economy and families’ standards of living.

I M PA C T O F 1 0 0 , 0 0 0 N E W S O C I A L R E N T H O M E S E A C H Y E A R


4 . 1 D E L I V E R I N G N E W H O M E S N AT I O N A L LY

We have been asked by SHOUT and the National Federation of ALMOs to compare the likely fiscal impacts of a potential policy of government support for the building of 100,000 new social rent homes each year with those of the existing regime.

We test an exemplar policy of building 100,000 new housing units for social rent12 each year, of which 24,500 are built by local authorities or arm’s length management organisations and 85,000 receive a government grant of £59,000 per unit. (See Exhibit 20.)

Exhibit 20: Policy assumptions

Sources: Capital Economics

Variable Assumption(s)

Current policy Total of 31,500 units for social or affordable rent built each year

5,500 social rent units are completed each year, of which 2,500 are built throughsection 106 contributions

25,000 affordable rent units are completed each year supported by government grant of £16,000 per unit

1,000 affordable rent completed each year without government grant through section 106 contributions

Exemplar policy 100,000 social rent units are completed each year from 2020/21

24,500 of these are by local authorities or Arms Length Management Organisations

85,000 are supported through government grant. We use our calculated requirement of £59,000 per unit as the level of grant

3,000 are built through section 106 contributions

20,000 social rent units house tenants who don’t receive housing benefit

Underlying economic

assumptions

Short term forecasts for public finances, inflation, and gross domestic product taken

from the Office for Budget Responsibility’s March 2015 outlook

Long term forecasts for public finances, inflation, and gross domestic product taken

from the Office for Budget Responsibility’s July 2014 fiscal sustainability report

12 For a current definition of social rent see Department for Communities and Local Government, Guidance on Rent for Social Housing (Department for Communities and Local Government, London) 2014


Given current conditions in the labour and materials markets that supply residential construction, and the need to identify and secure sites, one cannot expect an overnight jump to building at a rate of 100,000 new homes per annum. Time is needed to enable the construction industry and supply chain to build up capacity. Meanwhile, social landlords and their investors need sufficient time to plan their new developments and arrange their finances. Our judgement is that a steady build-up to 100,000 new homes per annum target by 2020-21 is reasonable. (See Exhibit 21 and Exhibit 22.)

Exhibit 21: Home builders reporting labour availability and costs a constraint on production, per cent

Exhibit 22: Home builders reporting materials availability and costs a constraint on production, per cent

Sources: Capital Economics and the Home Builders’ Federation

Sources: Capital Economics and the Home Builders’ Federation

0

10

20

30

40

50

60

70

80

90

100

1993 1995 1997 1999 2001 2003 2005 2007 2009 2011 2013

0

10

20

30

40

50

60

70

80

90

100

1993 1995 1997 1999 2001 2003 2005 2007 2009 2011 2013

–– Labour availability –– Labour prices

–– Materials availablity –– Materials prices


In addition to the capacity of the construction industry, there are also considerations relating to the availability of land. We have assumed open market prices for land. In theory, this should secure the land needed; in practice, it may be more problematic. Supply may be limited for many reasons, including not enough sites being identified in local plans and the tendency of public bodies to build based on meeting financial targets, rather than meeting housing need. The lack of sites to build on puts pressure on developers to overpay for land, which reduces the supply of affordable housing that can be provided.13 Improving land availability will be critical if the 100,000 new social units per year are to materialise. There are policy tools available to government in this respect and they may need to be considered in tandem with the new homes programme we are evaluating here. But such policies are outside the scope of this particular exercise.

Geographically, we allocate the new homes according to the relative demand for housing benefit today.14

Different-sized properties in different areas will generate different welfare savings for the government but, nationally, the government would save £62,000 per unit on average. But, it only needs to contribute £59,000 in grant funding to meet the funding gap and allow construction to proceed. Again, these calculations are based on the toughest of tests; they assume no recognition of the social landlord’s residual asset value after 25 years, no land or other contributions from local authorities or private developers, and there’s no grant from government to help achieve other objectives such as regeneration and renewal. (See Exhibit 23.)

Exhibit 23: National weighted average of scheme viability by estimated distribution of current housing benefit claimants’ bedroom requirement and location

13 Adam Morton, “Improving the land market is central to increasing housebuilding.” (National Housing Federation, London). Available at: https://www.housing.org.uk/media/blog/improving-the-land-market-is-central-to-increasing-housebuilding/

14 We estimate the bedroom requirements of current housing benefit claimants by location to calculate a weighted national average of scheme viability. Exhibit 40 in the appendix tabulates these results.

Sources: Capital Economics

Present value over 25 years (£ thousands); a discount rate of 3.5 per cent per annum is used for government contributionand 4.7 per cent per annum elsewhere

Building cost (including land) -118 -118

Government contribution 62 49

Revenue contribution from sociallandlords (first 25 years) 59 59

Sub-total 3 -10

65 65

Total 68 55

Building new homes for social rentinstead of tenant renting privately

Building new homes for social rent insteadof tenant renting at affordable rent

Recognition of social landlords’asset value in year 25


Sources: Capital Economics and L.E.K. Consulting, Construction in the UK Economy: The Benefits of Investment (The UK Contractors Group, London), 2009

4 . 2 I M PA C T O N T H E E C O N O M Y

The construction sector is particularly good at stimulating knock-on activity elsewhere in the economy and, therefore, generating further tax revenue.

A report for the UK Contractors Group estimated that every pound spent on construction output stimulates an increase of £2.84 in gross domestic product. This large multiplier is, in part, the result of a large proportion (92 per cent) of construction revenues remaining in the domestic economy and not being spent on imported inputs. What’s more, there is an additional 56 pence benefit to the exchequer from increased tax revenues and reduced benefits payments. Additionally, investment sentiment in the construction sector and supply chain will benefit from a medium-term government commitment to a steady programme of social building, as it will reduce the sector’s vulnerability to periodic downturns in demand in the private sector market. (See Exhibit 24.)

Exhibit 24: Construction multiplier effect

£1 spent on construction output generates a total of £2.84 in total economic activity

£1 £1.09 £0.75 £2.84 £1

Investment in construction Direct impact Indirect impact Induced impact Overall impact

Direct impactWage income and corporate profit generated in the construction sector, plus spend on non-labour inputs

Indirect impactIncreases in output and income in the supply chain. Supply chain impacts of construction and their knock-on effects i.e. Increase in output and income up and down the supply chain. Sectors that benefit from increased construction output include manufacturing (especially of building products and equipment), real estate, business services (including architecture, planning and surveying), mining and quarrying, and transportation

Induced impactIncluding increase in household income as a result of increased employment/income in construction and other sectors leads to increase in spending and demand/output in the overall economy


4 . 3 I M PA C T O N G O V E R N M E N T F I N A N C E S

We have examined the future impact of our tested policy on public sector debt and borrowing by assessing:

n Additional expenditure by government to provide grant to support the new building programme, which is funded through borrowing by both central government and local authorities

n Savings in welfare expenditure generated by moving families receiving housing benefit from private rented accommodation into social rent tenure15

n Higher tax revenues generated through increased construction activity

n Impact on interest payments on outstanding government debt

Exhibit 25: Impact on annual public sector net borrowing as a percentage of nominal gross domestic product


In the policy’s earliest years, the additional borrowing needed to fund the new homes will be greater than the welfare savings or the additional tax revenues from the construction activity. The net impact of the policy on public sector net borrowing should peak in 2019-20 at 0.13 per cent of gross domestic product or £2.9 billion (nominal terms). Thereafter, its impact on net borrowing will decline sharply — and, with improvements to the welfare bill accumulating each year, by 2034-35, the policy is set to create an in-year surplus for the government. (See Exhibit 25.)

-0.8

-0.6

-0.4

-0.2

0.0

0.2

0.4

2015

-16

2017

-18

2019

-20

2021

-22

2023

-24

2025

-26

2027

-28

2029

-30

2031

-32

2033

-34

2035

-36

2037

-38

2039

-40

2041-4

2

2043-

44

2045-

46

2047-

48

2049-5

0

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-52

2053

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2055

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2061-6

2

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64

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66

15 Our analysis is conducted on the basis of existing welfare policy, which currently sets an annual benefits cap of £26,000 for a household. The new Conservative government plans to introduce new policy to lower this cap to £23,000. This would, in some cases, reduce the cost of supporting households in the private rented sector and reduce the potential sav-ings in welfare expenditure. However, there may be some compensating disbenefits, for example higher levels of evictions from the private rented sector, and consequent costs to councils of placing families in expensive options, for example bed-and-breakfast accommodation.

n Additional borrowing by central government

n Welfare savings

n Change in interest payments

n Additional borrowing by local authorities and public corporations

n Reduced borrowing from increased tax revenues

–– Net policy impact


Turning to debt, the higher levels of borrowing required in the earliest years of the policy will barely register against the nation’s debt. By 2030-31 when the difference will be at its maximum, public sector net debt will be only 0.5 percentage points of gross domestic product higher than it would be under current policies. By 2040-41, the debt levels will be the same under either policy and, thereafter, the policy of 100,000 new social homes each year will put the United Kingdom on an increasingly improved debt trajectory. Public sector net debt as a proportion of gross domestic product will be 5.2 percentage points lower than it would be on current policies after 50 years. (See Exhibit 26.)

Exhibit 26: Public sector net debt as a percentage of nominal gross domestic product


4 . 4 I M PA C T O N FA M I L I E S

Households living in social rent rather than the private rented sector typically have higher standards of living — with more of their income to spend on non-housing items.

Of course, the amount varies depending on property size and location – but the broad trends are the same under most circumstances. Nationally, families would see their net incomes after housing costs rise by £18.70 each week or £942 a year on average.16 (See Exhibit 27.)

Under realistic assumptions, building new homes for social rent is fiscally and economically efficient, as well as being able to benefit materially households’ finances.

0

10

20

30

40

50

60

70

80

90

100

2015

-16

2017

-18

2019

-20

2021

-22

2023

-24

2025

-26

2027

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2029

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2031

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2033

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2035

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In 50 years time, debt as a proportion of gross domestic

product would be 5.2 percentage points lower

Public sector net debt would be 0.5 percentage points of gross domestic product higher than

current policy in 2029-30

Public sector net debt as a share of gross domestic product would

be lower in 2040-41

16 See Exhibit 40 in the appendix for national weights used in the calculation

–– Current policy –– SHOUT policy


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In this section we examine how building new social housing at a significantly greater scale fits in with the current focus on government austerity and whether policies can mitigate any

increase in public sector borrowing over the coming parliament.

S O C I A L H O U S I N G A N D A U S T E R I T Y


5 . 1 T H E M E R I T S O F A D D I T I O N A L B O R R O W I N G

The new Conservative government is committed to significant further reductions in public spending and a renewed focus on deficit reduction, the shape of which will become clearer in the budget planned for July 2015. Public investment in new social housing might therefore appear vulnerable. In fact, the more sensible stance would be to find ways of increasing investment, which would fundamentally enhance public sector finances.

To deliver the exemplar policy of 100,000 new homes each year, the public sector will need to increase its borrowing by more than it would have done otherwise in the initial years. The policy explored in this report would add to the level of government debt, so that by the end of the current parliament, it would be no more than 0.5 per cent or £8.8 billion higher than under existing arrangements.

In reality, the amount will be lower – because some of the additional cost can and should be met from private sector developer contributions and through redeployment of currently inefficiently used public land.

At first glance, one might think this increased borrowing flies in the face of the government’s commitment to continue significant reductions in spending as a share of gross domestic product. But this fails to recognise the underlying rationale for the current fiscal restraint: namely, to improve the fundamental sustainability of public sector finances.

Not all borrowing is the same.

Politicians are quite right to be concerned about increasing public debt in order to fund the day-to-day costs of public services. As a nation, we are living beyond our collective means if we have to borrow to pay teachers’ wages or to fund the welfare system we have voted for. But this is not what increasing investment in social housing implies.

One good reason for the government to borrow is to invest. ‘Investment’ can be a loaded term and, in modern political discourse, its meaning has often been stretched well beyond any definition to be found in either economics or accounting text books. But, in general, it represents the acquisition of fixed capital – physical assets such as infrastructure, buildings and machinery. These assets have long-term benefits, so it makes sense to borrow now in order to enhance productivity in the future. Compared with other kinds of infrastructure investment, social housing has the additional merit that, once built, the costs of management and maintenance are paid for by the rents tenants pay, in contrast to, for example, roads and schools.

Another sound reason for the government to borrow is to save. The creation of new social housing would significantly reduce the national welfare bill over any reasonable investment time horizon. Families, who would otherwise be housed in the private sector, would now be renting cheaper and better quality homes from a social landlord at a substantially lower cost to the state in annual welfare payments. Over 25 years the government would save £84 billion that would more than remunerate the initial cost of investment.


5 . 2 G O V E R N M E N T B O R R O W I N G A N D F I S C A L TA R G E T S

Even if government borrowing does rise, there are good reasons to argue that not all public borrowing and spending should be treated the same in fiscal targets. The United Kingdom government targets total debt across the whole public sector. This isn’t standard international practice. Many countries monitor and target the general government measure, which includes both central and local government but excludes public corporations. The housing services activities of local authorities plus their arm’s length management organisations fall under the definition of public corporation and, therefore, their financial liabilities are included in public sector debt but not the general government measure.17

Had the government’s fiscal mandate followed European and international precedent, and been couched in terms of general government rather than public sector debt, it would not have limited affordable home investment conducted by public corporations. (See Exhibit 28.)

Exhibit 28: Public sector borrowing definitions and housing


We have previously interviewed a number of key individuals in the London bond markets, and they are generally relaxed about the use of general government rather than public sector debt measures (provided there was statistical transparency).18 Indeed, many said that they would welcome further public corporation borrowing if it were to invest sensibly into infrastructure and the built environment. What’s more, there is concern that the nation’s dysfunctional housing market, in London in particular, is eroding economic competitiveness.19 The markets are positive about the government borrowing to invest and borrowing to save.

Public sector Private sector

Count towards generalgovernment debt

Centralgovernment

Localgovernment

Public corporations, e.g. ALMOs, council

housing services and Network Rail

Non-profit corporations, e.g.

housing associations

For-profit corporations, e.g. private developers

Count towards public sector debt

17 Further details can be found in John Perry, Let’s get building (National Federation of ALMOs, York), 201218 Capital Economics, Let’s get building: The view from the City (Capital Economics, London), 201219 The City of London Corporation response to Budget 2015 available at http://news.cityoflondon.gov.uk/

city-of-london-corporation-response-to-budget-2015


5 . 3 M A K I N G A C O N T R I B U T I O N W I T H O U T I N C R E A S I N G D E B T

Of course, in the coming parliament the government may not alter the measures of government debt that it targets. However, in previous work for Shelter we have provided a good basis for understanding how the government can minimise the impact of additional borrowing within the current peculiarities of its fiscal accounting arrangements.20

Interventions such as taking on contingent liabilities or contributing non-financial assets would not impose any additional burden on the government’s cash position.

A new funding platform that creates not-for-dividend institutions not controlled by government would permit an increase in debt outside of public sector borrowing constraints – while obtaining cheap rates through guarantees partially backed by the Treasury. We have previously demonstrated that the platform should include a housing investment bank focused on providing finance to the housing association sector and special-purpose tax-free ‘housing bonds’ savings accounts to provide a cheap source of capital. (See Exhibit 29.)

Exhibit 29: Funding platform to mitigate the impact of additional borrowing on public sector net debt


Special-purpose tax-free ‘housing bonds’ savings

accounts

National housing investment bank

Non-profit corporations, e.g. housing associations

Cheap sourceof capital

Cheap sourceof finance

With the liabilities partly guaranteed by the Treasury, this counts towards contingent liabilities rather than public sector net debt

20 Capital Economics, Increasing investment in affordable housing (Capital Economics, London), 2014


A national housing investment bank should have the economies of scale and specialised expertise to deliver cost-effective loans to housing associations. With liabilities partly guaranteed by the Treasury, it will be able to issue debt to the open market at favourable rates without detriment to public sector net debt measure. Meanwhile the creation of a new form of tax-free individual savings account, which is marketed and distributed by existing retail banks for a commission, would provide low-cost funds for the housing investment bank.

The government should make best use of its existing assets and deploy publicly owned land to improve the viability and bankability of projects. With land acquisition accounting for a large proportion of the development costs of new housing, the public sector can utilise its own portfolio of property with housing associations and developers to deliver housing schemes that require less up front financial investment.

It is entirely possible for the government not only to assist in delivering new housing for social rent, but also to enhance the sustainability of public finances with limited or no impact on its chosen target measures of borrowing and debt in its fiscal mandate.

Given the medium to long-term pressure on public finances, which are clearly set out by the Office for Budget Responsibility, it would be foolish to pass up the opportunity to make an early investment in heading off avoidable pressures. These pressures consist not just of means-tested benefit support for people in the private rented sector or ‘affordable rent’ housing, but the opportunity to build new stock which is well adapted to the needs of an increasing elderly population.

The Office for Budget Responsibility warns that rising health, pension and social care costs connected to Britain’s ageing population are the biggest challenges for public financing in the coming decades. Future governments would have to cut spending or increase taxes by £15 billion (2014 prices), which is roughly 0.9 per cent of gross domestic product, if they are to reduce the long-term level of national debt to a more sustainable level of 40 per cent of gross domestic product.21 The right housing, in the right locations, can reduce pressures on social care and primary and acute health care, and help to put the country’s finances back on a sustainable path.

21 Office for Budget Responsibility, Fiscal Sustainability report – July 2014 (The Stationary Office, Norwich), 2014


In this section we examine the broader knock-on social welfare benefits of tenants renting new social housing properties.

B R O A D E R K N O C K- O N S O C I A L W E L FA R E B E N E F I T S


6 . 1 U N D E R S TA N D I N G W I D E R S O C I A L W E L FA R E B E N E F I T S

Delivering new homes for social rent would help families in need and strengthen public finances. The case for investment in social housing must be based not just on need but also on the potential savings to the public purse as well as knock-on social benefits to the wider economy. These knock-on social benefits touch areas of public interest such as health, wellbeing and education and productivity, and affect all age groups in society. Although these are often difficult to quantify it does not lessen their importance. (See Exhibit 30.)

Exhibit 30: Broader knock-on social welfare benefits


Education

e.g. Children are less likely to miss days in school and

benefit from schooling stability if they have a secure social tenure

Wellbeing

e.g. Affordable and decent housing is an important factor in assessing whether an area

is a good place to live

Broader knock-on

social welfare benefits

Health

e.g. From warmer, more energy efficient housing


Building new social homes would give many households a higher quality of living space than they would otherwise have had in older private rented sector properties. A higher standard of home will generally have better energy efficiency, keep its tenants warm and have lower risk of damp and mould. Minimising these risks would be particularly beneficial for typically more vulnerable members of society, such as older people. Cold homes, fuel poverty and problems with damp and mould are associated with cardiovascular and respiratory problems, while poorer quality housing stock has been associated with excess winter deaths in the United Kingdom compared with colder countries in Scandinavia.22 A healthier population would ease the burden on the National Health Service, with the total health cost of poor housing in England estimated as over £600 million each year.23

Much of the existing housing stock is not only of poor quality, but is also largely unsuitable for the needs of Britain’s ageing population. Indeed, the vast majority of severe hazards in poor housing are associated with people having falls.24 Developing new high quality social homes which are well-located, easy to manage, accessible and where support and care can be provided cost-effectively would help reduce public service pressure on social care and health.25 What’s more, new development of specialist housing and smaller properties for those wishing to downsize would help reduce the prevalence of under-occupation, across all tenures.26

Living in affordable and decent housing is important to families. Household incomes are likely to be higher after housing costs if they pay social rather than market rents, giving greater financial security and improving the wellbeing of the family. Moreover a less constrained budget will put households under less pressure to under-heat their homes and decrease the risk of stress and family conflict. Affordable decent housing was voted the fourth most important thing that people thought made an area a good place to live.27 Tenants are more likely to find a home is of decent standard in the social rented sector. For 2012, the English Housing Survey found that a third of homes in the private rented sector were not of a decent standard, compared with just fifteen per cent in the social rented sector.28

Good quality social housing can also level opportunities in childhood and future participation in the labour market. Poor housing conditions have a damaging impact on learning and productivity. Children living in overcrowded or damp conditions are more likely to miss school.29 Meanwhile, social housing can provide a secure tenure for families and eliminate the need to move schools frequently. Educational attainment suffers when children are forced to move schools within the school year. Attending a single school can provide children with a stable influence and enhance their learning outcomes, providing not only better employment prospects for them in the future but also a more productive workforce for the economy.

22 Paul Wilkinson et al., Cold comfort – the social and environmental determinants of excess winter deaths in England, 1986-96(The Policy Press, Bristol), 2001

23 Maggie Davidson et al., The real cost of poor housing (BRE electronic publications), 201024 NHS Future Forum, Integration: a report from the NHS Future Forum (Department of Health, London), 201225 Martin Wheatley, are housing associations ready for an ageing population? (The Smith Institute, London), 201526 Richard Best and Jeremy Porteus, Housing our Ageing Population: Plan for Implementation (All party parliamentary

group on housing and care for older people, London), 2012 and Claudia Wood, The top of the Ladder (Demos, London) 2013

27 Department for Communities and Local Government, Place Survey 2008 (Department for Communities and Local Government, London), 2008

28 Department for Communities and Local Government, English housing survey 2012 (Department for Communities and Local Government, London), 2014

29 Shelter, Chance of a lifetime – the impact of bad housing on children’s lives (Shelter, London), 2006


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.02


Exhibit 36: Assumptions for modelling in housing tenure and the benefits bill chapter


Variable Data source/assumption

Council tax Council website

Childcare costs £25 per week for each child dependant aged sixteen or under

Social rent Formula rent calculation https://www.gov.uk/government/uploads/system/uploads/attachment_data/file/313355/14-05-07_Guidance_on_Rents_for_Social_Housing__Final_.pdf

Average property prices - Land Registry, House Price Index, (Land Registry), 2015 https://www.gov.uk/government/statistical-data-sets/house-price-index-background-tables

New social home assumed to be 81 per cent market value of open market

Affordable rent The greater of social formula rent or 80 per cent of median market rent

Private rent Lower quartile rent for each local authority from Valuation Office Agency data https://www.gov.uk/government/statistics/private-rental-market-statistics-england-only

Local housing allowance https://lha-direct.voa.gov.uk/bedroomcalculator.aspx

Benefits Turn2us calculator http://benefits-calculator.turn2us.org.uk/AboutYou


Exh

ibit

37

: Est

imat

ed

bu

ild

ing

co

sts

for

dif

fere

nt

size

d p

rop

ert

ies

acro

ss d

iffe

ren

t re

gio

ns

in E

ng

lan

d, 2

015

-16

(£

th

ou

san

ds)

So

urc

es: C

apit

al E

con

om

ics,

Val

uat

ion

Offi

ce A

gen

cy, S

avill

s an

d h

ou

sin

g a

sso

ciat

ion

dat

a. N

ote

: th

e co

st o

f la

nd

is a

ssu

med

to

be

50

per

cen

t le

ss p

er s

qu

are

met

re f

or

a fl

at t

han

a h

om

e.

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rLo

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74

74

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74

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31

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24

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11

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121

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Exh

ibit

38

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om

ics,

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mes

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d C

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ency

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artm

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for

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atio

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ears

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er c

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56

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74

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9

61

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59

5

6


Exh

ibit

39

: Sch

em

e v

iab

ilit

y as

sess

me

nt

of

bu

ild

ing

a n

ew h

om

e f

or

soci

al r

en

t ra

the

r th

an h

ou

sin

g t

he

te

nan

t in

a h

om

e a

t af

ford

able

re

nt

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urc

es: C

apit

al E

con

om

ics.

No

te: G

reen

= v

iab

le t

hro

ug

h c

on

trib

uti

on

s fr

om

go

vern

men

t an

d s

oci

al la

nd

lord

s; y

ello

w =

via

ble

wit

h r

eco

gn

itio

n o

f th

e as

set’s

res

idu

al v

alu

e; li

gh

t ye

llow

= v

iab

le w

ith

ou

t th

e p

urc

has

e co

sts

of

lan

d

Inne

r Lo

ndo

n, e

.g.

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den

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er

Lond

on,

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rent

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me

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ties

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rd

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g.

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rth

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an,

e.g

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ices

ter

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rth

met

rop

olit

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ds

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rth

east

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g. G

ates

head

Pre

sen

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r 25

yea

rs (

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dis

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rate

of

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per

cen

t p

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um

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r g

ove

rnm

ent

con

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on

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per

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t p

er a

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els

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ere

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Bu

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11

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7 -1

05

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3

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6

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4

145

8

9

68

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5

11

19

8

Rev

enu

e co

ntr

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tio

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so

cial

lan

dlo

rds

(fir

st 2

5 y

ears

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Exhibit 41: Assumptions used for modelling the business case for new social housing chapter



Current construction cost Actual data

Current land prices Regional/city data from the Valuation Office Agency in 2011,up-rated using Savills national land price

Government discount rate 3.5 per cent per annum – as used in the Treasury’s green book for evaluating investment projects up to zero to 30 years

Social landlord discount rate 4.7 per cent per annum – effective nominal interest rate for 2014 – as set out in the 2014 global accounts of housing providers

Social landlord net income stream

Social formula rent less 40 per cent for management and maintenance costs – as set out in the 2014 global accounts of housing providers

Value of future net income to registered social landlord

Present value over years 26 to 75 at a discount rate of 4.7 per cent per annum

Private rent growth 4.0 per cent per annum (nominal terms)

Earnings growth 4.0 per cent per annum (nominal terms)

Consumer price index inflation

2.0 per cent per annum from 2018-19. Earlier years from latestOffice for Budget Responsibility outlook

Social rents Consumer price index inflation plus one per cent from 2015-16


Exhibit 42: Assumptions used for modelling the business case for new social housing chapter

Exhibit 43: National weighted average of scheme viability by estimated distribution of current housing benefit claimants’ bedroom requirement and location, £ thousands




Welfare payments inside the benefits cap

Increase by 1.0 per cent per annum rising to consumerprice index inflation from 2018-19

Increase by 1.0 per cent per annum rising to consumerprice index inflation from 2018-19

Welfare payments outside the benefits cap

National average of viability Weighted average of components of viability (building costs, social landlord’s contribution and government contribution) by location and number of bedrooms using the respective share ofthe overall current council housing waiting list in England

Annual land and construction cost inflation

Increase of 3.0 per cent per annum

Building new homes forsocial rent instead of

tenant renting privately

Building new homes forsocial rent instead of tenantrenting at affordable rent

Present value over 25 years (£ thousands); a discount rate of 3.5 per cent per annumis used for government contribution and 4.7 per cent per annum elsewhere

Building cost (including land) -118 -118

Government contribution 62 49 Revenue contribution from social landlords (first 25 years) 59 59 Sub-total 3 -10 Recognition of social landlords’asset value in year 25

Total 68 55


Exhibit 44: Sensitivity test on national weighted average of scheme viability by estimated distribution of current housing benefit claimants’ bedroom requirement and location, £ thousands

Exhibit 45: Policy assumptions


Sources: Capital Economics, Office for Budget Responsibility, Economic and fiscal outlook – March 2015 (The Stationary Office, Norwich), 2015 and Office for Budget Responsibility, Fiscal Sustainability report – July 2014 (The Stationary Office, Norwich), 2014

Building new homes forsocial rent instead of

tenant renting privately


Present value over 25 years (£ thousands); a discount rate of 5.05 per cent per annum is used forgovernment contribution and 7.11 per cent per annum elsewhere

Building cost (including land) -118.0 -118.0

Government contribution 51.0 40.1 Revenue contribution from social landlords (first 25 years) 44.1

Sub-total -22.8 -33.8 Recognition of social landlords’asset value in year 25 22.9 22.9

Total 0.0 -10.9

Variable Assumption(s)

Current policy Total of 31,500 units for social or affordable rent built each year 5,500 social rent units are completed each year, of which 2,500

are built through section 106 contributions 25,000 affordable rent units are completed each year supported

by government grant of £16,000 per unit 1,000 affordable rent completed each year without government

grant through section 106 contributions

Exemplar policy 100,000 social rent units are completed each year from 2020/21 24,500 of these are by local authorities or Arms Length

Management Organisations

85,000 are supported through government grant. We use ourcalculated requirement of £59,000 per unit as the level of grant

3,000 are built through section 106 contributions 20,000 social rent units house tenants who don’t receive

housing benefit

Underlying economic assumptions

Short term forecasts for public finances, inflation, and grossdomestic product taken from the Office for Budget Responsibility’s March 2015 outlook

Long term forecasts for public finances, inflation, and gross domestic product taken from the Office for Budget Responsibility’sJuly 2014 fiscal sustainability report


A P P E N D I X : S E N S I T I V I T Y T E S T S


We have tested the sensitivity of our results to the various assumptions that we have made.Obviously this has an impact on the exact numerical outcome and we demonstrate this for some of our sensitivity tests on national scheme viability. However, for reasonable changes to our assumptions, our broad conclusions hold. Our tests suggest that the chosen discount rates for government and social landlords, future private rent growth, and the cost of land are key areas of sensitivity. We have stretched these to find the limits of the scheme’s national requirements.

Assuming discount rates of 5.05 per cent per annum for the government and 7.11 per cent per annum elsewhere levels off the scheme’s national surplus. Of course, looking at the national average hides that the policy would still work in areas such as in London and the urban South. What’s more, any land contributions from central or local government would bring the scheme back into surplus by lowering the building cost. (See Exhibit 46.)

Exhibit 46: National weighted average of scheme viability by estimated distribution of current housing benefit claimants’ bedroom requirement and location using stressed discount rates, £ thousands


Building new homes for social rent instead of tenant

renting privately


Present value over 25 years (£ thousands); a discount rate of 5.05 per cent per annumis used for government contribution and 7.11 per cent per annum elsewhere

Building cost (including land) -118.0 -118.0

Government contribution 51.0 40.1 Revenue contribution fromsocial landlords (first 25 years) 44.1 44.1

Sub-total -22.8 -33.8 Recognition of social landlords’asset value in year 25 22.9 22.9

Total 0.0 -10.9


We consider how changing our assumptions for private rent growth affect welfare savings and the profile of public sector net debt. If the annual nominal increase is less than 2.0 per cent per annum then public sector net debt levels will remain higher over the entire forecast period. If on the other hand private rents grow at 6.0 per cent per annum then public sector debt levels would be lower after 21 years instead of 28 years in our baseline. (See Exhibit 47.)

Exhibit 47: Change in level of public sector net debt under proposed policy compared with the level of public sector net debt under current policy under different assumptions of nominal private rent growth, per cent


Finally, we consider how changing our assumptions of land costs affect the viability of building a new home for social rent rather than housing a tenant in the private sector. In order to model the business case for new social housing, we have made assumptions about land costs. We have used regional and city data on land prices from the Valuation Office Agency from 2011, and updated this data using Savills national land price index to 2014-15. We have also assumed that the cost of land is 50 per cent less per square meter for a flat than a house.

If land prices are ten per cent higher than our land cost assumptions, all but one of our case study examples are still viable under our same methodology. Only the viabilities of three cases are affected if land prices are ten per cent higher. The first is a four-bedroom home in Brent which was viable through contributions from just government and social landlords now becomes viable with recognition of the asset’s residual value. The second is a four-bedroom home in Milton Keynes which was viable with recognition of the asset’s residual value, and it now only viable without the purchase costs of land. The third is a four-bedroom home in Allerdale, which was viable only without the purchase costs of land, but is now not viable as even without the cost of land at £43,000 the property would be in shortfall of £3,000. (See Exhibit 48.)

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