Selling expensive council houses can't accommodate the future

"What might be an appropriate tactical response in some cases could not be considered to be a comprehensive strategic solution."

According to the latest government figures, the number of households in England is expected to grow by 232,000 per year over the next twenty years. Last year, we completed just 109,000 homes, with rates falling again in the first quarter of 2012. How can we bridge this gap and what combination of tenures would best meet the needs of the population? With the economy in double-dip recession and access to mortgages constrained, most of these homes need to be for rent, although an element of housing for sale, possibly using a rent now, buy later model, would help to ensure more balanced communities.

A recent Policy Exchange report proposes that the volume of affordable housing could be increased by at least 80,000 homes per year by selling off social housing properties in high-value areas and replacing them with new homes in low-value areas. This might be an appropriate tactical response in some cases but could not be considered to be a comprehensive strategic solution to providing sufficient affordable homes.

There are a few difficulties with the Policy Exchange approach.

Firstly, it is a reactive approach that can only come into play once a home becomes vacant, so it is difficult to plan a new development when the timing of the cashflow to fund it is so uncertain. Inevitably, there would be a delay with fewer affordable homes available, before the new homes could be constructed.

Secondly, over the long term, we risk denuding high-value areas of all affordable housing, pushing families on lower incomes away from their places of work, reducing their disposable income and putting additional pressure on the transport system. It would also create greater pressure on public services in low-value areas. Having said that, many social landlords are making judgements about the appropriateness of their existing stock as they become empty, so this approach is already in place in some areas. Alternatively the homes may be retained by the landlord but let at 80 per cent of the market rent, which would generate a better income stream for the landlord while retaining the housing mix in the area.

The efforts of the coalition government to encourage house building, by streamlining the planning system and giving some support to stalled schemes, have failed because they are largely relying on the private developers to deliver the increase and they will only build where they can make a profit, difficult when first-time buyers find it so difficult to access mortgage finance. There are few private companies undertaking development for rent so this is a gap in the market that social landlords could exploit, at the same time as making a significant contribution towards bridging the gap between the number of new homes and new households.

Housing associations have access to relatively cheap finance, they have established development teams who know their areas and have good relationships with local councils, and they have the scale and housing management expertise to manage a large portfolio of rented stock efficiently. Under the current Affordable Homes Programme, most new affordable housing is being let at 80 per cent of market rent, well above social housing rent levels in most areas. This model requires relatively little capital subsidy (in many cases, none) but the higher rent levels are increasing the housing benefit bill for households on low incomes. Indeed the properties in high-value areas could be relet at market or sub-market rates and the cashflows from these used to support borrowing to build more homes.

Using their scale, financial strength and community knowledge, housing associations should be able to increase the volume of new rented housing without subsidy, while still being able to let at rents a little below the market rent level. These should be secure homes in which families could remain long-term without the fear of being pushed out at the end of a fixed-term tenancy introduced under the current regime. There would also be no requirement to means test the tenant population to identify the high earners who would be paying higher rents under the proposed “pay to stay” policy.

The government has begun to recognise that increasing the rate of house-building would also have a significantly positive effect on the economy, reducing unemployment and largely sourcing materials from within the country. An announcement is expected soon that the government will guarantee housing association loans, enabling them to further reduce the cost of capital and thus their costs of development. This is an opportunity to scale up the delivery of new homes for rent well above the level envisaged in the Policy Exchange report.

A man walks in late afternoon sunshine on the Heygate housing estate near Elephant and Castle on February 11, 2010 in London, England. Photograph: Getty Images

Chris Mansfield is a managing consultant at Hargreaves Risk and Strategy, a consultancy working in the housing association sector.

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Let's turn RBS into a bank for the public interest

A tarnished symbol of global finance could be remade as a network of local banks. 

The Royal Bank of Scotland has now been losing money for nine consecutive years. Today’s announcement of a further £7bn yearly loss at the publicly-owned bank is just the latest evidence that RBS is essentially unsellable. The difference this time is that the Government seems finally to have accepted that fact.

Up until now, the government had been reluctant to intervene in the running of the business, instead insisting that it will be sold back to the private sector when the time is right. But these losses come just a week after the government announced that it is abandoning plans to sell Williams & Glynn – an RBS subsidiary which has over 300 branches and £22bn of customer deposits.

After a series of expensive delays and a lack of buyer interest, the government now plans to retain Williams & Glynn within the RBS group and instead attempt to boost competition in the business lending market by granting smaller "challenger banks" access to RBS’s branch infrastructure. It also plans to provide funding to encourage small businesses to switch their accounts away from RBS.

As a major public asset, RBS should be used to help achieve wider objectives. Improving how the banking sector serves small businesses should be the top priority, and it is good to see the government start to move in this direction. But to make the most of RBS, they should be going much further.

The public stake in RBS gives us a unique opportunity to create new banking institutions that will genuinely put the interests of the UK’s small businesses first. The New Economics Foundation has proposed turning RBS into a network of local banks with a public interest mandate to serve their local area, lend to small businesses and provide universal access to banking services. If the government is serious about rebalancing the economy and meeting the needs of those who feel left behind, this is the path they should take with RBS.

Small and medium sized enterprises are the lifeblood of the UK economy, and they depend on banking services to fund investment and provide a safe place to store money. For centuries a healthy relationship between businesses and banks has been a cornerstone of UK prosperity.

However, in recent decades this relationship has broken down. Small businesses have repeatedly fallen victim to exploitative practice by the big banks, including the the mis-selling of loans and instances of deliberate asset stripping. Affected business owners have not only lost their livelihoods due to the stress of their treatment at the hands of these banks, but have also experienced family break-ups and deteriorating physical and mental health. Others have been made homeless or bankrupt.

Meanwhile, many businesses struggle to get access to the finance they need to grow and expand. Small firms have always had trouble accessing finance, but in recent decades this problem has intensified as the UK banking sector has come to be dominated by a handful of large, universal, shareholder-owned banks.

Without a focus on specific geographical areas or social objectives, these banks choose to lend to the most profitable activities, and lending to local businesses tends to be less profitable than other activities such as mortgage lending and lending to other financial institutions.

The result is that since the mid-1980s the share of lending going to non-financial businesses has been falling rapidly. Today, lending to small and medium sized businesses accounts for just 4 per cent of bank lending.

Of the relatively small amount of business lending that does occur in the UK, most is heavily concentrated in London and surrounding areas. The UK’s homogenous and highly concentrated banking sector is therefore hampering economic development, starving communities of investment and making regional imbalances worse.

The government’s plans to encourage business customers to switch away from RBS to another bank will not do much to solve this problem. With the market dominated by a small number of large shareholder-owned banks who all behave in similar ways (and who have been hit by repeated scandals), businesses do not have any real choice.

If the government were to go further and turn RBS into a network of local banks, it would be a vital first step in regenerating disenfranchised communities, rebalancing the UK’s economy and staving off any economic downturn that may be on the horizon. Evidence shows that geographically limited stakeholder banks direct a much greater proportion of their capital towards lending in the real economy. By only investing in their local area, these banks help create and retain wealth regionally rather than making existing geographic imbalances worce.

Big, deep challenges require big, deep solutions. It’s time for the government to make banking work for small businesses once again.

Laurie Macfarlane is an economist at the New Economics Foundation