Will the spending round crush urban growth?

Alexandra Jones welcomes funding for skills, but worries that grants to pay for councils and growth have been wiped out.

Everyone knew there would be very little money to spare in Wednesday’s spending round and Thursday’s "growth statement". The economy’s poor performance has put paid to any attempts to move away from "austerity" government, so departmental cuts of up to 10 per cent came as no surprise. Yet the big question for me was whether the Review – which, it’s worth remembering, doesn’t even get put into practice until 2015 – would start to signal an alternation in the balance of power, away from most decisions being taken centrally about how money is spent and towards more local decision- about how best to deliver jobs, growth and better public services for much less money. So did it happen?

The honest, if unexciting, answer is that it’s a mixed picture – the rhetoric is going in the right direction but Government still lacks a "place" focus in its approach to national policy, and many of the the decisions about devolution were fairly timid, with too much emphasis on central government control rather than local autonomy.

Take Heseltine’s Single Local Growth Fund. Heseltine suggested it could be as much as £49bn over four years; it ended up being £2bn a year for five years. While it’s good news that a direction of travel has been established, creating some degree of certainty for local enterprise partnerships (LEPs) wishing to make investment decisions, £2bn is hardly a ringing endorsement for devolution to local areas. Digging beneath the detail, much of the money is not new – about £700m has already been allocated to local areas for transport or the New Homes Bonus – and when you divide it between 39 LEPs, it's not a great deal of money, roughly the same as the nine Regional Development Agencies had in the mid 2000s. 

It is good to see skills money in there, however, and now it’s been created it will be difficult to put the localism genie back in the bottle – provided local areas deliver. The challenge for Whitehall as it finalises guidance about how the money will be allocated is to ensure that, even if the amounts are smaller than I had hoped, there is devolution of decision-making and that access to the funds do not involve local areas jumping through a lot of Whitehall-devised hoops.

It’s also unclear whether the welcome announcements on affordable housing, super-fast broadband and transport will respond to the needs of different places. The £3bn of capital investment to build 165,000 affordable homes, along with the £250m announced for more super-fast broadband are welcome and will make a difference in cities across the country, as will the vast number of inter- and intra-city transport schemes that were announced. My concern is that as we move from policy announcements to prioritisation and implementation, the significance of the differences between places will be missed by Whitehall departments. 

Finally, it was not a surprise that local government has again been hit hard by cuts, receiving a 10 per cent cut that Stephanie Flanders of the BBC suggested would amount to a 35 per cent cut in real terms for local government since 2010 (although the Chancellor argued that other measures meant that the "true" cut for local government would be 2 per cent in 2015/16). Combined with cuts in welfare, which will affect some city economies significantly, it will be very tough for many cities to manage their budgets giving rising demands for their services. 

To help them manage cuts more effectively, more action is needed on innovative measures that increase local autonomy. It was good to see confirmation of Manchester's Earn Back deal, involving Manchester keeping a proportion of the benefits generated by increasing local economic growth. It was also good to see additional money for Troubled Families, but I would have liked to see more steps taken down the road of "Community Budgets", allowing local areas to pool budgets across silos in order to deliver more effective, efficient local services in a way already demonstrated in pilot areas such as Manchester and Essex. 

So where does this leave us? I’m an optimist, so I still hope that as the detail emerges over the next few weeks and months this will show that government is putting "place" at the heart of its policy-making. In the meantime, in the two years before these announcements kick in, there’s still more to do to give greater freedom to cities with the capacity to deliver and provide greater support to those cities struggling with capacity, decline or both.

Alexandra Jones is the director of the Centre for Cities

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Has Brexit burst the British housing bubble?

The fall in value of the pound is having a negative impact on property prices.

The high cost of housing in the UK has almost nothing to do with supply and demand. What matters is political control. Rents are high because landlords have gained the upper hand politically. The consequences are vividly illustrated in Ken Loach’s new film focusing on inequality in Britain, I’ Daniel Blake.  As a student in the 1980s I paid £9 a week to rent a room in a shared house in Newcastle upon Tyne. Private rent was low because for decades before then rents had been regulated. It was the lifting of that regulation that meant rents could rise so that now students have to borrow vast sums of money just to have a place to live. Today’s students pay many multiples more in rent than I ever did, and millions of families with children are also struggling because they have to rent privately.

Because rents have been allowed to rise as high as landlords can get away with, the landlords have been encouraged to buy up more and more properties that were once social housing or lived in by a family, who had bought the property with a mortgage. The number of people renting privately doubled between the last two censuses of 2001 and 2011. That has never happened before. It was the end result of years of deregulation and the withdrawal of our government from representing our interests in housing. Well-regulated private renting is a benefit, but without rent regulation it becomes a social evil.

Housing prices are not determined by supply and demand because you do not have a choice about needing to be housed. Allow an unregulated market to develop when social housing is also being cut and there is no choice not to buy what is on offer, other than sleeping on the streets. Prices will go sky-high. The purchase prices for mortgage borrowers also rise to astronomical levels as first-time buyers are competing with landlords to buy properties, and so have to be able to secure a mortgage equal to the amount a landlords can wring out of people desperate for a home.

In the first blog in this series on affordable housing published by Taxpayers Against Poverty, Stephen Hill, director of C2O Futureplanners, explained: “There are over one million less affordable homes than there were in 1980. The population has grown by nearly nine million people. Incomes at the median level are flat, and secure employment is increasingly scarce.” He is correct, but the situation is even worse than that — it is not lack of housing that is the problem. Each annual census in the UK records the amount of housing that exists at each point in time. It does this by recording the number of rooms in homes over a certain size. The number of rooms per person has risen at every census since 1981.

The 2011 census was the first to count bedrooms and found that in England and Wales there were 66 million for a population of 55 million (21 million of whom were married or in a civil partnership). So even if we make the ludicrous assumption that only married people share a bed and no children use bunk-beds, there were at least 22 million bedrooms empty on census night 2011. We have not been building a huge number of new houses or flats in recent years, but we have been adding extensions on to our existing homes and so we now have more housing than we have ever had before, per person and per family. We just share it out more unfairly than we have ever done before.

If housing prices were about supply and demand then our surplus of bedrooms would result in falling prices, but this is not a free market. You are not free to buy a flat that has been left empty in London to appreciate in value by its owner. They do not want to sell, or sometimes even rent it out, and you almost certainly would not have the money even if they did.

It is in the housing market that the majority of investments are made in the UK, housing is where most wealth is held. As we become more and more economically unequal it is through housing that we most clearly see that most of us are losers while just a few (who own multiple properties) are winners. Recent UK governments have been allowing wealth and income inequalities to rise and rise.

As Fred Harrison explained in the second blog in this series, government has not only withdrawn from regulating housing rents and profits to avoid this winner-takes-all-economics — it is now even prepared to provide £2bn to buy properties that home builders can’t sell so that they don’t need to lower prices even if landlords and first-time buyers will not buy their properties. The government sees renting-seeking as a social good, and believes that the market in housing should be regulated less and less with each year that passes, other than intervening to keep prices high and rising. Meanwhile, street homelessness rises, evictions rise, the debt of mortgage holders rises, housing prices rise and a small minority of the population become richer. So how will it end?

You might have thought that prices would stop rising when landlords stopped buying properties because the return on their investments in terms of rent would not making it worth their while paying, say, one million pounds for a three-bed house in a part of London near a tube station. Suppose that the most a family could pay was £20,000 a year in rent. The landlord’s “return” on their investment would only be two per cent a year, ignoring wear-and tear and anything else that they might be able to off-set against paying tax. If the forces that were actually at play were “supply and demand” then surely prices have to stop rising when people can no longer afford the rents?

However, landlords have another return: the escalating value of the property itself. If the property is rising by five per cent a year in value then they are making a seven per cent return when they rent it out, even if annual rents are just two per cent of its value. The rise of five per cent a year is due to speculation which is itself partly fed by a belief that the government of the day will do all it can to protect their investments, but it will only do that up to a certain point.

Because it needs to raise taxes a little given the state of the national finances, the UK government is now withdrawing its support of reckless profit taking by smaller landlords. In October 2016 a group of buy-to-let landlords lost their appeal in the courts to try to continue to be able to claim their mortgage interest payments as a business expense. From 2017 only the largest of landlords who set up companies to rent out their properties will be able to continue to do that.

The government knows that the housing market is in trouble. That is why Philip Hammond, the current Chancellor, announced that their “Help to Buy” scheme (which was aimed at the very best-off of potential first time buyers) will end in December 2016. The government knows that with the risk of falling house prices in future it cannot afford the guarantees that “Help to Buy” created. “Help to Buy” schemes were the previous Chancellor, George Osborne’s biggest spending commitment. They were designed to help inflate the housing market and keep prices rising, but eventually every speculative bubble has to burst.

On 21 September the first reports of a stalling market were released under headlines that included: “Q2 UK house sales at an all-time quarterly low says Land Registry”. UK Land Registry figures now show housing prices to have fallen in London by 7% so far in 2016, with the number of sales roughly halving. Investors have stopped buying; if a recent investor wants to sell they have to do so at a loss. Nationally prices fell by 4.5%.

So what happened to the magic-money-tree? In short the pound fell in value and it has been continuing to fall ever since the UK voted to leave the EU. There was always going to be “the event” that triggered the end of speculation and it is looking more and more likely as if Brexit was that event. Once the pound begins to fall in value then any overseas investor knows that if they buy property in the UK, even if its value in pounds does not fall, it will be worth less to them in future.

Suddenly UK housing is not a safe asset. Suddenly prospective landlords actually have to try to rely on their tenants’ rent to pay back their borrowings. Suddenly housing prices change despite no great alteration in supply or demand. Suddenly the whole edifice looks unsafe, not just for the majority of young and almost all poor people in Britain, but for the large majority of the population.

It was never “supply and demand” that determined our housing costs and profits. Relying on that belief did not result in greatly improved cheaper housing for most people, but it was easy to claim that somehow tomorrow would be better if we just left it to the market — until we left it to the ever more unregulated market for too long. Housing costs, prices and supply are determined by governments, including those that shirk their responsibilities and have too much concern for the economic fortunes of the affluent few.


This is part of a series of blogs on affordable housing published by Taxpayers Against Poverty. You can read others in the series on their website http://taxpayersagainstpoverty.org.uk/ or sign up to attend their seminar in Parliament on the 16th November here: https://www.eventbrite.co.uk/e/taxpayers-against-poverty-affordable-housing-seminar-tickets-28329123170