IEA Blog

The cost of Housing Benefit (HB) has exploded over the last five years, rising from £13.5 billion in 2004/05 to £20 billion in 2009/10. This is a cause for deep concern, not just because HB is a major burden on taxpayers, but also because it produces severe disincentives for workless people to enter employment.

The benefit is withdrawn at a rate of 65p for every pound earned above a certain amount. For many claimants it is the main reason that it is not worth starting low-paid work. This withdrawal of HB is normally in addition to the withdrawal of benefits and labour market taxes that have to be borne at the margin.

The Housing Benefit trap is particularly pernicious in high rent areas such as London. The capital receives 26% of HB payments although accounting for 12% of the UK’s population. This may partly explain why parts of London have some of the highest rates of worklessness in the country despite the wide range of employment opportunities.

From time to time the newspapers print a story that illustrates the problem. Last month the Evening Standard looked at the case of a mother of six receiving HB to rent a £2 million house in St John’s Wood, at a cost of £6,400 a month. Once other benefits such as Child Tax Credits and Income Support are factored in, as well as Income Tax and National Insurance, it’s clear she would have to earn in excess of £150,000 a year to be better off in work.

Such perverse incentives, as well as the clear injustice of such cases, provide strong arguments for reform of the system both to reduce public spending and address high levels of welfare dependency.

A simple first step would be to phase in a requirement for HB claimants to pay a proportion of their rent out of their basic benefits (such as Income Support). This would act as a deterrent to those exploiting the system to live in luxury homes in exclusive areas and would encourage tenants to seek out low-cost accommodation.

A second measure would be to reform the “local connection” criteria which in effect provide claimants with an entitlement to live in a particular area, no matter how expensive. Councils should be far freer to house homeless families in low-cost areas. At the very least, they could be housed in cheaper areas within a short commute of the borough in question (for example, Westminster Council could house people in Barking and Dagenham).

The long-term solution to the Housing Benefit problem lies, however, in the liberalisation of planning and building regulations that prevent the supply of ultra-low-cost accommodation. A liberal approach to land use could finally bring an end to this costly, complex and counterproductive system, and go hand-in-hand with the abolition of housing benefit so that all welfare benefits were simply paid as untied cash.

It is now almost exactly 30 years since one of Mrs Thatcher’s iconic social policies was launched. On 20 December 1979 the Conservative government published a Housing Bill which included the Right to Buy. This allowed council tenants to purchase their dwelling at a discount of up to 50 per cent. Since then over 2.5 million council dwellings have been sold, making the Right to Buy one of the most transformative pieces of social policy of the last century.

There are several useful lessons that can be learnt from the Right to Buy. The first is the need to go with the grain of human nature and not to try and force people to behave in ways that are not natural to them. The Right to Buy played on our natural self-interest, to do the best for ourselves and our families. The policy encouraged households to be independent and to take responsibility for themselves.

This brings us to the second lesson: the Right to Buy involved a one-off intervention – the offering of a right – but then left households alone. Unlike much of New Labour policy, which involves continual interference in the lives of people, it was an example of government offering something and then withdrawing. In that sense it can be genuinely said that it liberated people.

But perhaps of most significance, the Right to Buy demonstrates just how difficult it is to develop successful policy. It worked because the basic resources existed in the form of 6 million council houses, there were enough households willing and able to take up the offer, it was affordable for both households and government, and, most importantly, the policy could be readily explained and its appeal was obvious: in other words, the incentives and benefits were clear to all.

This combination of circumstances is very rare – so perhaps the key lesson we can learn from the Right to Buy is that really transformative actions by government are also very rare, and this might just be for the best.

The Royal Institution of Chartered Surveyors (RICS) announced today that they had changed their forecast on house prices for 2009, and that instead of a fall they now foresee a small increase. This raises an obvious question: if they were wrong then, why are they right now? If an organisation with the resources and networks of the RICS can be so wrong about house prices six months ago, how do we know they – or anyone else – are right now?

But, more fundamentally, why should we believe that the problem with housing markets is that prices are falling? Prices are dropping for a very good reason – housing had got too expensive, beyond what many people could afford – and markets are now making the necessary corrections. Instead of worrying about house price falls, and hoping for a return to inflation, we should rather trust that the market will continue to correct the distortions of the last few years and so we will continue to see house prices falling. If we want affordable housing in the UK, this is the only practical way of achieving it, even if it might not suit the property professionals.

A couple of weeks ago I took part in a debate on the housing opportunities for young people hosted by BBC Radio Leicester. The young people there were very aware of the issues of affordability and shortage and, quite naturally, wanted answers from the assembled experts.

Many of the young people prefaced their questions with phrases such as “When I buy…” or “How can I buy…”, and I must admit I didn’t particularly notice this until it was pointed out by one of the panel. From that moment on, however, the discussion was turned into a series of declarations on the virtues of social renting and the evils of owner occupation.

The audience of young people was told in no uncertain terms that they should not expect to buy their own home, but that rather they should live in social housing. They should be demanding that the government builds more rented housing rather than merely thinking about how they can afford to buy.

What struck me was the almost complete disjuncture between the aspirations of young people to own – even in a recession – and the attitude of housing professionals who saw their role as promoting social renting. Indeed, there was a sense of triumphalism from some of the adults in the audience that the housing market was in a state of collapse, and that finally people might stop “deluding” themselves that owning was a better option than social renting.

In normal circumstances one might be tempted just to ignore this view and see it as irrelevant. For the last 30 years academics have been barking on about the evils of owner occupation, and no one had taken any notice. But it struck me that, for the first time in a generation, this critique of owning might actually be listened to.

It is therefore very important for those who believe in the virtues of free markets and property rights to stand up and argue strongly for them and not give free run to those who see state intervention as the answer to our current problems. I found it immensely encouraging that these young people in Leicester assumed that they would buy, but in times like these they need to be told that they are right and not being selfish and unrealistic.

Twenty-nine per cent of English homes are not ‘decent’ places to live, according to the latest edition of the English House Condition Survey.

They fail to meet the ‘decent homes standard’, a measure of the quality of the housing stock, which includes criteria such as state of repair, health and safety, damp and mould, and heating and insulation.

The decent homes standard is not intended to be a measure of poverty or even a proxy, but it could be viewed as an important component. Indeed, the Poverty Site lists this index as one dimension of poverty. And unlike many ‘poverty’ measures, which equate income inequality with ‘social exclusion’, this indicator is based on concrete information about the conditions people experience in the real world.

Current anti-poverty policies are often synonymous with income redistribution – new entitlements are created and existing ones expanded. But this kind of government programme would be unlikely to solve the problem of ‘housing poverty’.

The proportion of people occupying non-decent homes does not vary enormously across income quintiles or tenures. The main determinant of housing quality is dwelling age – the older the building, the worse the performance.

An effective way to tackle housing poverty is therefore to allow more new homes to be built. This means thinking about alternatives to the UK’s highly restrictive land-use planning system.

Yesterday it was announced that the Greater London Authority (GLA) is to create 50,000 ‘affordable’ homes. But do such schemes actually increase the affordability of housing?

When developers are forced to allocate a share of their dwellings (or land) to social housing or part-ownership it reduces their returns, since these properties will not be sold at full market value. Since the financial incentives to build are reduced, fewer homes are likely to be constructed. This reduction in supply will make housing in general less affordable – and it should be remembered that most people, even those on quite low incomes, have to find accommodation in the normal market.

The effect is exacerbated because full-price buyers will pay less when they know their neighbours are likely to include housing association clients, who may be more likely to engage in anti-social behaviour because of the inability of so-called social landlords to have appropriate clauses in their letting contracts to ensure that tenants meet acceptable standards of behaviour.

And because ‘affordable’ homes are subsidised by government, it means taxpayers have less disposable income available to spend on housing.

There is also significant moral hazard, particularly when social housing is prioritised, as in the GLA plans. If social tenants are allocated brand new, high-specification dwellings – often in expensive, desirable areas – it increases the incentives for people to choose a life of welfare dependency rather than working hard to improve their living conditions.

The policy is also unfair to existing residents who live near Boris Johnson’s social housing projects. They will see their properties devalued and their neighbourhoods degenerate as social tenants are moved into their area. Under the current planning system they will receive no compensation.

Given that land supply is currently relatively fixed, the proposed schemes simply make housing more affordable for one group at the expense of another group and of general welfare. If there is subsidy to the housing sector as a whole then it simply encourages the sorts of bubbles that have got us where we are today.

If the GLA really wants to solve London’s housing shortage it must focus on increasing the supply of land to private developers. This means abolishing the green belt – much of which is not very green - selling off under-used parks and playing fields, and reforming planning rules that wastefully allocate valuable land to industry and warehousing. Tinkering with ‘affordable’ housing will only make the problem worse.