HoC Library Briefing Paper | How subsidised is social housing?

Earlier today the House of Commons Library published Briefing Paper Number SN06804 on Social Housing: Pay to Stay at Market Rents

The papers contains the following section:

How subsidised is social housing?

The Chancellor’s reference to social housing rent levels being subsidised by ‘other working people’ has drawn comment on the degree to which social housing is actually subsidised, particularly compared to other housing tenures. Councils have been able to charge lower rents because of historic subsidy for the loans to build it. These loans had to be repaid (from rental income) and from 2008 council Housing Revenue Accounts (HRAs) recorded an overall surplus which was, in turn, paid to the Treasury. Local authorities with retained housing stock became ‘self-financing’ on 1 April 2012 – a one-off redistribution of debt took place between local authorities. Some (136) took on more debt while others had their debt levels reduced or became/remained debt free.[01] The extra debt was taken on to reflect the future surpluses authorities would have paid to the Treasury. Thus the abolition of HRA subsidy is arguably the point at which it became questionable to refer to council housing as subsidised housing.[02]

The grant paid to developing social landlords enables them to charge lower rents which, in turn, reduces Government expenditure on Housing Benefit. In Building new social rent homes (2015), a joint report published by the National Federation of ALMOs and SHOUT (Social Housing Under Threat), Government grant is viewed not as a ‘deadweight subsidy’ but a fiscally efficient contribution which produces future welfare savings in addition to a long-term capital asset.

As part of the Government’s deficit reduction programme grant funding to build affordable housing has reduced since 2010; social landlords are now expected to develop new housing to let at affordable rents of up to 80% of market rents. The additional rental income can be reinvested in new build housing. This shift is accelerating the rate at which new housing association provided properties can be described as being provided with little or, in some cases, no upfront Government subsidy. The residents of these homes may be entitled to personal subsidy in the form of Housing Benefit but this is no different to residents in privately rented homes.

Commentators have drawn comparisons with the substantial subsidies enjoyed in other tenures; for example, John Perry, policy advisor for the Chartered Institute of Housing, explored the “subsidy question” in a blog on 15 March 2016:

First, taxpayer subsidies are far from confined to tenants in social housing. Was tax relief on mortgages called a taxpayer subsidy when it cost some £8bn annually in the 1990s? It was certainly seen that way when it was finally scrapped in April 2000. So it’s at least arguable that capital gains tax relief, and the lack of any tax on the on-going value of a property (other than council tax) are also taxpayer subsidies. And they now add up to over £10bn and £13bn respectively of tax unpaid by private house owners. Even readers who reject the notion that tax relief is a subsidy would have to accept that lower-income owners do get direct subsidy – through help with mortgage costs when they lose their job, and through shared ownership and other schemes. These currently add up to a modest £800m per year.

Private landlords and tenants also get taxpayer subsidies. The government spends £9bn on private sector housing benefit, which can be seen either as part of income support to tenants or a subsidy to landlords. Either way, the money comes from the taxpayer and ends up in landlords’ pockets. While it’s true that the cost of housing benefit for council and housing association tenants is higher in total (at £15bn), the average cost per tenant is far higher for private tenants (£108 per week) than council (£82) or housing association (£92) tenants, simply because rents in the private sector are higher too.

So how does the government calculate that social tenants each receive £3,500 subsidy from taxpayers every year? The truth is that this is not money paid by the taxpayer at all; it is the difference between the rents actually paid and those that would be charged if the homes were to be let by a private landlord. While this is properly classed as an ‘economic subsidy’, it doesn’t add to people’s tax bills and is a largely meaningless figure given that councils and housing associations are non-profit organisations. In any case, as we have seen, people on much higher incomes than £30,000 are still able to get taxpayer subsidies, as long as they want to be homeowners. For example, a shared ownership applicant can get subsidy if they earn £80,000 per year, the buyer of a Starter Home can get a discount worth up to £45,000 if they earn up to £100,000 per year, and social tenants on any income can get subsidies of up to £104,000 as a Right to Buy discount.Subsidies for private housing don’t end there. Many people assume ‘subsidy’ means government money that helps towards the cost of building houses, not just the cost of living in them. This is true, and the current government has just made a dramatic switch in the way it directs its capital subsidies. Grants to housing associations to build affordable rented homes are planned to fall from nearly £1bn this year to only £130m by 2018.

Altogether, the UK Housing Review shows that while government support for affordable rented housing now totals £18bn, it is dwarfed by support for the private market – mainly for homeownership – which now totals £42bn. By 2020, practically all the government’s capital investment in housing will be aimed at helping homeowners. To take just one example of the different subsidies, some 250,000 people have signed up for a Help to Buy ISA, which will give them up to £3,000 towards a deposit, and is expected to cost taxpayers at least £2.2bn.

Where does this leave the tenants earning more than £30,000 per year who the government says have ‘subsidised lifestyles’, to be targeted through its Pay to Stay scheme for tenants in social housing? Oddly enough, working council tenants who receive no housing benefit have a plausible claim to be the least subsidised of all types of householder. Such tenants are paying the full cost of the housing they use together with any debt which councils hold. How do we know this? Because the coalition government in April 2012 forced councils to make their council housing ‘self-financing’, which means that all costs have to be covered by rents. Not only this, but the Treasury also obliged councils to take on several billions of extra debt as part of the deal. In effect then, each tenant pays extra rent that funds this benefit to the Treasury.

Housing association tenants are not in the same position because many live in houses that have been grant-aided. But these grants have been cut by more than half their value per unit under the present government, and are due to fall further still. Currently, one-fifth of all new affordable rented homes are built with no grant at all, which means effectively that other tenants pay higher rents to fund the costs of their neighbours’ new homes.

So how does the government calculate that social tenants each receive £3,500 subsidy from taxpayers every year? The truth is that this is not money paid by the taxpayer at all; it is the difference between the rents actually paid and those that would be charged if the homes were to be let by a private landlord. While this is properly classed as an ‘economic subsidy’, it doesn’t add to people’s tax bills and is a largely meaningless figure given that councils and housing associations are non-profit organisations. In any case, as we have seen, people on much higher incomes than £30,000 are still able to get taxpayer subsidies, as long as they want to be homeowners. For example, a shared ownership applicant can get subsidy if they earn £80,000 per year, the buyer of a Starter Home can get a discount worth up to £45,000 if they earn up to £100,000 per year, and social tenants on any income can get subsidies of up to £104,000 as a Right to Buy discount.

When questioned on the nature of taxpayer subsidies to council tenants by Baroness Hollis of Heigham during the Bill’s committee stage in the House of Lords, Baroness Williams said:

“the rents are below market rent” [03]

Links:
[01]The debt settlement was intended to allow each council, from rental income, to manage and maintain its stock in a good state of repair for 30 years, or replace it where necessary, with enough left over to meet debt interest and repay the debt over the same period.

[02] See John Perry, Who really gets Government subsidised social housing? [Guardian, 27 January 2012]

[03] House of Lords Debate 14 March 2016 column1627

Baroness Williams of Trafford: As the noble Baroness says, the rents are below the market rent.

Baroness Hollis of Heigham: What the noble Baroness is saying is that every time private landlords’ rents go up, the subsidy to council tenants from the taxpayer is increased. That is Orwellian.

Baroness Williams of Trafford: My Lords, I think that we will have to agree to differ. I recognise that there are different opinions across the Committee on this, but I have made the point because social rents are lower than market rent.

ord Beecham: Market rents are artificial. There is nothing God-given about market rents because they are determined by landlords, largely on the basis of a shortage of affordable housing anyway. In so far as there is a subsidy, surely it is the subsidy that is paid in the form of housing benefit for private tenants, about which the Government propose to do nothing at all.

In addition to that, the noble Baroness referred to the need for consistency across all local authorities. She has not made an argument for that, she has merely stated it as a given. The Government do not take the same view about council tax. They did in a sense when they introduced the poll tax, and they seem to be making the equivalent mistake here with local authority rents. It is an absurd proposition that the same system should apply across all local authorities irrespective, for example, of the value of the housing and average local incomes. Where is the justification for the simple assertion that that must be the basis of the scheme?

Baroness Williams of Trafford: I am sorry, I thought that the noble Lord was going on to make a speech. The fact is that generally social rents are cheaper than market rents, although they have been going up at a higher rate than rents in the private sector. I do not think we can compare this proposal with council tax because different areas have different needs in terms of the services they provide.

 

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