Let councils build – and borrow

Many voices – including Shelter’s – have been plugging the economic benefits of getting housebuilding, but two things are new about the current burst of pre-budget clamour.

Firstly, the breadth, and seniority, of the voices demanding investment has reached a new level. When the CBI, the Chambers of Commerce, a former Thatcher Government Cabinet member and even the Secretary of State for Business are all saying the same thing, all it needs now to complete the set is for the new Pope to emerge from the Sistine Chapel and call on the Chancellor to increase housing spend in the budget.

More interestingly, the calls for more homes are now focusing explicitly on public investment and public delivery.

Not so long ago the talk was all about ‘cutting red tape’ or channelling finance to the private sector to deliver. Now, after years of falling or flatlining housing production, attention is finally turning to the sleeping giant of house building: local councils. A glance at the figures shows just how big a giant it is, and how profoundly asleep it’s been:

(Graphs from this Savills report [PDF])

There’s a huge amount of opportunity lying idle there. Councils have plan-making powers, own large land assets that could be developed, and have both a duty and an incentive to build the homes their voters need.

After years of paying down historic debts and investment in repairs via the Decent Homes programme, the remaining council stock is in good physical financial shape, with half the average debt gearing of housing associations. And with over 1.7m council-owned homes in England, that’s a serious asset base on which to raise finance.

Recent changes have allowed councils to start building again, but the numbers are piddling, because the Treasury tightly caps the amount councils can borrow. The problem is that even prudent council borrowing is counted as national debt, and so runs into the same fiscal straightjacket that George Osborne finds himself in.

But, as others have highlighted, it seems this is more a function of accounting rules than real economics. Council borrowing to build homes for rent is not the same as government borrowing to fund wages, benefits or tax cuts – or even other types of investment. What other government spending generates immediate jobs and growth, provides a secure, long term income stream, AND gives you a capital asset that grows in value?

Nothing else I can think of passes the test: new hospital buildings create construction jobs, but incur an ongoing wage cost for all those doctors and nurses; new toll roads generate an income stream, but their value declines over time.

The campaign to lift the borrowing cap from councils is growing in momentum – and in Tuesday’s Lords debate Lord Jenkin joined the chorus. It’s a modest proposal – allowing borrowing up to the normal prudential limits to fund 60,000 new homes over five years – and there is surely scope for more in the same vein, but it’s a good first step.

Letting local authorities borrow sensibly to build affordable homes won’t solve the crisis over night, but it’s probably the single best thing Osborne could do to get Britain building again.

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3 Comments
  1. Why is new build social housing required when the country is awash with empty properties ranging from family homes to blocks of flats. In London a figure of 200,000 long term empty family properties (quoted by a Guardian correspondent) matches the 200,000 families requiring accommodation in the capital so there is no problem. The solution
    appears to be to hand we should just make the empty properties available to the homeless families, but how? Wherever a solution to this problem is to be found, it will not be that easy and new build social housing for sale or rent would have its part to play but like all proposed solutions it will rely on money being spent; money that neither the
    government nor private individuals and organisations have an inclination to spend. An additional source of revenue is required.

    People pay a substantial proportion of their earnings in VAT, income tax, council tax, business taxes and national insurance contributions. Inheritance tax recovers a proportion of the wealth an individual has made during their time in the state. In the UK 1,700 people ’own’ a third of the land area, about 200,000 have two thirds. Land is the only substantial untapped source of revenue in the UK (the establishment’s ‘sacred cow’?), for example with a tax of 1p/m2 on their present holdings, the Duke of Buccleugh would pay £9.76M, Duke of Athol £5.92M, Duchy of Cornwall £5.44M and the Duchy of Lancaster about £1.87M (if exclusive use was retained over all the land). The average detached house would pay £4 p.a. the average terraced house £1 p.a.

    The aversion governments’ display towards land taxation reflects a commitment to the status quo by the governing classes that will guarantee a continuing housing crisis. It cannot be seriously tackled until the feudal nature of UK land law is altered. When Parliament arrogated
    the power to tax UK citizens to itself, dispossessing the monarch of that right it left the UK ostensively owned by the monarch as feudal overlord thus she would be liable for any simple land tax based on ownership imposed by parliament (cf. income tax). If we were to tax the monarch on her realm she could charge those who occupy it and induce a freer market in land (or at least furnish the treasury with more tax money) but since much of her land is held freehold (free from any charges from the monarch) she cannot. This creates an anomaly that serves the owners of extensive freeholds well; they own the freehold not the land so the
    monarch is a buffer between them and a simple direct tax. The monarch cannot charge the freeholder but the monarch could not afford to pay a land tax on her entire domain. This feudal system of land holding ensures, whilst it remains in place, that any land tax proposed would be complex to frame and expensive to implement which acts as a disincentive to legislate and as a protection for the 0.3% who hold about 66% of UK land.

    A government’s duty should be to hold the state’s territory in trust for all its citizens (nationalisation), not to protect the terrestrial property rights of a very small section of society that have through their influence in the administrative and political systems created laws that discriminate in favour of a small number of individuals and organizations over the community at large. The market in land has been cornered by the few who because of our feudal system of land holding are protected from direct taxation, a situation which operates as a ‘dead hand’ on the land market. The ability of the nation to directly tax land would encourage its disposal by those not making productive use of it (or they could pay the tax) and so make for a freer market which house builders and other housing entrepreneurs could take advantage of.

    Nationalising the nation’s territory would remove the feudal barrier to a simple land tax. The acquisition and disposal of the 1st lease would be straightforward. Individuals or organizations would be entitled to lifetime leases which would be available for sale or sub-letting, the 1st
    leaseholder would have exclusive use (supported by legislation) and be wholly responsible for the payment of the tax. Leaseholders could build properties (subject to any restraint on the lease) on their area. Any properties on the area would be subject to a tax (say £10/m2) directly related to the ground they cover and any additional story’s area.
    It could replace the council tax. It would pass, for a registration fee, to the person(s) nominated in the deceased’s 1st leaseholders will. Where there is no will and no blood relative the 1st lease reverts to the common domain and the land registry then disposes of the property to a purchaser guided by an independent valuation. The money to be held in a registry account until it can be distributed as determined by probate.

    Having acquired a source of housing revenue how are we to spend it?

    In most cases the most cost effective use of money would be to bring sub-standard homes up to standard but regenerating empty homes is a thorny and cumbersome business because there is no will in the government circles to attack the legal and bureaucratic problems
    with any urgency although a bureaucratic industry has been created on the back of the homeless. Officials earn their money working the system as best they can, a system that hardly makes a dent in the total number of homeless families. I fear that as the problem gets worse even more rather expensive people will no doubt be employed to talk about it (commissions of enquiry and Royal Commissions).

    Giving grants to landlords to improve properties they should be attending to themselves seems like subsidising private wealth creation and is not what government funds are for are they? (cf. their use to fund pfi’s, ppp’s and quantitative easing).

    Abandonment of a valuable community resource should not be without cost to the owner, if the council tax is not paid then other council tax payers are subsidizing private property. At some stage the arrears would be substantial enough to justify seizing the property, an expensive undertaking that only adds to the LA’s problems (unless legislation was brought forward that followed the logic of the European Court ruling of 1985 and simplified the procedure for seizing long-term empty property). Those owners of empty property who do pay council tax could be encouraged to either dispose of them or bring them up to standard by imposing a multiplier on the council tax charged on empty properties, say 7% per year which would double the tax due in 10yrs (whilst offering them short term interest free loans to get any necessary work done).

    Does the public good (housing a family) trump private property rights? In 1985 the European Court of Human Rights ruled that it could and forced the owner of properties on long term leases to sell his properties to his tenants at below market value as required by UK law.

    Any viable solution involving the use of long term empty properties is
    predicated on the outcome of a conflict between private personal property and public good. The European Court judgement of 1985 makes a distinction between private personal property and private terrestrial property in effect, for housing; it placed the public good
    above private terrestrial property. This should give some encouragement to legislators in a quest for legislation that would extinguish the feudal nature of landholding in the UK and replace it with
    a territory owned by its citizens and held in trust for them by the state.

    Urban as well as rural development would benefit from those who can afford to secure large tracts of untaxed land for their exclusive use contributing to the national coffers and stimulating the development of under used and unused land and property. In the meantime government
    and LA schemes, charitable organizations and philanthropists will struggle on, alleviating as much distress as they can.

  2. Our council would rather spend money refurbishing privately owned homes & building more office blocks (that continue to lie empty, just like the ones they built before) than actually build more houses/flats for those who are in need. Especially with the welfare reform.

    There are many who are over 25 but under 35 who have found themselves in a 1-bed flat that their housing benefit will no longer cover (which it would before). People are being penalised through the ‘bedroom tax’ when there aren’t the homes to downsize to and when many disabled people (or the parents of disabled children) have had their homes adapted to their needs at the cost of thousands of pounds per home (in one case I’m aware of, this was £60k).

    There are many areas in our town where studio flats or shared housing for young people could be built, but the council isn’t interested.

    To give an idea of our council’s lack of business acumen: In the 90’s they knocked down a Victorian era building and then sold the plot of land for £1, the company they sold it too were to build an office block on it and then RENT IT BACK to the council at £50k a year! That office building is the town’s Housing Dept!

    If the council were to finance & build their own new social housing, they would be able to rent to people themselves and at best they would be gaining rent from those eligible to pay it or from those on benefits, the money would stay in the council’s hands (simply recycling through different departments, rather than ending up in the hands of the Housing Authorities (or worse, the private slum landlords).

    Oh yeah, that housing refurbishment scheme that I mentioned above, many of the houses benefiting from a 10-20k refurb are owned by private landlords. They’re getting new windows & roofs, the walls pointed (and even pebbledashed/faced in some cases) and new walls built for back yards where the old ones were in a poor state. And at the end of that, the landlords will then charge more in rent that will cost the council more through Housing Benefit payments! Any landlord benefiting from this scheme should be paying back any money invested in their property or should have to keep their rents frozen at a certain amount.

    And they wonder why the local councils are in so much financial difficulty! I know a bunch of 8-11 year olds that could do a better job!

  3. Oh, and another point, if they allowed people to build their own small homes without demanding they be over a certain square footage, there would no doubt be less homeless people out there. Of course, it doesn’t suit the banks (who want people to take out bigger mortgages so they get more back in payments) or the councils (who get less in tax from smaller properties).

    There’s a whole movement of people who would happily live in a small home (I’m talking under 300 square foot, even smaller in some cases), and there are ways that this could be made to happen if only planning departments would allow it to happen and had a little imagination about flexible housing design solutions (sleeping lofts, foldaway/multipurpose furniture etc).

    The university of Hertfordshire started working on little house solutions over 2 years ago with their cube house. It could easily have been adapted to create rows/blocks of units. I’ve no idea whatever happened to the project (there were issues with the design but nothing that couldn’t be easily solved with a little application of practical logic). And I bet those young people now forced into tight financial spots due to the changes in HB would no doubt be extremely grateful to have their own space & love the quirkiness of it.

    We’ve become so programmed that the dream is bigger homes, but we forget so easily there are so many who would be just glad for a small place to lay their head.

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