Can we, should we, deresidualise social housing?

A perspective on developments in England

Alex Marsh School for Policy Studies University of Bristol

July 2013

Can we, should we, de-residualise social housing? A perspective on developments in England1 In this paper I am going to focus on England, not Scotland or Wales. Increasingly the paths taken on housing policy by the devolved administrations are diverging from that taken in Westminster. Policy in Scotland and Wales is more strongly infused with a sense of social democracy. But fathoming out likely trajectories for social housing in England is a challenge. We are now living with a Coalition Government. This inevitably means compromise and the risk of less coherence in policy agendas. While many colleagues from elsewhere in Europe would find coalition unexceptional, for us it is novel in many ways. It is not something to which we are entirely reconciled. It doesnt fit well with our overly adversarial style of politics. It is unclear whether coalition government is a temporary aberration, destined to become a historical curiosity. Or whether it represents the shape of things to come. At the moment the smart money is probably on a further coalition as the outcome of the next General Election, in 2015, partly as a result of voter disengagement, the fragmentation of popular opinion, and the disintegration of mass political parties. One thing is clear. Housing currently has a political profile in England that it hasnt had for quite a long time. But the issue attracting most concern and media attention is not necessarily the housing circumstances of households on the lowest incomes. The overarching context for the English debate is a long-term failure of housing supply to keep pace with population expansion and a considerable tightening of lending criteria on residential mortgages in the aftermath of the Global Financial Crisis. The net result is high housing demand although the intensity of demand pressure of course varies across the country and access and affordability problems. Owner occupation is declining and more households are seeking to access rental accommodation. In this context the Coalition government has attempted a rather audacious rethinking of social housing. They have sought to tilt the axis of the whole system. They have sought to challenge the idea of social housing as a long-term tenure or a tenure for life. They have placed more emphasis upon social housing as a temporary safety net in times of difficulty. They have legislated to allow fixed-term tenancies, to shake the system away from seeing secure/long-term tenancies as the norm. They have legislated to break the link between the status of statutory homelessness and access to long-term social rented accommodation.

This is the text to accompany my brief presentation to a Roundtable on de-residualisation at the ISA RC43 Conference in Amsterdam, 10th-12th July.
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Local authorities are now allowed to discharge their homelessness duties into the private rented sector without requiring the applicants agreement. But this attempted reorientation of social housing is being imposed upon a system in which certain institutions are deeply embedded and which is subject to path dependencies. So change on the ground is perhaps not progressing as fast or as far as central government might have hoped. While the Governments change agenda has been embraced in some localities and by some landlords, it has been rejected in part or in whole by others. In financial terms we have a social housing system that has flipped over the last quarter of a century from a reliance on price subsidy to a reliance on people subsidies. At the moment around 95% of public money goes into housing allowances (housing benefit) and only 5% into capital subsidy. While the whole thrust of policy for thirty years has been for housing benefit to take the strain, the size of, and increase in, the resulting housing benefit bill has come to be seen as a major political concern. The policy changes we have witnessed mean that more than ever it is important not to think about social housing in isolation. In particular, policy has increased the interaction between the social housing system and the bottom end of the private rented sector. And this interaction is likely to increase over the medium term. If we were to be successful in de-residualising social housing then we would need to keep an eye on what was happening in private renting, which is where the displaced households would almost inevitably end up. Without change in broader economic trends we are talking about something akin to an exercise in deckchair rearrangement. We also need to think about the fate of social housing in the context of current ambitious attempts to restructure the social security system. The centrepiece of this reform is the attempt to unify a range of core benefits, including housing benefit, into a single benefit Universal Credit. There are, however, major question marks over the delivery of this project. Yet, the Government has already introduced a range of restrictions and caps on housing benefit. It has also introduced overall limits on benefit entitlement and changed methods of uprating for benefits and allowable increases in social rent levels. The Governments overarching policy concern is to avoid spending public money wherever possible. While it has cut spending under particular budget headings, it is struggling to cut relevant spending overall, when judged holistically. But this overarching policy concern obsession - leads to a set of policies that do not cohere well. Indeed, they appear to conflict in key respects.

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What are the standard scenarios about the future of social housing in your country? How plausible are these scenarios?

We have seen significant tenure transformation in England over the last decade. Private renting has expanded considerably, both in absolute and relative terms, while social housing local authority and housing associations combined has declined. Social housing has now been overtaken by private renting as a proportion of the stock. When we think in terms of future scenarios we might think, very simply, in terms of growth and decline and consider the factors that may contribute to movements in either direction. There are a couple of notable changes that might point in the direction of future growth of social housing. First, the Coalition government has followed through on an initiative that started under the previous Labour administration. It has localised the Housing Revenue Account. That is, it has dismantled the national system of revenue subsidy underwriting the costs of (some) local authority housing. The way this has been done means that some local authorities have found themselves in a position to borrow money against assets in order to invest in new building. For two decades local authority new construction has been virtually non-existent. Now there are identifiable development programmes in some parts of the country. Second, larger housing associations are now organisations of significant scale and balance sheet strength. Several have entered the market for retail bonds and other financial instruments in order to finance further new development. In doing so they benefit from the comfort provided to lenders by the regulatory framework. However, we are arguably reaching the stage where organisations may well be able to deliver on their development aspirations by dealing with the markets on the basis of their own financial strength and could do so operating outside the regulatory framework. But these developments are perhaps not entirely what they seem at first sight. While the Government has allowed local authorities to borrow it has not been willing to allow them to do so on the basis of the prudential borrowing code, as recommended by the CLG Select Committee last year. Instead Government keeps tight control over the overall borrowing ceiling for local authorities. The move by housing associations into the bond market allows them to tap into new sources of finance, but the terms of engagement are different and it further embeds associations in global circuits of capital. Critics have argued that as housing associations are obliged to bend their minds to satisfying the markets the risk is that social purpose and, indeed, social housing as conventionally understood are increasingly marginalised. When we turn to consider decline we can identify a rather longer list of factors that may contribute. 3

The Coalition has sought to reinvigorate the Right to Buy, which had rather run out of steam, by offering more favourable discounts. This was accompanied by a promise of onefor-one replacement of the stock. But the numbers necessary to deliver on that promise dont stack up. On entering government the Coalition made substantial cuts to the social housing capital program, which their predecessors had tried to use counter-cyclically in the face of the risk of economic slowdown after 2008. More recently there has been some concession from parts of the Coalition that this was probably not a great idea. But this later shift in policy stance has not been accompanied by major new injections of funding. Instead the Government has preferred to promote the use of the state balance sheet to offer guarantees in order to encourage others to take the risk. This is an innovation in our context. Through the Localism Act 2011 the Government has also reformed the planning system in ways that has had the net effect of reducing the likelihood of social housing arguably any housing being constructed. The Government has also allowed private developers to retrospectively renegotiate and reduce the affordable housing requirements that had been placed upon them when planning permission was granted, in order to improve viability. This is seen as being a way of getting development started on sites that have stalled. Given the importance of such s106 agreements in meeting targets for affordable housing delivery over the last decade this is potentially a major change. But perhaps the most significant move the Coalition has made is to introduce so-called Affordable Rents as an alternative to conventional social rents. Affordable Rents can be set at up to 80% of local market rents. All new development supported by capital subsidy is to be on an Affordable Rent basis, and social landlords have the option to move to Affordable Rents for existing properties when they are relet. In high demand areas this can represent a significant increase in rent levels. The aim is, of course, to increase the rental income stream. This will allow for shallower capital subsidies and greater private borrowing secured against assets that are to be sweated ever harder. In lower value areas, however, Affordable Rents may not be significantly out of line with prevailing social rents, so the move wont necessarily allow access to new resources. There is limited research, as yet, on the impact of the Affordable Rent regime. A recent study looking at impacts in London suggested that Affordable Rents were rarely being set at 80% of market rents because that is a level judged by landlords to be implausibly high. Rents are more likely in the region of 65% of market rents. So far the social profile of the tenants of Affordable Rent properties in London is similar, if not slightly more disadvantaged, than for conventional social housing. The implication is therefore that the housing benefit bill per unit has increased in order to make properties accessible.

The Affordable Rent regime has been opened up to private providers. So the distinction between social landlords and private landlords has become increasingly blurred. The Coalition Government is also expert at the PR puff and the sleight of hand. Policy announcements quite frequent give with one hand and take away with the other. So it is important to study the detail. In the recent spending review the Government made a fuss about major increases in housing investment. But the increase was relatively modest, in historical terms, and it came with a lot of strings attached. In particular, it was expecting that many more relets would be at Affordable Rents, and a recalibration of the formulae for social rent uprating means that over time social housing will become increasingly out of reach of households who rely on housing benefit. But the future trajectory of social housing is not about the structure and generosity of subsidy alone. We also have to acknowledge the role of allocation systems. The driver of social housing allocations in Britain is an assessment of comparative household need. The overall imbalance between the number of households in need and the number of relets available means that in many areas only those with significant need will have a chance of gaining access. Indeed, in areas of acute need, for many years those who were designated as statutorily homeless accounted for the bulk of lettings. However, in 2009 a landmark legal case loosened the requirements to house those in the most need. And, as noted above, the Coalition has legislated for discharging homelessness duty into the private rented sector rather than social housing. In principle this means local authorities have more latitude to reframe their local allocations scheme in ways that open up the possibility of de-residualisation. Many local authorities are keen to increase the proportion of lettings going to lower income households in work, rather than to those in the most vulnerable social and economic circumstances. Some authorities have moved decisively in this direction already. Others are consulting locally on revisions to their policy. So these moves havent yet worked their way through the system. Yet given demand pressures on social housing the scope for creating more socially mixed communities as a result of these greater flexibilities is more constrained than the letter of the new policy framework might suggest. Also, in the background it would appear that the Treasury has ongoing concerns that more lettings to households in less disadvantaged circumstances will represent a reduction in the efficiency of the targeting of subsidy. 2. What are the principal political, economic and social drivers shaping the scale, limits and ambition of social housing? The English system embodies some long-standing constraints and inflexibilities. Most notably, for more than twenty years there has been a debate over whether we should switch to the EU definition of public sector borrowing. This would allow borrowing associated with trading activities including social housing, suitably constituted not to count against 5

public sector deficit/debt. This discussion rumbles on without much progress. It means that while local authorities have now been given prudential borrowing powers their discretion over investment decisions continues to be tightly controlled by the centre. Some have the capacity to borrow more and build more. But they are not able to. But this type of long-standing issue is dwarfed by the austerity agenda to which the Coalition has cleaved since 2010, in the face of significant domestic and international criticism. Almost all sides of the debate acknowledge the need for more social housing development to address affordability issues, both chronic and acute. Most people recognise housing investment can be a mechanism to give the economy a meaningful kickstart. And they recognise that social housing development is likely to be more responsive in the short to medium term than private speculative builders. The primary difference rests in whether politicians are willing to put up the money to underpin the investment. So far the Coalition has made some grand claims for the investment of rather modest amounts of money. This comes down to political priorities. Few dispute the dysfunctional nature of the housing market but it is not seen as such an overwhelming political priority that decisive action has to be taken. The opposition Labour party is developing a policy position that rests on the view that policy has moved too far in the direction of housing allowances. A switch back to capital subsidies is required. That may well be true. A move to capital subsidies may deliver a reduction in overall public support for housing in the medium to long term. But in the short term it is going to require a boost in overall housing spending as housing allowances are maintained while new building occurs. The Labour party has yet to offer a very meaningful transition plan. While the austerity narrative acts as a general impediment to action, there are a range of more detailed uncertainties about policy implementation that place constraints on the ability or willingness of social landlords to plan. For example, the regulatory framework for housing associations is under review (again). But more important are the social security reforms. Something like two thirds of current social housing tenants receive housing allowances. The outline of the new social security system is clear. But there are grave doubts about whether it will be implemented to the Governments proposed timescale, if at all. And if it is implemented there are ongoing concerns about its impact upon the security of revenue streams and hence landlords ability to service debts. This is not a climate hospitable to choosing to take on increased risk. We already know that the parameters of the new social security system, as they interact with the new mechanisms for financing development, make the development of new larger family properties either too risky or uneconomic in some parts of the country. 6

For these reasons, and others, some of the more ambitious and innovative social housing organisations are thinking through what can be achieved without government support or outside regulatory systems. As levels of public subsidy decline we can anticipate eventually reach a tipping point. Some landlords will conclude that it is no longer worth being subject to regulatory surveillance and stringent policy requirements regarding how assets are to be used or who is to be allocated properties. The freedoms of true independence will most likely appeal to some. Whether what they do with those freedoms can sensibly considered social housing in any meaningful sense is an interesting question. 3. Both. Social housing has not been a political priority in England for quite a long time. As housing problems pile one on top the other the merits of a more robust housing policy become ever more apparent. The key role of new house building in sustaining the macroeconomy has been widely accepted. The virtues of local housing organisations as key community resources are being more widely recognised. So there is a window of opportunity for those who wish to press the case for a better housing policy and for social housing to be a key part of it. However, the current trajectory of housing finance policy and social security policy means that the future of conventional social housing must be judged seriously at risk. The Governments attempt to accelerate the spread of Affordable Rents and intensify the sweating of the assets of, nominally, independent organisations is likely to have a transformative effect on those organisations. Potentially it will also have a transformative effect on the role they play in local housing markets. However, whether a transformation occurs will depend on the way allocations policy is reshaped and the trajectory of the private housing market. My best guess will be that the private housing market will continue to be unaffordable to many particularly following the Governments new bubble-building Help to Buy scheme and social housing landlords will not be able to reprofile their tenants to the extent that some would like. That constrains the scope for de-residualisation. The route out of the crisis for social housing could also depend quite profoundly on the outcome of the 2015 General Election. Some commentators have suggested that housing could be a key election battleground this time around. The formal housing policy of the Liberal Democrats, the junior Coalition party, includes significant commitments to social housing. The Labour opposition appear to be developing a policy which is more hospitable to conventional social housing. If the General Election delivers a Labour government or, perhaps more likely, a Labour/Liberal Democrat coalition then the future for social housing could look very different from one in which the Conservatives are returned for another term, either alone or in coalition. 7 Is the present crisis a threat and/or an opportunity for social housing?

4.

Do we see the sector playing a long term role in future mixed housing systems? If so, what will its key characteristics be?

Current social housing organisations will no doubt continue to play a significant role in the housing system. But there is likely to be a bifurcation, driven by the changing environment. Some social landlords are likely to adopt the strategy of sticking as far as possible to providing conventional social housing, perhaps with a greater community orientation. These housing associations will not be developing new properties. On the other hand, large housing associations will get larger, probably through merger and acquisition, in order to strengthen their balance sheets and access assets that can be put to work as loan security. Developing housing associations will become more closely enmeshed with private finance and, of necessity, operate in more market-friendly ways. They are also to varying degrees and in varying combinations - diversifying away from conventional social renting. Not only to Affordable Renting, but also to greater involvement in low cost home ownership and intermediate renting, or market renting. The Government has launched a Build to Rent scheme intended to boost new construction for standard private renting. Some of the early bidders for funding under the scheme are social housing organisations. Some associations, rather than diversifying into different types of housing provision, are diversifying into related areas such as the provision of care or community services. There is a general search for sources of cross-subsidy to underwrite social housing provision. Many of the larger organisations will therefore have a mixed portfolio of activity. Social housing will sit as one element of this portfolio. It will possibly be a declining element. The various activities may well be branded differently. This approach is likely to mean that the market is segmented, rather than social housing being de-residualised. Social housing, as currently understood, may eventually become primarily associated with the smaller, non-developing, more risk-averse housing providers. Such providers are unlikely to be well-placed to de-residualise. Housing organisations that we have thus far viewed as social landlords will remain part of the housing system. But the way the system is evolving means the time is ripe for a reconsideration of what is social about social housing. 5. Final thoughts

Can we de-residualise?

We can, but it is only going to happen if political priorities are significantly rethought. At the macrolevel housing needs to come up the list of political priorities. This will enhance supply sufficiently to give greater policy flexibilities. At the microlevel there needs to be substantial change both in terms of finance and in terms of allocations. It is most definitely not the case that policy cant innovate or isnt innovating. There is currently plenty of innovation occurring. It is just that most of that innovation is directed towards coming up with new ways of not spending public money now. Even if we end up spending just as much, or more, money later. Should we de-residualise? I think the answer to that is yes, but within parameters. The mixed communities rhetoric may have waned and the neighbourhood effects debate may continue to be inconclusive, but there is evidence around stigmatisation and the like that means that reducing the labelling effects of social housing would be a positive move. But, as I said at the outset, we need to couple thinking about de-residualising social housing with a concern for what is happening at the bottom end of the private rented sector. To some extent they are two ends of the same seesaw. We should also, though, go beyond thinking about social housing in the way that we have conventional conceived of it in the UK that is, as a specific set of properties receiving price subsidies. This type of thinking is ever less relevant to understanding what is going on. It doesnt allow us to build a balanced or comprehensive picture of what is happening. For example, the Governments Build to Rent scheme for private renting is similar in scale to its annual investment in Affordable Rented housing. Or the Government has recently expressed interest in development Rent to Buy schemes that provide price subsidy on a temporary basis. Temporary subsidies, revolving funds, recycling subsidies. These are mechanisms that are more explicitly part of housing systems elsewhere. They are only really starting to be explored in the English context. If we move further down this route then it reinforces the need to arrive at a more flexible understanding of social housing. Such mechanisms also lend themselves to moves to de-residualise social housing. We have asked: Can we de-residualise? Should we de-residualise? We might also ask: is there the political will to act? That is, do we want to de-residualise? This is a rather more pressing question. And the answer seems to me to be rather less clear.

About the author Alex Marsh is Professor of Public Policy at the University of Bristol. He has been Head of the School for Policy Studies since 2007. Alexs research and writing has encompassed a wide range of topics in the fields of housing studies, public policy and regulation. Between 2005 and 2009 Alex has been managing editor of Housing Studies, the leading international academic journal in the field. He continues as a member of the journals Management Board. Alex worked part-time as a Visiting Academic Consultant to the Public Law team at the Law Commission between 2006 and 2010. His work with the Commission addressed compliance issues in the private rented sector and systems of redress against public bodies. From 2004 until 2012 Alex was a trustee of Brunelcare, a Bristol-based charity providing housing, care and support for older people. For six years he chaired Brunelcare's Audit and Scrutiny Committee.

www.alex-marsh.net

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