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Monday 13 August 2012

Taxpayers to boost private developers profits

The Government's latest attempt to boost the building industry will transfer taxpayers money into private developers profits.  Eric Pickles, Communities Secretary, has given the green light for "expert planning brokers" to renegotiate hundreds of Section 106 planning agreements already made with Councils.

Section 106 planning agreements are a long standing arrangement which require developers to make a financial contribution to the community or provide affordable housing or infrastructure in return for planning permission. Typically the builders financial contribution will fund new road access, contributions towards new school places or a subsidy towards provision of more affordable housing to be rented by Councils or Housing Associations.

In other words developers are required to contribute towards infrastructure which will otherwise will have to be paid for from the public purse as a result of the very development from which they will make a profit. Without these agreements the developers effectively receive cross subsidy from the taxpayer for the public infrastructure which the new developments inevitably need to make them sustainable and saleable.

Since the 2007 credit crunch developers' home sales have been hit by stalled house prices and lack of buyers due to unaffordable or unobtainable mortgages. Not surprisingly many developers, who have to make a profit to survive, have put thousands of developments on hold and made even more thousands of building workers redundant. To help out the builders and increase the supply of housing the Tory led Government plans to send in the "planning brokers" to  effectively 'seal the deal' for the house builders profit needs by transferring the hidden costs of infrastructure to the taxpayer.

Who are these "planning brokers"? I don't actually know. My guess is they will be part of the same legion of private planning consultants who are normally acting on behalf of developers to arm-twist quasi-judicial local Council planning committees into accepting unwelcome planning applications with the threat of planning appeals often unaffordable for many Councils. If I am right that will be like letting the fox into the hen-house. I genuinely feel sympathy for Councillors on these Committees, being torn between their constituents' greater interests and the quasi-legal path they must tread. So what is happening to localism while central government appoints "expert brokers" to renegotiate these agreements?

Lets face it, this whole approach typifies this Tory led Government's ideology. They are putting private sector profit before the interest of the average taxpayer. This form of cross-subsidy to the developers will only help sustain unaffordable house prices, force working families who can get a mortgage into greater debt  and add further financial pressure to Councils to fill the infrastructure gap and/or reduce standards of these most basic services.

If the Government was really concerned about sustaining a vigorous building industry and a decent, affordable and sustainable housing supply they would be using any additional public sector funding to increase affordable social housing development, which already very effectively levers in private finance to minimise public sector borrowing. This would then provide employment and profit for the most efficient developers. Taxpayers would have the community owned asset of affordable rented housing, reducing the demand for private rented housing and the consequent expenditure on housing benefit (see previous post on this issue) as well as reducing pressure on the bottom end of the housing market ultimately making owner occupation an option available to more people.

Thursday 9 August 2012

Right-to-Buy costing taxpayer extra £2 billion per year

A report published recently by Sheffield Hallam University estimates up to £2 billion per year extra money in benefits through local housing allowances is being paid to private landlords of former Council homes sold under the Right-to-Buy and this money could have been better used paying for new house building.

A large increase in private rented sector has been well documented in recent years. What has not been widely recognised is the large part played ex-local authority homes in this increase.

One of the objectives of the Right-to-Buy when introduced by the Conservative government in the 1980's was to increase owner occupation. By 2012  2.5 million homes had been sold to sitting tenants. One argument in favour of the Right to Buy was that the owner occupiers would  take pride and invest in the maintenance of their homes thereby improving the characteristics of the estates as well relieving hard pressed local authorities from the maintenance responsibility. What no one really foresaw was that would lead to an increase of private rented sector.

Of course the initial sale was only the start of the process. Inevitably many Right-to-Buy owners sold on their homes for a variety of reasons. Most were re-sold to individuals for owner occupation but by 1995 it was estimated as many as 8% were being privately rented after 10 years. There is little accurate data on the percentage of ex-Council homes now being rented privately but earleir studies indicate this is more than 25% in London and 20% in Birmingham

In the mid 1990's the incentives to move Council homes into the private rented sector increased significantly through  the introduction of deregulated Assured Shorthold tenancies , greater availability of Buy-to-Let mortgages, house values rising significantly faster than inflation  and less favourable alternative investment opportunities

Despite the popular myth that Council estates are less desirable than other areas private landlords have discovered that the lower values of ex-Council homes give a greater rate of return on investment. This is in part supported by the better space standards of local authority homes, wider estate management functions undertaken by local authorities (such as grounds maintenance, dealing with Anti-Social Behaviour , communal area repairs and community development) which are not provided in other areas with a concentrated private rented sector. Added to this an unfulfilled demand for rented property in lower value , and  therefore more affordable, areas there has been an inevitable shift from owner occupation to private renting.
The higher rents in the private rented sector compared to Council rents have contributed to the increase in the housing benefit bill. Department of Work and Pensions (DWP) indicate that between 2008 and 2011 the number of housing benefit claimants in the private rented sector rose from 1.1 million to 1.6 million, an increase of nearly 50% in just 3 years. This is nearly a third of the total private rented stock in the UK.

While ex-Council stock sold under the Right-to-Buy remains a small proportion of all private rented homes, the study found that in three areas they studied in Scotland, (the only areas where the relevant data was available) it is this stock which has made up 40% of housing benefit claims in the private rented sector. This would suggest that the increased Right-to-Buy element of the expanding private rented sector is catering for the same tenant group as the original Council housing but at a much higher price for the taxpayer because of the much higher rents charged.

In a Joseph Rowntree Foundation Review of Housing 2011/12  the total housing benefit bill attributable to the private sector was estimated as £7.6billion. If the Scottish experience of private rented ex-Council housing is reflected across the whole UK the annual cost of Local Housing allowance benefit to the taxpayer is estimated as over £3billion per year with the additional cost of private sector rents compared to the equivalent Council rents as £2billion. This exceeds the receipts generated from the Right to Buy (RTB) in any year over the last 10 years.

The report concludes
" ...as the Right-to-Buy is being extended in England on the basis that it will generate new income for housebuilding. What we have shown is,that in fact, the RTB has resulted in growing annual revenue costs to the Treasury that may well continue to exceed receipts generated from new sales. If the government has billions of pounds to spend on housing it might make more sense to spend it on new housing supply rather to invest it in a tenure change and continuing housing shortage in key locations"