Look the other way

If nothing else, the current collapse has exposed the failure of relying on private finance to deliver the almost a quarter of a million homes a year that would be required to fulfil government targets.

Peter Malpass, professor of housing at the University of the West of England, says: ‘What we have is a policy that goes back to the Thatcher era – the belief that the private sector is good and the public sector bad. The theory was that government should stand back and let the market get on with it. Houses would be provided in sufficient quantity and market forces would guarantee affordability.

‘But the policy has produced neither adequate supply nor affordability. The government has tested this theory to destruction and it’s time to find another model to replace market fundamentalism.’

‘Maybe we should consider a funding paradigm that would be less vulnerable to the turmoil on Wall Street and in the City’

Right now, house builders face major financial problems – many have already gone bust. The market has shrunk to the extent that the number of new homes built in Britain this year is expected to fall below 80,000. Some estimates put the number of building workers laid off in the past few months at up to 100,000.

The government is pressuring lenders to make mortgage loans more freely available in return for the billions of taxpayers’ cash. The intent is a boost in lending that will stimulate demand and get the market back on track. But is the hope of a return to previous levels of mortgage lending and the effort to stimulate private house building aiming in the wrong direction, as many critics argue? Is it destined to result in another disaster?

So far, the government’s stimulus package has met with a lukewarm response from developers who complain that it is too little and too late. They want the £8 billion the Homes and Communities Agency (HCA) has available for affordable homes in the next two years to be used to kickstart house building. The money would fund affordable housing on mixed-use sites and act as a subsidy for cash-strapped builders or the big housing associations that have taken on a development role.

But this is a continuation of the previous funding model – not a new paradigm – and depends on house prices picking up. If prices and demand remain low, there’s unlikely to be sufficient profit for builders to begin work on new projects – and housing associations will be unable to sell properties to generate the extra income required to go on building.

Since the 1980s, mixed-use developments – where some properties (usually the major part) are for outright sale, some are for part rent/part sale and some are for letting at ‘affordable’ rents – have replaced council building as the main vehicle for delivering social housing.

If the poor cannot afford a mortgage for that first step on the property ladder, maybe shared ownership schemes with housing associations or private developers are the answer.

Selling mortgages to low-income groups – after the collapse of the sub-prime sector – is now seen as an act of folly. But shared ownership schemes could be criticised on equal grounds. The Joseph Rowntree Trust and CHAS, the housing and debt advice service, have both warned of the dangers of shared ownership targeted at low-income groups.

Up to a quarter of the cases they handle are the result of shared ownership – and they make up a disproportionate number of repossessions and evictions.

Everyone agrees that a solution to the housing crisis depends on a bigger public sector role. The HCA is expected to pick up a large part of the burden – although even its £8 billion budget for the next two years is a drop in the ocean, when the total housing market is worth between £1 and £2 trillion.

A review is in progress on the ways in which the HCA dishes out its billions. One suggestion is that, instead of providing grant, or grant alone, to fund housing association building, the HCA would take an equity stake in the construction. The agency would get the money back if values went up and properties were sold.

The HCA could give cash to affordable housing providers to buy land from developers and landowners. The agency could take on the role of buying land or fund housing associations to do so. The money would be paid back from sales. Private builders could act as contractors and local authorities could provide mortgage guarantees.

But in the current climate, housing associations have little enthusiasm for schemes that place such a heavy reliance on sales. They have £51 billion of debt and need £12 billion new borrowing to deliver the government’s affordable homes target for 2018–11. Social rented homes make a loss, so where will the investment come from?

The Smith Institute, a thinktank with close links to the Labour Party leadership, has put its weight behind a scheme that would involve private finance – from banks, insurance companies and pension funds – taking on development costs.

Rather than being offered for sale, the properties would be retained by the financial backers and rented out. Finance could be delivered by special purpose vehicles (or SPVs) owned by a single entity or joint venture with housing associations, ALMOs, local authorities, private developers and the HCA. An alternative involves the setting up of local housing companies, partnerships between local authorities and private builders. Councils would be master developers and contribute publicly owned land.

But while the banking crisis shows little sign of abating, the shortage of private funding on which development plans depend will result in more being mothballed. Without a clear government lead, and a bigger influx of taxpayers’ cash, uncertainty will continue to dog the sector.

The government has now given the green light to the Bank of England to spend another £50 billion of taxpayers’ money. The money will be used to buy company debts – and ‘toxic’ assets. But in the midst of a housing shortage, there are still 200,000 properties developers can’t sell. Mortgage finance is hard to get. If cash is targeted at the housing sector, it could have a major impact.

In the meantime, the government has said it will allow local authorities to offer mortgages by reducing the rate at which they lend money and bring council loans in line with the commercial market. From the 1960s to the mid-1980s, local authorities lent sums that at one point were equivalent to 15 per cent of all mortgages.

Gordon Brown is also backing a plan to restart council house building. Treasury rules are to be relaxed to allow councils to borrow money for use in the construction of social housing on land already earmarked for development by private house builders but put on hold. Last year councils built only 375 homes, but the new move could result in thousands being built, although it will be some years before it comes to fruition.

Thousands more council homes are welcome, but the number is dwarfed by the demand. By next year, according to the Local Government Association, there could be five million people on council waiting lists. And the proposed building of a few thousand homes falls way short of the 200,000–245,000 homes a year built by councils in the 1960s (alongside 100,000–225,000 built by private developers).

‘Government hasn’t yet had its Jimmy Greaves moment – the point at which people stare at the glass and realise they’ve hit rock bottom’

All the measures that are being proposed are inadequate, according to Peter Malpass. ‘The government showed a misplaced faith in the market and as a consequence it has failed to do the necessary long-term planning,’ he says.

‘Now we have a crisis, but the government is just firefighting. We need to look beyond emergency measures towards a more fundamental and strategic restructuring of the housing system. We should revise our approaches to be much more open to the need for the state to manage the housing system, and not just dole out cash. Recent months show the housing market is inherently inefficient. We need bold moves – the state has to intervene.’

The present crisis originated with the collapse of the sub-prime sector. When banks discovered billion-pound holes in their balance sheets, they claimed the huge deficits took them by surprise. But the governor of the Bank of England had been warning about the risks of an overheated housing market for years. The bank refused to slash interest rates in the hope that the market would gradually cool down.

In early 2016 – long before the Northern Rock fiasco – the governor warned that mortgage borrowing was out of control. House-owners should not rely on values climbing indefinitely, he said. A housing bubble was being created and if it burst, the bank feared disaster. It would result in ‘a potentially large social problem’, the governor declared.

But banks such as Northern Rock, Bradford & Bingley and the big high street lenders now in the worst difficulty (and asking for more government cash) refused to heed the warnings and went on to devise new ways of lending – interest-only loans, mortgages worth more than 100 per cent of the (inflated) value of a property – that pushed the market to disaster.

Peter Malpass says we should be careful to avoid the same mistakes and that the present crisis could have a silver lining if it forces a rethink of housing policy.

An alternative model would start by constructing policy around housing need. ‘The state would have to commit itself to organising a substantial proportion of the production of necessary housing. But it’s not a question of going back to the 1970s – or the 1960s or 1950s – when councils borrowed money on the open market to build houses. The capacity of local authorities to deliver housing has been systematically run down.

‘We have to pursue the same objectives by means that will work today. In the past 35 years we’ve operated with a model for affordable housing which says that housing associations build properties and manage them – but why should they?

‘We have regional spatial planning and housing strategies, why couldn’t we have not-for-profit regional house building delivery organisations that would do the house building and then pass on the properties ownership to smaller locally based organisations that would manage them and keep them over a long period into the future.’

At the moment, the government is fearful of such radical moves, Peter Malpass says. ‘It hasn’t yet had its Jimmy Greaves moment – the point at which people stare at the glass and realise they’ve reached rock bottom. Ministers are not quite ready to admit they’ve messed up in a big way and have to turn themselves around.’