The economic case for more social housing across Britain


11:12 pm - March 30th 2013

by Dan McCurry    


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Rising house prices used to make cheery headlines in the papers. It was associated with economic success. We were all getting richer. If people can afford to pay more and more for houses, then the economy must be getting bigger and bigger.

In truth, the rise in house prices had just as much to do with the easy availability of mortgages, which created an “effective demand”.

As a youngster, I remember how people’s excitement of buying their own council flat infected everyone else. Aspiration amongst the working population must be one of the most important factors to a thriving economy, and it was very much instilled in the east enders in the ‘80s. This is how Thatcher won.

Today we hear commentators speak of the “lack of animal spirits”, referring to an economy which is moribund. Few people are investing lavishly. Few new enterprises are born from a sketch on the back of a beer mat. There’s a general lack of excitement, of inspiration.

The problem is that if we want to fix the problem of over-valued houses, then we would need to supply enough new homes to cause house prices to fall. However, deflation would stop developers buying land for fear of losses through falling prices. House price deflation would effect consumer spending. If people believe they are getting poorer in their assets they will avoid splashing out. How many politicians would choose policies that would have such an effect?

George Osborne must have considered these issues, when he chose to support the buyers, rather than the builders, of new homes. Such is his largesse that his subsidy will include houses up to a value of £600,000. So much for first time buyers.

The problem for the Tories is that they will only look at one section of the housing stock. When considering the solution, it helps to see housing as two separate stocks, with two separate economies. Private housing with it’s market economy, and social housing with it’s demand economy. They are both effected by supply and demand but in different ways. A lack of supply increases prices in the private stock, and waiting lists in the social stock.

The solution is to greatly expand the social because this can increase the amount of available housing without effecting the value of private homes, as social housing doesn’t compete with owner occupation. It would likely bring down private rents but we’re not so concerned about that, because falling rent puts money directly into the pockets of tenants, so the economic effect of rent deflation is more than mitigated.

A dramatic increase in the stock of social housing is an existing policy of Labour. Ed Balls proposes to build 100,000 new homes by providing 20% deposits to Housing Associations, who would raise the rest on the capital markets, using a business plan that combines homes for sale with not-for-profit rent. However, he should probably consider a figure closer to 300,000+ if he really wants to make an impact.

He should also make it his business to sell the economic argument for a greater expansion of social housing to the wider electorate, with a particular emphasis on the likely lower rents, as this provides a benefit to those who haven’t had the good fortune to get a social home themselves.

So it’s not just units that Mr Balls must contend with. He should also turn around the sorry reputation that social housing has developed from past mistakes. That makes a whole other challenge.

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Reader comments


Building more social housing right now would probably be better than nothing but I think a cheaper, more sustainable solution is hidden in your own explanation:

“The problem is that if we want to fix the problem of over-valued houses, then we would need to supply enough new homes to cause house prices to fall. However, deflation would stop developers buying land for fear of losses through falling prices. House price deflation would effect consumer spending. If people believe they are getting poorer in their assets they will avoid splashing out. How many politicians would choose policies that would have such an effect?”

Deflation isn’t a problem in well-functioning markets, electronics being perhaps the best example. Individual firms just have to suck it up and lower prices if they want to stay in the game. The reason why property developers are different is that planning restrictions give them quasi-land monopolies, allowing them sit on land and wait for the juiciest time to build or sell. If planning restrictions were lifted, house prices would fall dramatically but it wouldn’t stop new houses from being built.

A reduction in nominal wealth would suck for existing household owners, but the public good would be served by, and the nominal shock of the loss of valuable assets could be offset by increasing the money supply.

In the absence of a well-functioning private market in housing and house-building, more social housing is better than nothing. But a functional market would be superior and is within the government’s power to grant.

“The solution is to greatly expand the social because this can increase the amount of available housing without effecting the value of private homes, as social housing doesn’t compete with owner occupation. It would likely bring down private rents but we’re not so concerned about that, because falling rent puts money directly into the pockets of tenants, so the economic effect of rent deflation is more than mitigated. ”

What a remarkable economic argument.

1) The change in value of a close substitute will not change the value of the first product? Really?

2) A fall in rental values will not lower the price of privately owned housing? Really?

Those are both seriously, seriously, bad arguments.

BTW, in the South of England the majority of the “value” of a house is actually the “value” of the planning permission to build a house on that piece of land. If you want to make housing cheaper then you should be issuing more planning permissions. Simples.

2

So, what is wrong with bringing prices down, I thought that this was supposed to be one positive affect of the market.

@3

It is the OP who seems to believe that lower prices is a bad thing – “If people believe they are getting poorer in their assets they will avoid splashing out. How many politicians would choose policies that would have such an effect?”

I can’t tell from Tim W’s post wether he thinks lower house prices is a good or a bad thing. He was simply pointing out the very flawed argument in the OP.

Personally I don’t think deflation is a bad thing.

4

Whether the OP suggests that lower house prices are good or bad, I am pointing out that, according to market theory, driving prices down is good.

From this perspective, more social housing should (from previous experience) have the impact of bringing down rents. As for home ownership, having a supply of social housing merely adds to consumer choice of buying, renting from a housing association or council or renting privately, all good stuff.

@Tim.

Is renting a close substitute to owner occupation?

It’s a bit like comparing the purchase of a portion of chips with that of a chip shop. If people are in social housing, does this stop them having the ambition of owning their own home?
An increase in the quantity of social housing is unlikely to have any effect on the price of owner occupation.

Is renting a close substitute to owner occupation?

Social renting and private renting are close substitutes, yes. And rental values very obviously have an effect upon private house prices.

The other point about social housing is the crying need for it in so many communities.

9. Shatterface

As a youngster, I remember how people’s excitement of buying their own council flat infected everyone else. Aspiration amongst the working population must be one of the most important factors to a thriving economy, and it was very much instilled in the east enders in the ‘80s. This is how Thatcher won.

Right, working class people who bought houses they were previously pissing away rent on are responsible for Thatcher – not middle class people who had a god given right to buy new or renovated houses in order to move in to them.

Why is it that Thatcherism is blamed on working class people who wanted the security middle class people take for granted?

BTW, in the South of England the majority of the “value” of a house is actually the “value” of the planning permission to build a house on that piece of land.

The majority of the ‘value’ of a house in the South is that it is in the South.

We live in a country which culturally and economically orbits London because that’s where all the farms, shipyards, steelworks and coal mines were.

@Tim

Reductions in rental income would reduce the attraction of buy-to-let house purchases and this would affect demand. Agreed.

11. Planeshift

It’s interesting how right wingers would prefer the entire south east of england to become a concrete jungle (the effect of removing planning restrictions) rather than spend a bit on social housing and in the process reduce housing benefit in the long run.

An extra half million homes in the social sector is win win for everyone. The waiting lists go, the construction sector kick starts the economy, and the taxpayer gets a long run saving of housing benefit.

12. Derek Hattons Tailor

@11 But the reality is that is where they would be built, because that is where the demand is. This is of course a circular argument(no people = no demand = no investment = no jobs = no people), but attempt to move people out of London and you are accused of social cleansing or worse. It also seems unlikely that the waiting list would go, as the population isn’t getting any smaller, or any richer.

@11
How are you going to build all this social housing without removing planning restrictions?

No doubt you will say the extra borrowing to build this housing will be worth i- lets just keep on increasing the debt at an even faster rate.

Try this graph of the ratio between average house-prices and earnings
http://www.housepricecrash.co.uk/graphs-ftb-average-house-price-to-earnings-ratio.php

Houses have simply become unaffordable to a larger percentage of first-time buyers. Also with many pundits saying house prices are still too high and are likely to fall further in most places outside London, many of those who want to buy are probably thinking now is not a good time to buy, especially since employment prospects are uncertain and average real earnings are back at the level they were in 2003.

15. So Much for Subtlety

8. Cherub

The other point about social housing is the crying need for it in so many communities.

I would put it the other way around. The main point about social housing is how many ruined communities it has created. The more we reward something, the more of it we will get. And we have been rewarding social dysfunction so very very much.

Abolish social housing and a large part of the problems of Britain will disappear. Or if not abolish it, change the way it is awarded – it ought to go married stable couples first.

Because of war damage, a significantly larger percentage of West German households are in rented housing than in Britain. Post-war reconstruction of housing in W Germany was left mainly to private sector developers with the result that developments were smaller than in Britain – where local councils went for economies of scale and high rise development on prompting by Conservative central governments in the 1950s – as well as being more socially mixed.

A couple of miles away from where I sit is the largest council housing estate in south London – Dagenham is the counter-part in north London. These estates were built in the later part of the 1930s on the low-density garden city models to rehouse families often from inner London slums and poor housing. John Major was born in the hospital built to serve the healthcare needs of the local community.

This was the splendid pub built to serve the social needs of the local community but it was pulled down in the early 1990s after the local licensing authorities withdrew the pub’s license and said no license would ever again be granted. By accounts, this was the outcome of a horrorific murder during a Sunday lunchtime when the pub was crowded. A car drove into the extensive adjoining car park and parked there. Two characters got out, went into the pub and shot a man there who was drinking. They carried his body out to their car and drove away. And no body saw a thing. It took the police a long time to crack the crime and bring the killers to trial.
http://www.flickr.com/photos/23419478@N00/2471793020/

This doesn’t demonstrate that there shouldn’t be social housing, only that large council estates are apt to create and sustain social problems.

@11
If there is only one thing this government does seem to have got right, they’ve taken on the nimbys in their own backyards, as it were.

@15
Your view of social housing is common and is a real, real problem for us. The reputation of social housing is bad. Mostly it is bad in the places where we want to build it, the Tory areas. This is what we need to turn around.

@Bob B

Do you argue that social housing works if it is mixed with private and in small estates?

Or is it that long standing working-class communities tend be less lovely than people would like to imagine?

Or are you arguing against social housing?

Dan McCurry

I’m certainly not arguing against social housing. What I’m arguing against is large council estates and high rise housing estates as these generate and sustain social problems.

Local councils went for large estates – where the housing became instantly recognisable as “council housing” – because there were economies of scale in building large estates. Councils built high rise housing estates – which are more costly to build than low-rise high density developments – because Conservative governments in the 1950s offered councils subsidies to build high.

In W Germany, the result of relying on the private sector for reconstruction was smaller developments and rented housing with great a greater social mix.

Back in the 1970s, I canvassed council estates where Labour stalwarts argued in favour of retaining 11+ selection in schooling so teens didn’t get trapped by neighbourhood peer groups.

15

I was brought up on a council estate, a few doors down lived a teacher at the local grammar school (which I attended), in all, the estate was the home of an headmaster and several more teachers. The estate was also home to a civil engineer. Home ownership was certainly an aspiration but because of the lending constraints at the time, even young professionals could not buy. And it wasn’t a big problem because the vast majority on the estate took great pride in their gardens, certainly it looked a lot better than many private estates I now visit.

The fact is, a house is a house, what has changed is our perception towards renting and particularly renting from local authorities. The emphasis on home-ownership was the underlying cause of the credit crunch where banks and other financial institutions took advantage of this cultural change and loaned monies to totally inappropriate borrowers. Furthermore, local authorities placed problem families together so now, instead of the problem being that of families/individuals, it now becomes a problem of social housing, which is clearly your take on it.

16

Germany has quite a different perspective on home ownership and, up to the 1990s at least, renting was not considered the ‘poor relative’.

18

Agreed

20

I don’t know who these Labour stalwarts were but on the council estate I lived with my family quite a few children went to the local grammar, many, like myself, chose to work at the local pit, also see my comments above.

21

“The emphasis on home-ownership was the underlying cause of the credit crunch where banks and other financial institutions took advantage of this cultural change and loaned monies to totally inappropriate borrowers.”

Historically, that isn’t correct. Government promotion of home ownership goes back decades, long before the onset of the financial crisis in autumn 2007 with the run on Northern Rock because of its business model in which its mortgages had been financed by borrowing on the wholesale money market.

When inter-bank lending dried up because banks stopped trusting the collateral offered by borrowing banks, Northern Rock was in deep trouble. The drying up of inter-bank lending was caused by loan collateral under-pinned by subprime mortgages of dubious provenance.

Prior to the crisis, over 70pc of homes were owner-occupied but that has now dropped to about 69pc. What boosted home ownership decades ago was the tax break for interest payments on mortgages, which we no longer get. For historic details on Mortgage Interest Tax Relief, try this
http://www.hmrc.gov.uk/statistics/mortgage.htm

The home mortgage boom prior to the financial crisis was not caused by a recent preference for home ownership but because easy, low-deposit mortgages were being promoted as the result of bankers bonuses. Mortgage finance was used for all sorts of transactions: buying houses to rent out, house extensions, buying second homes, paying for social care etc.

21

‘Historically, that isn’t correct’, maybe not for London and the South East but certainly for many, working-class areas, and it is those borrowers (who would have previously rented social housing) who were given the ability to purchase (as you state) beyond their means. This was driven by a) culture b) lack of decent social housing because most of the best had been sold-off.

23

Try looking at the reality:

“At the beginning of the 1980s around half of all households owned their own homes. By the end of the decade, this proportion had increased to two-thirds. Chart 1 shows that almost all of the growth was due to a rise in the number of people with a mortgage, rather than an increase in outright owners.”

“Home-ownership rates also vary by region as shown [for 1996] in Chart 3. Scotland is the region with the lowest proportion of households owning their homes (56%) and the South East (excluding Greater London) is the highest (72%)”

From: Home-ownership and saving in the UK (February 2000)
http://www.cml.org.uk/cml/filegrab/pdf_pub_hf_45-4.pdf.pdf?ref=3275

In other words, even in Scotland, the country/region with the lowest incidence of home ownership in 1996, 56pc of households owned their own homes. As Chart 3 shows, the incidence of home ownership in London was only a little higher than in Scotland.

In the last few years, home ownership has been in decline. The latest BBC report for England I can find says this:

Home ownership in England continued to decline last year, according to the latest English Housing Survey.
The proportion of households living in their own homes fell in 2010-11 to 66% (14.45 million), from 67% in 2009-10.

There was an 8% rise in the number renting from private landlords to 3.62 million, or 16.5% of private households.

The number living in council or housing association homes rose too, to 3.8 million or 17.5% of households.
While 30 years ago there were 3.55 million more households in council or housing association homes than renting private ones, that gap has now shrunk to just 209,000.
[BBC website 14 February 2012]

Try this Guardian report from 2011 on renting housing in Germany:

Brits buy homes, the Germans rent – which of us has got it right?
Germany seems to offer cheaper rents and more choice than the UK. But is the grass really grüner?
http://www.guardian.co.uk/money/2011/mar/19/brits-buy-germans-rent

24

Home ownership increased from the beginning of 1980 to the end because of the right to buy, this gave many council tenants one third or more off the purchase of their council house. This also allowed many working-class families the possibility of home-ownership who otherwise could not afford to buy. Added to this, many councils supplied the mortgages which allowed the purchase. The thing was, that most of those who bought did so from the better stock, I don’t think one house on the estate where I grew-up is now owned by the local council.

As your own figures show (I haven’t checked them), home-ownership has increased to up to 72% in some areas and a cultural change towards the idea of renting social housing has changed. Home ownership attracted an high status and real estate became an investment rather than creating a home. Certainly the reduction of good quality social housing and the prevailing culture of home ownership drove people to take on debts that were unmanageable and financial institutions were willing to service those wants. I can remember when most building societies would only lend up to 3 x annual salary and a 10% deposit as the minimum. In 2003, I was offered a £250k mortgage on my, rather average, wage, which I didn’t take up.

That is the reality, and until we start building more social housing and change our cultural attitudes to renting said housing, the housing benefits bill will continue to rise and more people will take-on debts that they cannot comfortably pay.

27. Richard W

To put things in brutally technical terms the UK housing market is seriously fucked up. If I say UK housing is currently undervalued people will think I am nuts. It is nominally undervalued and none other than the ECB agree.
https://twitter.com/faisalislam/status/314872819840323584/photo/1

How the hell can a market where people complain that they cannot afford the nominal prices also be considered on some measures undervalued? The rents that private landlords are extracting is the answer. Rents are too damn high for a number of reasons. The long-run average rental yield that a landlord after costs should achieve is around 5%, the national rental yield that takes account of all social housing is 3.60%. Therefore, a house should cost 20x the annual rental yield. In terms of rental yields that landlords are actually achieving gives the ECB undervaluation figure. If landlords are extracting significantly above the 5% yield and few domestic consumers consider the nominal price of UK housing cheap, that is an indication of a seriously screwed up market.

The demand for housing is pretty inelastic, the substitute for buying a house is not living in a bus shelter instead, it is renting. Therefore, those who can’t afford a deposit to buy a house will seek housing in the rental market. Over a long enough period of time things will adjust to the long term trend, but at the moment we have a shortage of homes to rent. For lots of reasons some people will just never be able to afford or want to buy a house. Therefore, unless we want to see people sleeping on the streets a social housing sector will be a reality.

The UK postwar system of huge social housing estates was a disaster. Unresponsive monolithic council landlords who treated housing as a private fiefdom is not something we want to go back to. The Thatcher policy of selling council housing stock to tenants was not a disaster, though the discounts were too high, not building more social housing was a disaster. We have the ludicrous situation of some of those same houses being rented back to what are effectively social tenants and landlords trousering the too high rents. That situation is a direct consequence of not building enough new social housing stock.

The absolute worst thing to do is rent caps which are the default solution for some on the left. Build new high quality social housing in small scale developments is the right answer. New social housing stock should be built through housing associations and not councils. An expansion of the social housing stock will reduce rents to something approaching where they should be. I don’t see such building as collapsing the private owner market because it would only be correcting a distortion that is already there in rents.

The private owner market looks very expensive for people to get on the so-called first rung of the ladder. However, we are living in an nominal economy that is operating 15% below where it would be with a continuation of the previous trajectory. That is over £200 billion that is not in the economy so sticky prices look, well, expensive. Relaxing planning rigidities can help but our main problem is the lack of growth.

27.

Richard, just to clarify. I’m not saying it is a bad thing for house prices to fall, but I am saying that there are knock on effects to the wider economy, as well as being terrible politics.
BTW, I’m glad someone is rejecting rent control. The last thing we want is to bring investment to a sudden halt. The reason the major institutional investors got out of landlording in the ’70s was because of rent control. That was a shame because big companies likely make more professional landlords. You can have a conversation with Prudential. How do you have a conversation with tens of thousands of buy-to-let investors?

The buying-to-let market is booming in some places:

“Britain’s biggest property listings website today said investors were piling into buy-to-let for ‘blindingly good returns’ after the government’s efforts to bolster lending had created an ‘arbitrage of immediate return’. Rightmove said its research showed that rents are delivering average gross yields of ‘5.9 per cent’. . . The Government’s Funding for Lending Scheme (FLS), launched last summer, has offered £80bn of loans to banks at rates as low as 0.25pc. This has helped pushed down mortgage – and savings – best buy deals. . .The number of Britons with buy-to-let mortgages has soared in recent years, to nearly 1.5 million, with savers facing record low interest rates turning to alternative assets for income. . . ”
http://www.telegraph.co.uk/finance/personalfinance/houseprices/9937565/Buyers-rush-to-blinding-returns-from-buy-to-let.html

@ Bob B

It wouldn’t be so bad if this was the price we paid for a recovery, but they haven’t even achieved that.
Remember when Osborne and Cameron used to scornfully describe “the mess” that Gordon Brown made?

Dan McCurry

I can’t find any recent figures to show what is happening to housing starts, let alone for social v private housing coming on stream, but recent official construction industry production figues are bleak:

Construction accounts for 7pc of the British economy, but output fell sharply in January, down 7.9pc, according to government figures released on Friday.

The latest Office for National Statistics figures and the Markit/CIPS construction purchasing managers’ index survey suggested that the sector had contracted every month since last October. [Telegraph 9 March 2013]
http://www.telegraph.co.uk/finance/budget/9920026/Budget-2013-Osborne-urged-to-focus-on-house-building.html

32. Barry, Ipswich

This piece does not make any sense at all.

Public sector housing, via Local Authorities or Housing Associations is subsidised in a number of ways, in particular there is no cost of capital, the finance for public sector housing comes from borrowing by the exchequer or via taxes. If the money is borrowed the debt has to be serviced, but this debt is not serviced by rents. if the money is raised by tax there is still a cost of capital has it could just has easily be used to pay down the national dept.
Without a government guarantee for this finance, HA would not be able to raise the money.

Rental income from public sector housing does not even cover the cost of maintenance and administration of public sector housing. If this was not the case then LA and HA housing would generate surpluses which would support further investment in public sector housing. There would then be no justification for the £3billion or so a year direct subsidy into this sector.

Rental values in the private sector by contrast do factor in the cost of capital. So private sector rentals will always be higher. Maintenance and administration is done by the landlord, and they try to make a profit too.

It does not necessarily follow that because rents in the private sector are higher than public sector rents, it makes sense to build public housing. It does not. The aggregate cost of public sector housing is always higher than the private sector housing. This is true is spite of the numerous points where profits are taken in the chain of private sector housing sales.

The only sound argument for Public Sector housing is that, on balance, public sector landlords will, by an large, treat their tenants better than private sector landlords, and of course private sector landlords will not take many of the tenants that come through council house waiting lists.

If you want cheap housing for people who can’t look after themselves then say just that. You might justify this on so-called Social Justice grounds, but don’t try to justify it with this economic nonsense.

33. Derek Hattons Tailor

@ 32 “could have been used to pay down the debt” is an opportunity cost, not a C of C. Government can always borrow money more cheaply than the private sector can, which is why PFI doesn’t work.

32. Barry, Ipswich

” Public sector housing, via Local Authorities or Housing Associations is subsidised in a number of ways, in particular there is no cost of capital, the finance for public sector housing comes from borrowing by the exchequer or via taxes. ”

The Treasury lends Local Authorities the funding for capital projects through The Public Works Loan Board (PWLB)and makes a profit from the lending by charging them 80 basis points over the benchmark gilt. So there is a cost of capital and it is more than the Treasury’s cost of capital.
http://en.wikipedia.org/wiki/Public_Works_Loan_Board

I think some Local Authorities are exploring whether they can raise funding at a lower rate than the Treasury charges them by issuing their own bonds. Nothing legally to prevent LA turning to the private capital markets.

“If the money is borrowed the debt has to be serviced, but this debt is not serviced by rents. ”

The housing associations already issue their own bonds and some UK HA have even issued bonds in the US capital markets. The capital debt is easily serviced by revenue rents and is why investors like social housing bonds. A spread over gilt yields, stable income streams, a claim on the assets and implicit UK government backing. Apart from there is not enough of them and the bond issues are still quite small what is there not to like?
http://www.traderisks.com/wp-content/uploads/2012/07/Social-Housing-Bonds-July-2012-TradeRisks.pdf

32.

Barry,
In one of the comments above, someone says that tenants are advised to deduct 30% of rent to go against costs. As a person who has let out property in the past, I would agree.
That leaves the other 70% of the rent which is profit. Obviously, reducing rent by 70% would make the rent much lower figure, so your argument is flawed.
However, the 30% figure does not include the costs of a mortgage, so I’m sure it is more complex than that.

36. Barry, Ipswich

34. Richard W
The public sector loan board does lend money to LA, generally for public sector projects like roads, community centres etc etc.
Even if these loans were available for council housing development, which I doubt, it would not be the council house tenants that pick up the whole cost of re-paying the capital nor paying the interest.
These loans are serviced out of the rates so the taxpayer (a minority of whom are likely to be council house tenants) pick up the cost, again.
If you really do need finance for public sector housing then why not nationalise public and private sector pension schemes. The capital is then free and you don’t pay interest. This is somewhat more honest than say a government, LA or HA borrowing money from these same institutions and then finding they can’t pay the capital back.

34.

Richard,

You do realise that the article you point to describes HA bonds as highly profitable. In fact, 200bps (2%) above gilts. As compared to 80bps that you say government requires.

HAs are going to the bond markets because government and banks won’t provide, but the article also says that banks won’t provide in the future, due to Basel 3. I don’t know why Basel 3 would regard government backed HAs as anything other than prime.

I think we have a problem with reputation again.

38. Richard W

37. Dan McCurry

” You do realise that the article you point to describes HA bonds as highly profitable. In fact, 200bps (2%) above gilts. As compared to 80bps that you say government requires. ”

Yes, the PWLB charges the LA 80bps above the 10-yr gilt. The problem is the LA are vulnerable to any government changing the terms of trade to suit the government. If they issue their own bonds the cost is fixed for the duration of the bond when it is issued. Moreover, the term duration of borrowing from the PWLB at 80bps may not be the same as the issued HA bonds at 200bps.

The LA are doing the right thing in exploring a collective agency to issue bonds on their behalf. They may well be able to borrow at good rates if they do it collectively.
http://www.localpartnerships.org.uk/userfiles/file/Featured/LA%20bonds%20summary.pdf

The HA bonds are yielding 200bps spreads over gilts because they are small issues and small bond issues are always illiquid in secondary markets. Obviously profitable for investors means the issuer is not getting a great deal. But it is better than the banks not lending to them at all. Big LA should be able to borrow at smaller spreads. If the HA issued more or collective bonds the yields would drop. However, there may be some legal reasons why they all issue their own bonds.

“HAs are going to the bond markets because government and banks won’t provide, but the article also says that banks won’t provide in the future, due to Basel 3. I don’t know why Basel 3 would regard government backed HAs as anything other than prime.

I think we have a problem with reputation again.”

The banks are just not keen on property related debt finance until they clean up their balance sheets. Holding capital against that type of lending has got really expensive for them. Until Basel 3 and capital requirements settle down nothing much will change. Most big companies are just bypassing the banks and going straight to bond markets for funding. The HA should forget about debt finance and shift their focus and the cost of bond finance will fall for them. With an ageing population the pension funds and insurance companies have an insatiable demand for fixed income sterling assets.

39. Robin Levett

@Richard W #34:

Nothing legally to prevent LA turning to the private capital markets.

Except the debt cap imposed when HRA self-financing was introduced…

@Barry, Ipswich #36:

Even if these loans were available for council housing development, which I doubt, it would not be the council house tenants that pick up the whole cost of re-paying the capital nor paying the interest.

These loans are serviced out of the rates so the taxpayer (a minority of whom are likely to be council house tenants) pick up the cost, again.

Lending for council house building would fall within the HRA; so the loans could only be serviced out of rental income.

40. Richard W

Robin, can they not setup a special purpose vehicle(SPV)to circumvent the government imposed debt cap? If the SPV is the issuing vehicle it would be off balance sheet for the LA.

It’s funny how respectable “off-balance sheet” has become due to necessity. That’s why Osborne is guaranteeing mortgages rather than providing them.
It seems to me the only people not doing “off-balance sheet” these days is the banks.

42. Robin Levett

@Richard W #40:

Robin, can they not setup a special purpose vehicle(SPV)to circumvent the government imposed debt cap? If the SPV is the issuing vehicle it would be off balance sheet for the LA.

If it were that simple…

Quite apart from the fact that any lender would be looking to the LA to provide security, the SoS has perfectly adequate powers to insist that the SPV’s debt be brought onto the Council’s balance sheet.

43. Charlieman

@42. Robin Levett: “Quite apart from the fact that any lender would be looking to the LA to provide security, the SoS has perfectly adequate powers to insist that the SPV’s debt be brought onto the Council’s balance sheet.”

I think that Richard W needs to stretch his memory back further. The Rates Act 1984 limited the amount by which property rates could be increased. Local authorities responded by raising capital using sale and leaseback schemes (“cash for lamp posts”), some of which were imaginative and beneficial whilst others were plain bonkers. As a consequence, the UK has had 30 years of capital management at the centre.

Local authorities can raise money using approved mechanisms, but that’s all. Maybe we’ve had enough time for a rethink.


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