in the early 1980s when I was just a baby housing researcher,
required reading for anyone with a smattering of economics and
pretensions to expertise in housing finance was a little book
called 'Housing Rents, Costs and Subsidies' by Gray, Hepworth and
Odling-Smee. These guys were big hitters - Noel Hepworth was for
many years king of CIPFA - which suggested that their ideas
deserved to be taken seriously.
I owned a well-thumbed copy which has disappeared sometime in the
intervening years but, as I recall it, the argument of the book was
that housing subsidies and taxation were a mess which distorted
housing choices and helped create an unbalanced and unsustainable
At the time I read the book mainly to understand the argument
that, since housing is, for owner-occupiers, best seen as an
investment good (because it lasts a very long time and tends to
increase in value), the subsidy to owner-occupation is best
understood as relief from taxation of "imputed rental income" and
capital gains, not the tax relief then provided on mortgage
interest payments. But another strand to its argument proposed a
radical change in rents policy in social (at that time nearly all
The starting point of the whole argument was that there should be
a level playing field for choice among tenures. The choice between
owning and renting ought not to be distorted by favourable tax or
subsidy treatment of either tenure, nor should the choice between
social and private rented housing.
This meant an end to the tax reliefs to owner-occupation but it
also implied that council housing rents should be raised to market
levels and all subsidy to less well-off tenants be delivered via
housing benefit. The book was published before Right to Buy came on
the scene, but discounts would probably have been anathema to its
I was reminded of this argument on reading the part of the Lib
Dems' housing policy paper 'Decent Homes for
All' which relates to the idea of higher rents for better-off
tenants. The government's Pay-to-Stay proposals envisage a
higher-rent regime only for tenants on the highest incomes - over
£60,000 is the lowest threshold canvassed in the consultation
The Lib Dems go further, calling for measures to allow social
landlords to "vary rents based on all tenants' ability to pay, on a
sliding scale up to market rent levels for those on the highest
incomes". This approach is advocated to overcome the obvious
unfairness of a system in which there is a sudden jump in rents at
a particular income threshold.
But it also takes us back to the rents policy advocated by Gray et
al, by effectively topping up the national system of housing
support delivered through Universal Credit with local schemes
reminiscent of rent rebates as they were originally introduced - as
a method through which better-off tenants cross-subsidised those on
lower incomes within the HRA.
The idea of a level playing field between social and private
rented housing also raises the question of what, for the purposes
of comparing the two tenures, counts as a market rent.
The Montague review report on the prospects for institutional
investment in the private rented sector makes the point that
investors calculate their return on investment in housing for rent
taking into account both rent income and capital growth since it is
quite practicable to get vacant possession and cash in their
capital gain if they choose to.
For homes let on longer-term or more secure tenancies, investors
may well expect higher rents to compensate for the fact that sale
is not an easy option. If this argument is accepted, a 'market'
rent for council housing ought to be higher than prevailing private
sector rents to reflect the benefit of security enjoyed by council
August though the authors of 'Housing Rents, Costs and Subsidies'
were, their ideas had negligible impact on government policy,
either on housing taxation or council rents. This is understandable
as far as taxation is concerned - the Thatcher governments were not
interested in a level playing field between tenures but were dead
set on tipping the balance in favour of home ownership.
More interesting is the question why they were not attracted by
the ideas on council rents. One reason may have been that the
private rented sector was at that time widely seen as dead on its
feet and, until the introduction of assured tenancies late in the
1980s, most private rents were also held well below market levels
by rent regulation.
Reform of private tenancies and rents was perhaps seen as the
first priority. More compelling is the fact that raising rents to
market levels would have dragged many thousands - perhaps millions
- more tenants into dependence on housing benefit. In those days,
before Right to Buy creamed off many of the better-off tenants and
cuts in council house building restricted access to the most needy,
only around a third of tenants received help with their rent.
Tipping the balance the other way and making the majority of
tenants subject to means-testing was thought to risk imposing
unacceptable humiliation on working tenants and adding a
substantial additional administrative burden on councils or the
benefits system or both.
Here we are, thirty years later, with a resurgent private rented
sector and the majority of social housing tenants already dependent
on benefits. Housing Associations are already building homes for
affordable rent at up to 80 per cent of market levels, and many
councils are considering following suit.
Would it be that big a deal if all social housing tenants became
subject to regular means-testing? For that is the implication of
what the Lib-Dems are proposing, since there is no point
introducing a sliding scale of rents according to income unless
household incomes are regularly checked and rents updated
There are probably fairness arguments - both between social
tenants on Universal Credit and the rest and between social and
private tenants - for using the same rules on income assessment as
apply in Universal Credit.
Having passed the responsibility for administering rent rebates
for tenants on the lowest incomes to DWP, council housing
departments would find themselves rebuilding benefits teams to
administer high rent schemes for the rest.
Two reasons occur to me for not going down this road. The first is
the worry that the game is not worth the candle; that the costs of
administering the scheme - particularly after taking account of the
likely impact on arrears - would take too great a bite out of the
additional income it might bring in.
The second draws on that part of the thinking behind the
introduction of Universal Credit with which I agree. One ambition
of Universal Credit was to put an end to the poverty and
unemployment traps which at certain income levels imposed
impossibly high marginal rates of taxation as separate benefits
were withdrawn simultaneously as income rose, creating powerful
disincentives to work.
According to the theory of Universal Credit there is only one
benefit to withdraw and only its interaction with the Income Tax
system to worry about. But if tenants on higher incomes are drawn
into means-related rents we too need to think about how their rents
and tax liabilities are likely to interact.
What would be the taper in a social landlord's higher rent scheme?
It might be expected to vary from landlord to landlord according to
the size of the local gap between social and market rents, but in
parts of London where social rents are barely half of prevailing
market rents we might be looking at as much as 20 per cent.
Coupled with current tax rates and thresholds, particularly a 40
per cent tax rate that kicks in at an income of less than £45,000,
this implies pretty hefty marginal tax rates for some tenants. If I
were in their position I would think very seriously about playing
my Get Out Of Jail Free card and opting for the Right to Buy.