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Back to the future – some thoughts on rents policy Matthew Warburton - 28/09/2012

hands_house_300Back 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 housing market.

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 council) housing.

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 authors.

Liberal Democrats' housing policy paper

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 paper.

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.

What counts as market rent?

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 tenants.

The Thatcher years

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.

Should social tenants be means-tested?

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 accordingly.

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.

Arguments against means-testing

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.

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