2016 03 – Housing Part 2

Rail, Rents and Housing  Part 2

by Eamon Dyas

There is another area where government thinking over the past generation has directly contributed to the present crisis – that of housing policy. Margaret Thatcher’s policy of selling council homes which began in 1980 has proved to have reverberations way beyond the immediate one of a diminution in the nation’s social housing stock.

The reason why the “Right-to-Buy” legislation which was introduced in 1980 was so effective was because it was undertaken in a wholesale and sustained manner – something that was possible because it was pursued with missionary zeal by adherents of a doctrinaire programme to reverse what the Conservatives saw as the increasing dominance of the state over the individual. Michael Heseltine, the minister in charge of implementing the relevant legislation said at the time that “no single piece of legislation has enabled the transfer of so much capital wealth from the state to the people”. A more accurate assessment would have described it as the transfer of so much capital to individuals – to describe the recipients as “the people” is to completely misdescribe the concept. Under the scheme a tenant could purchase their council home at a discount of between 33% and 50% depending on the length of time they had been a tenant. The local councils were permitted to retain half of the proceeds from sales but were compelled to use the money to reduce the levels of their debt rather than build replacement homes. In 1982, 200,000 council homes were sold to tenants and since its introduction the government estimate that around 2 million council properties in England have been sold to individuals.

While the introduction of around 2 million new properties into the private market could be claimed to have a dampening effect on prices as the supply of homes was pushed higher in terms of existing demand, any such effect was marginal and of short duration. Sales of council properties peaked in 1982-83 and continued at varying levels ever since. This meant that the market was able to absorb such properties over time without too much disruption. What was of more significance was the fact that such properties were no longer tied to, or reinforced by, local communities. Once sold they now became subject to the upward pressure of the wider London market and the ex-council tenants now, in many instances, with their new-found wealth becoming part of the transient property purchasing component that constituted the demand side of the property market. Those who took advantage of the Right to Buy scheme expanded the numbers of active punters in the private property market. Their subsidised properties were in most cases sold on at the prevailing market rate and the ex-council tenants then became active purchasers of other properties using their profits to push up the prices at the next rung on the property market.

Another issue surrounding these sales was the way in which they were used to ingrain the policy of financial deregulation among the wider population. Banks and building societies were encouraged to offer mortgages on unprecedented terms to council tenants to enable them to purchase their homes. Overall the impact of the “Right to Buy” scheme was to generate an enormous increase of finance into the property market which in turn had a commensurate impact on prices.

Since last year when the present Conservative government under David Cameron was elected the madness has taken on a new level with the stock of homes under the control of housing associations coming under threat. Within days of his election he announced plans for an extension of the Thatcher “Right to Buy” scheme to tenants of housing associations (the new scheme was called “Right to Acquire” to distinguish it from the earlier scheme). This means that 1.3 million housing association families would be eligible to take advantage of the extended scheme in England. In September 2015 the National Housing Federation (the umbrella body under which housing associations are organised), put an offer to the government which proposed an implementation of the “Right to Acquire” on a voluntary basis. The NHF proposed this compromise in the context of legislation that could have seen the demise of housing associations as independent entities. The compromise also allowed them more flexibility on negotiating compensation for the discounts that they had to offer tenants and gave them the power to refuse to apply the “Right to Acquire” on certain properties.

This compromise was agreed by David Cameron who was eager to avoid a parliamentary battle and the possibility of a legal challenge on the legitimacy of legislation that compelled the sale of assets that were owned by charities and not-for-profit organisations. As the implementation of this scheme is to start in 2016 it is difficult to know how it will impact on the social housing stock and on the property market. The proposal originally made by David Cameron in May last year stipulate that housing association tenants eligible under the scheme would be entitled to a discount of between 35% and 70% on a house and between 50% and 70% on a flat. However, the figure was capped at £77,900 outside London and £103,900 in London. This would entitle someone who was a tenant for ten years being able to purchase a £100,000 flat for just £40,000 with a 60% discount. According to the National Housing Federation between 15% and 35% of housing tenants will be able to afford to pay a mortgage which translates to around 221,000 homes. I have been unable to ascertain how any of these figures pan out regarding the London situation but it’s unlikely that any tenants in London would be living in flats that are valued at £100,000 or under. The Daily Mail ran an article on 25 January 2014 which stated that there were only seven properties advertised in London at prices under £100,000 at that time and on that basis it would seem that any tenant of housing association properties in London would have to commit to a mortgage significantly more than £40,000 in 2016. The impact of the scheme must also be measured against the reluctance of a significant minority of housing associations to support it (according to the Guardian of 17 October 2015 only 55% of housing associations supported the scheme).

But whatever the effect of the “Right to Acquire” scheme in terms of its impact on housing association stock in London the overall effect of the “Right to Buy” scheme over the past 35 years has been disastrous for the housing market in the capital. That disaster is not only caused by the absolute decline in the number of social housing units but in the manner in which the “Right to Buy” scheme has fuelled the property price rises during that period.


Crossrail and population.

The announcement that a new station was to be opened at Woolwich as a result of the Crossrail Act of July 2008 added to the incentive for developers to buy up local properties and small businesses in the area. The object of their investment was to seek to maximize profits by constructing as many home units on their recently acquired land as possible. In this regard the relaxation of the planning laws facilitates the intensive housing that usually emerges in the form of apartment tower blocks. This, together with the relaxed financial atmosphere of London, provides another route by which “unnatural” levels of finance are pumped into the London property market. In some instances the apartment building is constructed only after securing foreign funding through speculators eager to purchase in advance multiple units of a proposed apartment tower block. In Greenwich this has been the case with Chinese and Asian speculators eager to find an investment for their money that will bring in a decent rental income in place of a less attractive dividend from investments in alternative areas of business which might offer less of a safe haven for their funds.

The resultant apartment blocks, designed to accommodate as many inhabitants as possible, sometimes end up replacing buildings that previously housed one or two families with a building that now houses 150 to 200 individuals. This in turn ends up distorting the previous demographics of the area and creates local islands of intensive housing. The encouragement to build on “brown sites”, i.e. areas that had been previously used for small businesses or had been derelict for some time, can also distort the previous demographic profile of an area as it creates more areas of habitation than was the case prior to its development. Aside from a small number of units put aside for locals who can afford them, the people purchasing or renting these units in the emerging apartment blocks will in most cases be couples and professionals who come from outside the area.

The extra numbers that move to the area do so on the premise that Crossrail, or another rail line to the centre of London, will provide a relatively cheaper means of accessing their place of work than would be the case if they lived outside London. It is this consideration that justifies the additional rental or purchase cost involved. However, the very thing that attracts these people to places in such circumstances also creates a problem in terms of the additional pressure it places on the rail facilities. Crossrail, like the “solutions” that went before it, while possibly offering a solution to the travel requirements of the people living in the area at the time it was envisaged (plus the additional projected numbers that have already proved to be totally inadequate), is already incapable of meeting the additional numbers that it itself has been the cause of creating. It is also creating a problem further into London’s rail network as a proportion of these additional numbers will require access to parts of the rest of the city’s rail and tube system at some point in their journey.

In June last year the Greater London Authority issued figures that claim to project the population of London until 2036. It also shows in graphic form the extent of the underestimate of all its projections since 2006. In each year since then the projection has increased significantly since the projection the year before (see: GLA 2015 round of trend-based population projections – Methodology, p.15). The current projection is for London to have a population in excess of 10.5 million people by 2036 but on the basis of every similar projection since 2006 this figure is likely to be erring on the conservative side.

According to the Evening Standard of 29 October 2015 the Office of National Statistics has since projected that the population of London could see a growth to 11m by the year 2050 (at the present time the population of London is 8.6 million). Earlier in 2015, on 3 February, City A.M. published a population map showing that the bulk of growth in London’s population between 2015 and 2039 will take place along the Thames corridor between Wandsworth and Fulham to Havering on the north of the river and Wandsworth to Greenwich on the south of the river.


Future plans.

In the wake of the Crossrail project and without any reference to the actual impact it has had on the economy and demography of London we already see talk of that project being emulated with Crossrail 2. This is Boris Johnson in response to a report by Pricewaterhouse Coopers of 27 November 2014:

“London’s population is growing rapidly and with more people travelling in our city than ever before it’s vital that we deliver extra rail capacity to support future growth. Crossrail 2 is an essential infrastructure project and this report shows the range of financing initiatives we could employ to get it moving. We’ll now be discussing those financing options closely with London’s boroughs, business groups and other key players who have a stake in getting behind Crossrail 2.”

According to this report the envisaged new Crossrail 2 is designed to support up to 200,000 new homes along its route but no reference is made to the type of new home that is described and no reference either to the impact on local property and rental prices that will define the nature of such new homes. As was the case with the existing Crossrail project the new Crossrail 2 will be overwhelmingly funded by the taxpayer and fare paying public despite the fact that huge profits will flow to the property developers who take advantage of it along its route. If the real concern of the politicians was to make life easier for the working populations of London the impact of Crossrail on the economy and property prices along its route needs to be independently investigated in order to inform future projects of a similar nature and to arm those who have a genuine concern for the welfare of the travelling working population with the facts. Such facts can then be used to influence the way future projects can be managed in ways that can guarantee a balanced outcome in terms of housing and property and rental prices.

It is often said that the building of more roads does not solve the problem of traffic congestion but only attracts more cars to the point when the additional roads too become congested. A similar argument could be made against the construction of additional rail systems. But another argument could be brought to bear against the construction of additional rail systems and that relates to the unique way in which they impact on the property prices and demographics of London. Of course it need not necessarily be so. After all a rail system provides a more efficient and environmentally friendly means of moving people from their abodes to their places of work than is the case with cars and roads. But the experience over the past generation has shown that without the proper protections and mechanisms in place rail expansion has had a toxic impact on property and rental prices in the capital. That experience has shown that for any expansion of the rail network to be denied an influence over property prices the government must have a number of tools at its disposal. It must have the defining influence over the network as well as its power to set fares; it must have some means of dampening the huge profits that are being made by property speculators exploiting the social need for a rail network either by way of a special tax on their profits or by rent control or both; it must have a better system in place for regulating finance in the housing sector.

It should also be said that any solution to the government’s problems with the levels of housing benefit cannot be considered in isolation to the historical causes for rents in London being so high. Instead of seeking solutions that can only have the eventual effect of creating a socially cleansed capital our politicians should be seeking solutions that address the core of the problem.

Note: Rail, Rents and Housing (Part 1) was published in Labour Affairs February 2016.