Economic Social Policy- Housing

Running Head: ECONOMIC SOCIAL POLICY- HOUSING

Economic Social Policy- Housing

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Economic Social Policy- Housing

Mortgage costs, house prices and the relative merits of owning or renting are never far from the media headlines. None of this is unique to Britain, although the volume of daily and weekly commentaries, monthly press releases covering a range of market indices and annual reviews is such that it is hard to imagine it being exceeded in other countries. (Freeman, Holmans & Whitehead, 2008) The latest price cycle of houses in Britain has increased apprehensions concerning housing affordability. However, citizens are still hopeful that the current decline of housing affordability is a sign of repeated price pressures, and will finally be reversed in future. Or one can say, variation in housing prices or rents are natural aspect of the housing market; once these housing prices get stable, housing will turn out to be more inexpensive with the rise of net income.

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In this paper, this topic will be discussed through comparison of housing affordability and tenure share trends from past to the present. Public rental housing is a problem area in many countries. (Bramley & Dunmore, 2008) Low standards, lack of amenities, negative selection of tenants leading to segregation and stigmatisation, poor surroundings and chronic financial crises are recurring themes. The debate on the social housing situation follows a familiar path: state or municipal housing versus private landlords, market rents versus subsidised rents, what to do about problems of squalor, crime and public health. Four or five decades of social policy development in the leading welfare states have alleviated these problems, but failed to solve them completely. (Booth & Crook, 2005) The costs, in these days of economic difficulty and stubborn deficits, have come in for increasing criticism.

Hence, within Britain home-ownership share has decreased in current years, followed by a long-run increasing trend. In addition to that the standard age of home-ownership has also increased. Its major reasons could be high amount of deposit taken from the first-time purchaser of house, variations in the distribution of earnings and decrease in affordability (or alterations in tenure costs). Main Reasons for the decline of tenure demand are

Earnings/ or distribution of income

Rising prices of houses ( increased taxation)

Demographics

Problems with the Credit market

According to the literature, the period between late 70s and early 80s, when there was high inflation, the tax benefits to tenure decreased the user cost of capital and hence raised the demand for housing and therefore house prices. In the 1980s and 1990s, regulated economies have succumbed to the `free market' onslaught of reformers armed with the ideology of neo-liberalism and its associated theories of public choice and monetarism. The mechanisms for the creation of the market economy have been decentralisation, devolution, deregulation, privatisation and sale of state assets. This has had significant consequences for the housing market in general, and public housing in particular.

In most of the typical 'problem areas' public housing has a remarkably favourable record. Except for space, dwellings in public housing have a standard equal to the rest of the housing stock. During the record production years from 1965 to 1974, 370 000 new dwellings were added to public housing. Since then, there has been a continuous effort to improve the surroundings and provide more and better facilities. Since from its inception there was no means-test to obtain a public dwelling, neither stigma nor segregation was built in. However, the economic weakness of some non-profit public housing companies continues to cause concern.

Economic difficulties from 1973 onwards eventually led to substantial changes in housing policy, from the mid-1980s onwards. The effects of these changes are related to public housing in particular, and to the type of public housing provided in each country. A recurring key problem for public housing is rent-setting, and the case of United Kingdom is considered in terms of the comparative vulnerability of public rental schemes.

The first method of supply side intervention, construction programmes in which the government builds or commissions its own housing for rent to lower-income households, is epitomised by British housing policies, which came to encompass a quarter of all households. (White & Love, 2004) It became the centre-piece of housing policy from 1936, where up to one-fifth of the housing stock Direct rent controls were phased out by 1975, being replaced with rent limitation provisions in loans to non-profit builders.

The second major option in housing policy is to subsidise housing consumers, the two most common instruments being tax concessions (mainly to owner occupiers) and cash allowances (usually to rental tenants). Such concessions typically include tax exemption for mortgage interest or exemption of a house from capital gains taxes in the first instance, and 'accommodation allowances' in the second, especially to those with lower incomes, larger families, the elderly and handicapped. These are usually a direct cash transfer. The family allowance that had been introduced for low income families was amended to encourage low-income families with children to move into larger and better dwellings. Then the family allowance was changed into a housing allowance for families with children, a similar allowance for low-income earners without children. Housing allowances today are available to low-income families with children, retired people with low ATP superannuation, and in some instances, the disabled.

Housing market 'duality' means that social housing is separated from the housing market in general, protected and regulated to keep rents low, and targeted through means-testing to the most needy groups. The consequences are that it becomes stigmatised, and vulnerable to attacks by Conservative governments. A 'unitary' housing market, on the other hand, is one in which there is no distinction between private and public housing, but where the rental market as a whole is controlled by housing policy through incentives (e.g. low interest rate loans for building in exchange for rent limitation clauses) and rent-'leading' whereby rents set for a large public utility sector constrain private rents. Such supply side measures may be complemented with accommodation supplements on the demand side.

It is also probably true to say that Britain has outperformed other countries in the number and quality of academic analyses of the home-ownership market. Using a range of measures-illusionary gains (current estimated value minus the price paid), crude gains (current value minus the price paid and any outstanding mortgage), gross gain (current value minus price paid, any outstanding mortgage, deposit and the cost of improvements)-it becomes evident that for the UK as a whole in 1991 the proportion of losers increases from 5 per cent (illusionary) to 47 per cent (gross). Secondly, losers and gainers were not randomly distributed in terms of socioeconomic group or income. Thirdly, timing of entry bad the greatest impact upon the scale of gains.

The fixing of a 'reasonable' rent proved a thorny problem. John A. Lee, as Undersecretary for Housing, had originally held out for a rent related to income to meet the social goals of the programme. A figure of 20 per cent was generally agreed to be reasonable. The Treasury proposed that a true cost-rent, according to the above formula, be applied, with consumer subsidies if necessary to meet social goals:

It is all the same to the family in need of assistance whether help is by augmenting income and thus paying part of the rent or by fixing rent at a lower level. From a large waiting list, the houses were to be let by ballot, and not by means-testing. State housing thus began its career as true public cost-rental housing, rather than as residual, targeted, rent-subsidised 'social housing for the poor. This situation did not, however, last very long. The ballot system of allocation was abandoned after widespread criticisms. Those in serious need were furious that many in better circumstances won. There was much discussion of an allocation procedure that "leaves a minimum opportunity for ill-formed or malicious conjecture", as one public servant expressed it. A system of means tests was instituted, but this did nothing to ease the public suspicion that 'pull' was in operation.

Neither were true cost-rents long retained. By the end of the term of the First Labour Government, rents were no longer being based on the costs of the programme, but were being assessed according to area, location and ability to pay. (Megbolugbe, I.F. & Linneman, 2003) By the 1970s, the process was completed of reducing state housing to fill a narrow residual capacity for the worst-off, increasingly concentrated to ghetto-like areas, notorious for their high levels of crime and unemployment. Ethnicity coincided with class, and the clientele of the Housing Corporation became predominantly Polynesian and poor. Shoddy and cheap construction and monotonous design completed the stigmatisation that ended any possibility of state housing offering an alternative to home ownership for those above the poverty line.

Neither is home ownership still within the reach of most non-rich first-time buyers: as a percentage of annual household income, the average value of new private dwellings. Home ownership costs are now relatively higher than they were in the Great Depression. (Holmans, 2007) Those with the means to buy continue to do so, but low-income earners find the barrier too great. For the decreasing number of new entrants, average housing now takes more than half the average wage in mortgage repayments. The success of housing policy is closely related to the state housing loans scheme, which enables the authorities to specify where, when and how housing is to be built, as well as its final price, including the cost of land acquisition. Combined with the demand-side state housing allowances, and strengthened by half a century of consistent development, housing policy must deliver housing of good quality and low cost to all classes of society. (Fielder, 2001) The benefits of a unitary rental market, a variety of tenures within a tenure-neutral policy context, and a refusal to build special 'social' housing for the poor, show some distinct advantages when compared with the situation prevailing in rest of the world.

The English-speaking countries offer three major forms of dwelling, namely home ownership, public (or 'cost') renting, and private (or 'profit') renting. The housing pattern in some European countries is quite different. (Werczberger. E, 2006) Kemeny terms them 'cost-renting societies' as opposed to the Anglo-Saxon 'home owning societies'. These countries also offer another major form of dwelling which is absent or underdeveloped in English-speaking and other home-owning societies: co-operative tenure, also known as 'tenant-ownership' (bostadsratt).' (Angle, Bellchambers, & Nuttall, 2006)

Clearly there is a 'hierarchy' of tenure forms, from home ownership at the top to rental tenancy at the bottom, but equally clearly there is a strong element of choice to fit household circumstances. Whereas the balance between owning, renting and co-operative tenure is fairly even, the primary feature of tenure patterns in English-speaking countries is the overwhelming dominance of home ownership, the alternatives being a profit-oriented (and hence, high rent) private sector and a limited access (and hence, low rent) public rental sector ('dualism')

As per the Economic theory, the rates of return for each type of asset should remain equal at all times. Falling house prices are a frightening phenomenon for owner-occupiers, particularly if they have bought their house on mortgage and feel themselves slide into negative equity. That nightmare came true in the UK in 1989-1992. There is ample and interesting account of people's problems, reactions, strategies and feelings in a situation of negative equity.

Although home-owners appear to be less inclined to stress the investment aspects of home ownership, the authors do not find any signs of a fundamental change in attitudes. Home ownership appears to be still preferred over renting. A striking finding is that 14 per cent of those with low or negative equity had postponed having more children because of the uncertainties surrounding the market value of their home.

There are lots of stories of people who have seen the values of their houses plummet and we see how differently they react. Some manage to see the value loss as "just paper money", others have bitter feelings and regret their decision to buy that particular home at that particular moment. And some are in a position where they can just "sit and wait" for prices to go up, whereas others have gotten into real trouble.

Negative equity is described as a situation "where outstanding mortgage debt exceeds the current value of the dwelling". This seems to be a clear definition, and the problem associated with negative equity according to this definition is also clear: the value of the house is lower than the outstanding debt, so part of the mortgage loan is unsecured. According to another definition, negative equity is "a situation in which the (estimated) market price of a house has fallen below the original mortgage advance that was used to buy that house". In this second definition, mortgage repayments are apparently not taken into account. Although the authors do not explicitly choose the one or the other definition. But there are home owners who pay extra amounts to the bank to reduce their negative equity, which points to the first definition.

Britain now has a level of owner occupation which is similar to that of other English-speaking developed countries. Owner occupation was assisted by government policy throughout the 1980s and 1990s, rising in absolute numbers and as a percentage of all stock from 56 per cent in 1981 to almost 67 per cent in 1995. In Australia a similar rise occurred during the period from 1947 to 1961 with growth from 53 per cent to 70 per cent and the level then remaining fairly steady in the succeeding years. As owner occupation has grown there has been debate over whether there is a 'natural' level of home ownership (varying in different countries and at different times) beyond which additions to the size of the tenure would be unsustainable. (McCrone, & Stephens, 2005)

At the height of the 1980s housing boom, researchers reflected widespread opinion in viewing capital gains obtained through home ownership as an important aspect of lifetime earning capacity. However, the subsequent recession and falling house prices created major problems of negative equity with, for example, Forrest, Lansley & Murie (2004) estimating negative capital returns of 300 per cent in the first year after purchase for a first-time buyer at the low point of the recession. High levels of arrears and repossession accompanied the recession, and levels of arrears are still significantly above the pre-recession levels at 67 000 home owners in arrears of more than 12 months at the end of 1996, compared with 10 000 to 15 000 in the second last decade of last century (Megbolugbe & Linneman, 2003). In Britain there is evidence that in the wake of these events public attitudes toward home ownership may have shifted with ownership now seen as more risky than. Most commentators have projected only limited growth in the level of owner occupation in the UK over the next 20 years and it has been stressed that even such limited growth is dependent upon issues of affordability. If this is the case then the potential role of low cost home ownership (LCHO) in enabling further incremental growth of the tenure may become rather more important. While LCHO initiatives may create affordable home ownership for those at the margins, the question arises of whether those additional home owners being targeted are so marginal that their interests might be better served through the provision of rented alternatives. In looking at the roles of home ownership initiatives, it is therefore necessary to consider how affordable the initiative is to marginal purchasers, what is the scale of potential demand, and how sustainable these forms of ownership are.

Home ownership is a private good but, as we have seen, most developed countries treat it favourably in terms of tax and subsidy. In the UK, the rise of the tenure in recent years has been at the expense of social renting and this trend has been driven by major government policy initiatives. A variety of explanations have been suggested to Ministers to encourage the promotion of sustainable home ownership of the UK and other governments towards owner occupation. It is argued that there must be some perceived public benefit which justifies the sustained support given to home ownership. Kemeny notes that high levels of home ownership are associated with societies where the social values attach importance to aspects of 'privatism' such as car ownership, minimal public urban infrastructure provision and home-centred female roles. (Coles, 2007) He also points out that Conservative parties have tended to promote home ownership more strongly but that, especially where home ownership is high, electoral pressures have led to Social Democratic parties increasingly favouring home ownership, and marginalising social housing.

Although the impetus for UK government policies can in part be traced to the ideology of home owning (particularly the Right to Buy), they have also been fuelled by a desire on the part of government to keep public spending in check, for example through the virtual cessation of new local authority building and removal of general revenue support to social housing (as opposed to targeted Housing Benefit (HB) (Jowell, R., Curtice, Park, Brook, Thomson & Bryson, 2004). The main forms of subsidy to householders in recent years have been through mortgage interest tax relief (MITR) and HB (targeted at renters). MITR is seen as wasteful and unjustifiable in the long term, since it is not targeted at need and it has been argued to have an inflationary effect on house prices. Consequently, MITR has been increasingly restricted from past few years. Specific help for those owners who would find difficulty in getting into or sustaining themselves in home ownership, delivered through a variety of LCHO initiatives, can be argued to be a more cost effective use of limited public funds.

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References

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