Is there justification for government intervention in the uk housing market and how has recent policy overcome market failure.
QUESTION: IS THERE JUSTIFICATION FOR GOVERNMENT INTERVENTION IN THE UK HOUSING MARKET AND HOW HAS RECENT POLICY OVERCOME MARKET FAILURE
Housing is a basic necessity of life; it provides safety and security (Gibb et al, 1999.) Government has never been the universal provide of housing and consequently, policy goals have been pursued by less than direct methods. There are alternative views as to why housing should be part of the welfare state. Glennester believes that it is because 'housing has a long life,' the provision of which depends on a stock of assets whose size is very large; the housing market is slow to adjust to changes in prices and therefore tenants are open to exploitation. Gibbs argument is much wider in that housing is 'conceived as part of a broader social policy agenda.'
Wheelan (1998) suggests the problem is too much government policy and not enough individual choice and market decision-making. The idea of two types of decision makers is frequently commented on in King and Oxleys book 'Housing: Who Decides.' A dichotomy is apparent between social (collective) and individual decision-making, an idea that will be looked at later on.
This assignment will focus on analysing current Government Policy with regard to the following specific aims:
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.0 - A REASON FOR INTERVENTION?
If the housing market were taken its simplest form, there would be no need for government intervention. Barr in his book 'Economics of the Welfare State' explains how the housing market will tend towards equilibrium. New buildings are only a small proportion of existing housing stock so total supply can increase only slowly. Thus the short run supply of housing is highly inelastic though may become elastic in the long run. See Appendix 1.
It is useful to see from this analysis how supply within the housing market changes from being inelastic to elastic over a long period. In reality, it is unlikely that the market will be able to converge to a new equilibrium on its own. The case for justification by government essentially lies in the idea of equity and efficiency.
.1- EFFICIENCY
Efficiency will occur in a perfect market where it is not possible to make anyone better off without making someone else worse off, known as the 'Pareto Optimum.' In addition to this Barr shows how three main ideas make it possible for efficiency to occur in the housing market.
. Tenure neutrality, an overriding concept that leaves individuals indifferent between buying and renting.
2. Secondly, for efficiency to occur, the optimal output of quantity must lie between the value placed on the marginal utility of housing and the marginal social cost of the resources used.
3. Finally, the market must be sufficiently flexible, to prevent excess demand and limit the possibility of not choosing a job in area A because of living in area B. 'No market fully meets all the conditions required to be 'perfect'' (Gibb et al, 1999, p.22) and Oxley is in agreement and stresses that 'markets cannot function efficiently without social decision-making.'
Consequently, there is a need to look at if governments were to intervene on the grounds of efficiency would there be justification? Market Failure is an idea constantly arising in economic debate and there are large amounts of literature discussing the topic. Some of aspects of market failure apply more strongly than others to the production and consumption of housing; an emphasis will be placed on externalities, merit goods, government failure and public goods. In addition to market failures, Barr considers the importance of perfect information and perfect competition in an efficient market.
1.1.1 EXTERNALITIES An externality is the result of an individual decision, which imposes costs or bestows benefits on others, not reflected in the market transactions. The production of housing leads to external effects, a poorly constructed house will pose a danger to the occupier and a passer by. Thus, atomistic decision-making is restricted and controlled by laws.
The external effect is compounded by the problem of imperfect information. For many characteristics such as size and location the ability to get of hold of this is generally easy. Information about technical matters such as poor foundations or impending subsidence is easily concealed. The government can regulate for minimum standards of construction to improve information and reduce negative externalities. This can be done by regulation of agents and professionals through the government - home information packs, a current policy to be considered centrally later when looking at equity.
It can be demonstrated that housing can have positive external effects on the well being of a wider population due to traits in terms of its physical standards, design and location. There are three areas in particular which are interconnected with housing - health, education and crime, if these areas are strongly linked, consequent externalities will arise. Health and housing has been examined as having positive and negative effects. Poor quality housing causes ill health has been illustrated, as has the proposition that good quality housing promotes a healthier population. The links are not necessarily straight forward as they may ignore role of other variables (income, class and age.) The existence of significant externalities does make some sort of case for public action.
1.1.2 PUBLIC GOODS. Public goods are another part of what is known as market failure. A public good provides no incentive for private decision makers to demand or supply the good.
Housing is not a public good because dwellings can be supplied exclusively, are rival in consumption and private property rights in housing are created and traded. Housing is often jointly supplied with quasi-public goods. For example, most dwellings benefit from access to a road and to street lighting. The lack of exclusivity in provision makes it difficult to extract individual voluntary payments causing issue of 'free-riders.' The provision of such items therefore tends to rely on public expenditure. Thus, although housing is not a public or quasi-public good, it is very closely linked to items that are. Decisions on their production cannot be made efficiently without a linkage to decisions regarding the infrastructure. Efficient housing production thus requires a degree of social and collective decision making.
1.1.3 MERIT GOODS. Finally, housing could be treated as a merit good. The merit good argument is repeatedly used as a component of market failure and thus an argument of government intervention on efficiency foundations. King and Oxley both 'doubt the value of categorising housing as a merit good.'
Turning to Bramley et al. (1995) they take the case that a 'minimum standard of housing consumption for all types of household is a "merit good".' This illustrates that good housing has an intrinsic merit and this is a compelling argument for its provision. It is the issue of ignorance that makes housing a 'merit' good. Obtaining good quality housing is assumed to be beyond the perception of some and hence the market under provides. This assumption is understandable for health and education needs but since the majority of housing is provided via a market this presumes that individual households are competent and capable of determining their own needs. Housing is therefore not properly a merit good; the decision depends on a differential view of human competence.
Housing markets indeed do show characteristics of market failure. There are significant externalities and its provision is fundamentally linked to the provision of quasi-public goods. These are important reasons why individualistic decision-making should be doubted. For the market to allocate resources efficiently two other assumptions need to hold - perfect information and perfect competition.
1.1.4 PERFECT INFORMATION
Externalities were compounded by the lack of perfect information with regards to
* Technical matters.
* Information on prices. Housing is an irregular purchase and highly heterogeneous, buyers will not have perfect knowledge. The market has developed institutions such as estate agents and realtors, which improve the accuracy and flow of information.
* Knowledge about the future. There is uncertainty involved about one's house - thunderstorm, fire etc. This issue can be solved through the market with home-structure insurance. Problems that have arisen due to lack of information have been solvable through the market. The state's role is to regulate minimum standards for surveying and house-insurance policies.
Action taken on efficiency grounds will depend on 'one's ideological position with respect to redistribution of resources and the connection between housing issues and distribution of resources in society.' (Oxley, 2000, p. 88) Views on redistribution are an explicit equity objective and will be looked at in the next section. Furthermore it can be argued on economic grounds that, while the housing market does indeed exhibit all the problems aforementioned, they have not been the main reason for the growth and complexity of housing policy in the UK. 'The main impetus behind housing policy has been to tackle considerations of equity (Gibb et al, 1999, p. 24). Are there sufficient concerns for governments to intervene? Generally, on the whole, none of the efficiency arguments point towards public production of housing or state allocation but efficiency is enhanced by regulation.
.2- EQUITY
There are many different definitions of equity, horizontal equity involves treating people in similar situations in a similar way, hence a distributional issue. Vertical equity is essentially how housing should be financed, different treatment for different people.
It can be argued that individuals have rights of ownership of what they have and no one, including governments can take it away. If this is so, governments have no finance and so cannot exist. Similarly, if individuals create wealth they are the recipients of their labour. However, it is the interaction between individuals, which creates ...
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.2- EQUITY
There are many different definitions of equity, horizontal equity involves treating people in similar situations in a similar way, hence a distributional issue. Vertical equity is essentially how housing should be financed, different treatment for different people.
It can be argued that individuals have rights of ownership of what they have and no one, including governments can take it away. If this is so, governments have no finance and so cannot exist. Similarly, if individuals create wealth they are the recipients of their labour. However, it is the interaction between individuals, which creates wealth, making the process social and not individualistic. Governments sometimes take action to improve the efficiency with which resources are allocated, but they may also aim to improve the equity or fairness with which resources are distributed. An explicit equity objective is a redistributional objective (Oxley, 2000, p. 90.) The definition of equity, seen as a distributional issue, can take many different forms. Barr defines horizontal equity in terms of equality of opportunity and minimum standards.
1.2.1 HORIZONTAL EQUITY
1.2.1A EQUALITY OF OPPORTUNITY
Equality of opportunity can take two forms.
. Firstly it concerns the access to adequate housing generally. A past aim of government was to ensure that housing needs of vulnerable groups were met and given priority, this idea has been carried into and given greater emphasis in the government Green Paper 'a decent home for all.' There must be fairness between one citizen and another in giving and receiving help towards housing costs - a significant equitable issue.
2. Secondly equality of opportunity relates to access to different tenure, another key proposal in the Green Paper. Whatever the particular virtues of different tenures, the role of government ought not be encouraging households into it, but rather creating the conditions for stability, which will enable households to make proper choices.
1.2.1B MINIMUM STANDARDS
Minimum standards are an efficiency and equitable issue in terms of economic theory. Glennerster describes it when 'all citizens of a nation state enjoy access to a minimum standard of life.' Imperfect information and some types of externality (housing causing eyesores) justify minimum standards on efficiency grounds. If information and power are methodically correlated with income there is a strong case for intervention through one form or other since equity is present.
1.2.2 VERTICAL EQUITY
Vertical equity concerns how housing should be financed. Past Government policy aims, although not well specified have always concerned the affordability of housing. In a Conservative White Paper, 1971 an objective was 'a decent home for every family at a price within their means.' In a 1997 paper the goal changes slightly to 'within the reach of every family.' More recently in 2001 the government's aim was to 'promote social cohesion, well-being and self dependence.' Although the wording has changed there is still emphasis on equity and how it should be achieved. Barr believes that it can be pursued either by reducing price or increasing means. The former only being appropriate to achieve vertical equity where there exists efficiency grounds and in their absence, the later policy (cash transfers) contributing more to efficiency.
1.2.2A ACCESS TO CAPITAL MARKETS
Michael Oxley, views the relationship between housing and redistribution as a potential means rather than the end of a policy. It could be concluded that this is because some households are unable to demand housing of an acceptable standard because of a lack access to capital markets. Capital market failure can occur in the housing market due to number of reasons. Mortgage companies will require permanent employment with a good record, making it harder for lower socio-economic groups to borrow against their future incomes. As a result two people with the same income may not have the same ability to get a mortgage, a journalist for example.
1.2.2B LACK OF EFFECTIVE DEMAND
This view sees lack of effective demand and its relationship between demand and need a key concern. Housing 'need' is often a term misunderstood, Robinson defines it as 'the quantity of housing that is required to provide accommodation of an agreed minimum standard ...without taking into account the individual household's ability to pay for the housing assigned to it' (Robinson, 1979, p. 56-57) Barr similarly argues that it is not that imperfect information is a major problem - poor people live in sub-standard accommodation less because they misperceive the benefits of housing than because they cannot afford anything better. Illustrating that the poor are disproportionately affected, giving equity as well as efficiency grounds for intervention.
1.2.2C EQUAL POWER
Barr indicates a crucial assumption for horizontal equity is equal power, to enable consumers to enforce rational decisions. There is some case for intervention because tenants can be subject to monopoly power; just 10% of housing transactions are new houses. As a result, there are some legal monopolies in London. Government believe that one of the challenges they face is that 'tenants in one area may be charged a similar rent for a small, rundown property on an unpopular estate to that for a large family home in a more desirable location' (Chapter 2, The Way Forward for Housing). Therefore a strong issue of equity arises since people in similar situations are getting treated very differently.
Concluding, in terms of efficiency there is no great ground for intervention but instead will be enhanced by regulation in a variety of forms. Equity is a distributional issue and as Oxley argues 'redistributive actions are an essential and inevitable function of governments.' Government policy will contain principals of equity, it is crucial that they are merged with those of efficiency and can accommodate the two pulling in different directions.
2.0- CURRENT GOVERNMENT POLICY
2.1- REVIEW OF 'QUALITY AND CHOICE.'
In April 2000 the first comprehensive review of housing was published - Quality and Choice: a Decent Home for All (DETR, 2000.) Its aim, to address explicitly the fundamental aim that had dominated decades of political policy - 'achieving a decent home for every family at a price within their means.' The Green Paper emphasised the following proposals regarding the case for government intervention due to market failure:
* Support sustainable home ownership. Working more closely with lenders, insurers and others involved in the home buying process, to ensure that consumers get a fair deal and to strengthen the protection available to them through mortgages and related insurance schemes. (Para4.3)
* New approaches to improve the quality of social housing and housing management. An aim to ensure that all social housing is of a decent standard within 10 years. Supported through transfers and arms-length companies
* Improvements to the delivery of affordable housing, so that it is provided where it is needed and in a form that is sustainable. To see better links between supply and demand at the local level and higher standards of quality, design and efficiency. (Para 8.5)
* Review tenure arrangements for social housing, thus giving greater weighting to those factors influencing personal choice when selecting housing. (Para 9.5)
* Proposals to develop housing benefit measures to improve incentives to work.
The debate that the Green Paper stimulated was 'lively and constructive, but overwhelmingly supportive' (foreword by the deputy prime minister.) Problems associated with the paper are central to the original macro-efficiency aim of a 'decent home for every family,' what composes a 'decent home' or 'family'? Furthermore, will a 'fair deal' lead to an equitable policy and give all, access to capital markets?
2.2-QUALITY AND CHOICE - THE WAY FORWARD FOR HOUSING
The policy statement, 'the way forward for housing' followed up the government's green paper, explaining how the government are taking the agenda further. It was published in December 2000 with housing policies in light of the Green Paper and including consultation responses.
2.2.1 ENCOURAGING SUSTAINABLE OWNERSHIP
Current Labour legislation looks largely at building a framework where owners can afford the commitments of ownership. Chapter two of the Policy Statement looks at encouraging sustainable ownership by building a robust economy in all parts of the economy and a strong system of consumer protection. A home is the biggest investment most people and make and thus one of the Government's aim is to avoid a return to the boom and bust economy of the past (para 2.1 Way Forward DETR)
The Green Paper issues many proposals, all of which were taken forward into the latest Policy. The issue of market failure arises centrally with regards to perfect information and access to capital markets and therefore looking at two new schemes, the Starter Home Initiative and production of a Home Information Pack (HIP) are of key relevance.
2.2.1A HOME INFORMATION PACKS
Respondents who commented on the Government Green paper welcomed the proposal to improve the home buying and selling process. There was some comment on the need to ensure the validity and reliability of the information contained in the 'seller's pack.'
The Housing Policy states that forty per cent of those who go through the buying and selling process declare themselves dissatisfied with it. An efficient housing market benefits us all. Government is pursuing a range of measures to increase certainty in the process and reduce delays. The publication of the Housing Bill - Consultation on Draft Legislation, March 2003 sets out specific legislation, one main area:
* Requiring anyone marketing a home to assemble a home information pack, so that the information needed by buyers and sellers is available when the property is marketed, and uncertainty and abortive costs are reduced;
What is wrong with the current system?
. Information required by buyers and sellers about a property only becomes available after an offer has been made and accepted - problems with the property may come to light only after several weeks, by which time the buyer and seller may have incurred significant costs in legal fees, searches, surveys, etc. This can cause the terms to be renegotiated, delay exchange of contracts and even result in transactions failing altogether.
2. Extensive research has shown that the current system is extremely inefficient and wasteful and does not look after the best interests of buyers or sellers. Delays in the present system can encourage gazumping (when a seller gets offered a higher price and takes it) and other problems. Providing key information up front in the home information pack will make the process more efficient, transparent and consumer friendly. This means less risk of transactions collapsing, less wasted expenditure and earlier certainty for everyone, in general, more specific
What will the home information pack contain?
* Terms of sale;
* Evidence of title;
* Replies to standard preliminary enquiries made on behalf of buyers;
* Copies of any planning, listed building and building regulations consents and approvals;
* For new properties, copies of warranties and guarantees;
* Any guarantees for work carried out on the property;
* Replies to local searches; and
* A home condition report based on a professional survey of the property, including an energy efficiency assessment.
Issues of Equity or Fairness
. The proposals would require sellers of homes or their agents to provide some information that is currently obtained and paid for by buyers. Since most sellers are also buyers, the financial consequences would be broadly neutral in most cases.
2. The potential gainers under the new arrangements would be first time buyers, this group would be provided with information that they would normally commission and pay for themselves under the current system. Although the cost may be reflected in the purchase price.
3. The potential losers are sellers who are not buying another property. The group will incur the cost of providing a pack but will receive no equivalent benefit on the purchase of a new home.
4. Some people on very low incomes or who need to sell as a result of mortgage arrears for example will face difficulties in assembling the home information pack.
Effect on the Market
There is a view that the proposals will lead to a permanent reduction in the number of properties coming onto the market because of the deterrent effect on sellers. The requirement to provide a home information pack could be a disincentive to those who were not fully committed to selling their home. Others take the view that although there may an initial drop in the number of properties put up for sale, the market would soon bounce back. There is no way of knowing in advance which of these views is correct. Other countries that have introduced a home information pack, particularly Denmark and New South Wales, Australia, have not noticed a significant impact on the number of completed sales.
If nothing were done it would result in things staying as they are now. There is a view that left to it; the market would develop solutions to the problems we have identified. The current problems are very longstanding, however, and the market has failed to come up with solutions so far. Advances in information technology and the introduction of electronic conveyancing would speed up part of the process but would not ensure that key information is made available at the start of the process.
The main objective of the home information pack is to inject transparency into the process and make failure much less common. Members of the public will benefit from a more efficient, transparent, certain and speedier selling system that places less stress and anxiety on homebuyers and sellers.
It is a form of government intervention intended to overcome market failure, whether it has been successful only time will tell.
STARTER HOMES
KEY WORKERS
3.0-SUBSIDIES
3.1-INCOME TRANSFERS OR TRANSFERS IN KIND?
A question often posed is: 'which in principle is best, income transfers or transfers in kind?' This is an issue of vertical equity and concerns individuals making their own consumption decisions, or through direct transfers of housing. This is a question that has particular importance for housing. It is of relevance when deciding whether there should be state provided housing or only extra cash for those in need?
* In-kind transfers can be explained by the idea of consumption externalities, see appendix 2 for further discussion. Thus, if it is true that many households fail through ignorance to claim financial benefits to which they are entitled, provision in kind may be more efficient.
* A cash transfer can involve increasing effective demand by raising the incomes of selected households or individuals with low demand. However, Barr argues that it is politically easier to transfer housing in-kind since there are fewer stigmas attached by receiving benefits in kind than in the form of means-tested cash transfers. Furthermore, the rich might favour the in-kind approach due to self-interest and believe that they are improving the productivity of the work force and helping to prevent social unrest.
The extent to which extra income results in extra housing demand depends on the income elasticity of demand for housing. It is a matter of individual choice and preferences for housing compared to other items. The case for cash transfers rests mainly with the notion of consumer sovereignty and consumer choice. Robinson contends that if individuals are left to decide how they wish to spend money they can make choices which best promote their welfare and so such transfers are likely to increase utility more than will transfers in kind, such as the direct provision of housing (Robinson, 1979, p. 117-120). Despite this, while the argument for in-kind distribution is very strong for health and education, for housing it is weaker. There should be a selective but not a general case for redistribution in the form of housing. Hence rejecting cash benefits, which are seen as paternalistic and have very high administration costs.
3.2 HOUSING BENEFIT - THE THEORY
The state only came to be a major provider during the last century and became a prime actor after the First World War, providing 'homes fit for heroes.' In 1974 the Housing Act was established and led to generous grants to non-profit housing associations, designed to encourage growth of non-government providers of social housing. The emphasis in housing policy had been on alleviating perceived shortages. In consequence, government subsidy took the form of supply side or capital subsidies. However, since the later 1970s the perception of the housing problem had changed, largely because there was now a crude surplus of dwellings over households (King, 1998). The UK along with most European countries followed a pattern, shifting from concentrating on supply side, towards issues of quality and access which necessitate a concern for the demand side.
3.2.1 DECLINE OF SUPPLY SIDE POLICIES
Changing perceptions of the housing problem have meant supply subsidies have generally declined in importance relative to demand subsidies. Kemp (1997) considers centrally the reasons for this general shift:
. The end of massive housing shortages meant the problem was now seen as one of shortage of income, preventing access to quality housing.
2. Personal subsidies can be targeted better and thus said to be more efficient in that more individuals can be helped for a given sum of money.
3. There was a shift in emphasis of housing policy towards the consumer.
3.2.2 PERSONAL VS. PRICE SUBSIDIES
There has been much debate regarding personal income subsidies and price subsidies. King and Barr agree that in order to improve vertical equity, redistribution should be via income subsidies.
* Personal subsidies can be specifically targeted to those in need.
* One of the problems with supply side subsidies is that they cannot easily be withdrawn when the household's income increases. This isn't the case with personal subsidies which are dependant on income.
* Demand side subsidies can offer the household some choice in the housing market, superior to that presented by applicants of social housing.
Barr gives reason why redistribution via price subsidy is arbitrary.
Redistribution via price subsidy has been arbitrary in at least three ways.
. Take two areas A and B, A's housing stock is older than B's but of equal quality. Since rents are determined on an historical cost basis, rents in A will be lower, even if the tenants have the same average wage. The result is that redistribution is arbitrary by region.
2. Housing costs are pooled, tenants in newer housing are subsidised by those in older accommodation, and the effect is that redistribution by income level can be easily arbitrary.
3. Due to excess demand, families with local authority or housing association tenancies benefit at the expense of those on the waiting list.
The conclusion is that there is a predominant shift from price subsidies towards income subsidies.
3.3 HOUSING BENEFIT - CURRENT POLICY
Over the last 20 years, the role of Housing Benefit has increased substantially in real terms. In 1978/79, £2.3 billion (at 1998/99 prices) was spent on Housing Benefit. By 1998/99 this figure had increased to £11.1 billion. This reflects, in part, a long term shift in the balance of public spending on housing support from direct "bricks and mortar" subsidy to personal subsidy in the form of Housing Benefit. As the chart below shows, in England the balance has moved from 84% bricks and mortar subsidy and 16% personal subsidy in 1979, to 27% bricks and mortar subsidy and 73% personal subsidy by 1998-99.
3.3.1 DECLINE OF BENEFIT
There is evidence that there has been a decline in the number of housing benefit claimants. This has had huge impacts on the government and led to a £6.5 billion saving in expenditure. There are various reasons as to why this saving has incurred and implication's concerning market failure:
. Introduction of the Working Families Tax Credit in October 1999 reduced the number of claimants with very high marginal deduction rates. It is estimated that the introduction of Working Families' Tax Credit will move about 90,000 claimants off Housing Benefit in 2000/2001.
2. Implementation of anti-fraud initiatives. A proposal supported in 'A way forward for housing,' though accompanied by concerns that delays in processing claims were arising in some local authorities
3. Decline in unemployment figures.
3.2.3 PROBLEMS OF THE CURRENT HOUSING BENEFIT SYSTEM
* The current housing benefit system suffers from the effect of the 'poverty trap.' As incomes rise, benefits are withdrawn; this 'taxes' away most of the additional income from employment and is inconsistent with the Government's over-riding objective of making sure that 'work pays'. It results in the marginal benefit from entering work being minimal.
* Paying housing benefit directly to landlords undermines individual responsibility where tenants have all of their rent met by the scheme.
* The benefit rules are complex. Claimants don't understand them and often don't know what benefit rules apply to them and what support they might be entitled to. An issue of equity, if less educated are disproportionately effected.
3.2.3 POSSIBLE REFORMS
Improving Work Incentives: In order to improve work incentives it would be necessary to increase the earnings level permitted before benefits are withdrawn. They could also be improved by reducing the 'income taper', the rate of benefit withdrawal as income rises. Unfortunately there is a draw back to these options. They would increase the cost of Housing Benefit at a time when the Government is trying to reduce it. An option for this though could be restrict the people being affected by the reduction of the income taper to only people in work. These options would also unfortunately increase the number of people affected by the poverty trap. To some extent, there is a policy conflict between containing the cost of housing benefit and increasing work incentives.
Introduction of Basic Incomes: Extending the basic personal allowance to provide an additional cash subsidy, guaranteeing all households with a certain level of income. This would remove the problems associated with the poverty trap but at a very high cost.
Introduction of a Housing Tax Credit: A Housing Tax Credit could replace Housing Benefit for households in work. A Housing Tax Credit would be an incentive for people to get work and would be a great aid towards housing costs for low-income households.
Such a reform is fundamentally for unemployed people or people on temporary contracts as the move between benefits and employment could actually be more financially hazardous than previously. There would however have to be differentiation between tenures (private tenants, housing association tenants and local authority tenants) and Housing Tax Credit as rents amongst these vary significantly. An idea of tenure neutrality is present here and will be discussed further in a later section.
There has been considerable debate with regards to the 'best' form of housing benefit. In general, there has been an inherent shift from general subsidies to income transfers, however the poverty trap is an inevitable issue. A switch back to general subsidies for housing providers would allow working households to free themselves from this restraint, ensuring work is favoured over a reliance on benefit. This form of reasoning is beneficial in looking at whether policy has overcome market failure.
4.0 - FUNDING
Partly by accident and partly be design, the UK has ended up with a highly centralized form of funding its social services. Housing differs from education and health in that social landlords charge for their services through rents. Their funding is only partly based on central government grants (although the majority of their rental income is, in fact, derived from central government indirectly via the housing benefit.) Central government faced the problem of large cost variations between authorities which bore little relationship to relative value of properties owned. This led to the development of local authority housing subsidies since 1980 and has centred on attempts to equalise resources between such authorities.
There are now two different kinds of provider of social housing, both of which provide housing at below market rents to tenants who are granted tenancies mostly on the grounds of need. To begin with, local authorities publicly designed and planned. The size of the sector has declined sharply since 1980, by 2002 only 3.4million dwellings were owned by local authority, nearly half of what was owned in 1981 (see appendix one.) A reduction caused by a result of a deliberate policy - the Housing Act 1980 gave tenants the right to buy at discount the local-authority property in which they lived (see appendix two for data.) Nearly 2 million local-authority dwellings were sold this way between April 1979 and March 2001.
Right to Buy was introduced by Thatcher in 1980 and enabled local authority tenants of at least three years to buy their houses at discount depending on their length of tenancy. The Housing Act was heavily publicised and was billed as the 'sale of the century (Matt Weaver.) They were set up because the government was under severe pressure to reduce the size of the public sector - housing was targeted because it being an area that doesn't give quick clear results as a product of spending compared with health and education. Politically, Right to Buy was popular because few people owned stocks and shares and owning a property was a form of capital, a financial asset on which to fall back on. More importantly it could lead to an increase in conservative voters. If property was owned there would be greater pressure to keep local authority rates low, rather than those who lived in social housing in favour of high taxes and the status quo.
As revealed by The Guardian there are both pros and cons to 'Right to Buy.' It is claimed that if people own their own property they have more incentive to look after it and the neighbourhood around it, an issue of equity. It can be argued that the presence of economically active households reduces the social exclusion of an area. On the other hand, those remaining in the sector have a narrower social base, with higher proportion of low-income households dependant on benefits. Before the right-to-buy there was less of a stigma about renting a council house since more people on low to moderate incomes lived in a local authority properties. Most people who can afford to buy have now done so leaving an increasingly marginalized group that cannot. Also, right to buy has made an impact on the supply of social housing. When it was introduced there was 5.5million affordable homes in England, now there are only 4.2million. The accumulative effect of this net loss of affordable housing is now being felt with a housing crisis in the southeast. It is now much harder for people to get social housing in the southeast. Excess demand can consequently lead to labour immobility.
Right to buy could be partly responsible for the UK's high owner-occupier rate, though this not reasonable since most European countries do not have access to such social housing. An alternative notion is that tenure choice is not neutral through the government's policies. Government, by being tenure neutral in its policies, would be able to provide a level of consistency for the market which has been missing for perhaps a generation (King, 1998). Support for the costs of housing consumption has typically taken the form of tax allowances for interest payments.
TENURE NEUTRALITY
In the past owner-occupiers were given tax relief on mortgage interest and taxed on imputed rents. For a properly tax neutral system there should be no incentives to favour a specific form of tenure. Government abolished tax on imputed rents in the 60s and tax relief was eventually abolished in 2000 after numerous reductions. It was often argued that MITR (mortgage interest tax relief) was not a good use of public money as it failed to help lower-income and first-time buyers. Introducing a specific subsidy reduces the cost of being a homeowner and boosts demand. Housing has an unresponsive supply so leads to a higher demand and results in higher prices. Capitalisation of the subsidy occurs since the subsidy is now reflected in the higher capital value of the asst and does not reduce owners' costs. New entrants therefore require higher mortgages and thus bigger deposits. It is possible to see the wider implications of abolishing MITR.
Theoretically, the abolition of MITR would reduce house prices, increasing net mortgage payments and reduce the wealth effects of housing, leading to reductions in wider consumer spending. In short, the effects are deflationary for the economy as a whole. However, the fiscal savings on MITR, allows government to cut tax rates, increase public expenditure or decrease interest rate. This is expansionary, and would help to offset the deflationary housing sector consequences of abolition. Pearce and Wilcox (1991) attempted to estimate the wider effects of abolishing MITR and their discussion highlights the possibility of widespread repercussions through the economy resulting from the policy change.
A second aspect of tenure neutrality is that access to different tenures is unequal (see table one.) Access to capital-markets is restricted to the detriment of the worse off. Barr believes that the allocation of local-authority housing is marred by the way tenants are selected from the waiting list. Excess demand for private rented accommodation and risk-averting behaviour by landlords creates arbitrariness in access to regulated tenancies. As a result, tenure has become increasingly polarized, with the better off heavily represented among owner-occupiers. In 2002, nearly 50 per cent of households in the bottom income quintile lived in social housing, compared to 3 per cent in the top quintile. Tenure neutrality is thus achieved in terms of neither equality of subsidy nor equality of opportunity. In both respects the system tends to work to the advantage of the better off, with an added element of arbitrariness.
Household tenure by income quintile, Great Britain, 2002-2003 (Percentages)
Income Quintile
Owner-occupier
Local Authority
Housing Association tenants
Other
Total
Bottom Quintile
40
32
5
3
00
Second Quintile
61
21
9
9
00
Third Quintile
75
1
4
0
00
Fourth Quintile
86
4
2
8
00
Top Quintile
90
2
7
00
Table: 1
Source:Calculated from General Household Survey raw data files
At last, housing associations, part of a wider category called registered social landlords (RSL), a sector which remains small but is currently growing. In 2002 about 6.8% of British households were housed by a housing association, compared with 2.4% in 1981. It is important because of its dominant role in new housing investment. Housing associations are an intermediate between public and private housing, a private institution acting, in effect, as an agent of the state. There is a very close link between the two forms of social housing due to the concept of a 'transfer.'
The Office of the Deputy Prime Minister defines a housing transfer as a 'dynamic framework for delivering greater investment, improved services, a more responsive approach to tenant needs and better value for money' (October 2003, A consultative paper). A transfer occurs when a council sells off some or all of its homes to a housing association, if tenants agree to the move in a ballot. The main incentive to transfer, for council, tenants and the government conforms to horizontal equity- increased investment, bringing council housing up to a decent standard. There is an estimated repairs backlog of up to £20bn for council housing; the public money available is unlikely to tackle this. Moreover, Britain's tough public spending rules mean councils cannot borrow private money against their assets. But housing associations can, which is why so many councils are now opting for transfer. Raising quality of social housing is one of the government's main objectives in The Housing Green Paper, this in turn requires support for continued transfer of council housing to non-profit-making registered landlords.
There is little doubt of the high correlation between those on low incomes, poor housing and homelessness. One policy instrument to be used is an appropriately constructed and operated housing allowance system. It should be payable to households in all tenures and should be a function of household income, household size and housing costs. It should promote maximum choice by households in the type, tenure and location of the housing they occupy. The main points to question are the link between the payment of a housing allowance and housing costs and who receives the payment, the consumer or the provider?
Providing reformed income related assistance across all sectors, as the main instrument of housing policy, would correctly acknowledge that housing issues are income distribution issues which need to be addressed by redistributive measures. However, the objective of decent housing will not be achieved simply by giving people more money. Problems of damp, poorly insulated and structured houses will not disappear because of more individual spending power. Eventually, in a market situation with good information and the implications of inelasticity removed, this is predicted to happen in equilibrium.
King and Oxley believe the housing policy to be in a 'state of flux.' It seems that there is an apparent contradiction. Government are consistently cutting the level of subsidy going directly to housing providers yet have equally consistently increased the level of control it exercises over them. Government have been trying to do two things which are pulling in opposite directions. On one hand, it is only the government who can decide on housing policy. On the other, the government is trying to release individuals from dependency and make them more responsible.
Bibliography
Cullis, J and Jones, P. (1998): Public Finance and Public Choice, 2nd edn, Oxford, Oxford University Press.
BEST, R (2001) 'TACKLING DISADVANTAGE - MORE SHORTAGES AND HOMELESSNESS?' -
APPENDIX 1
Figure 1.1 shows a stock adjustment model, Q* is the initial equilibrium of housing stock, p* clears the market and induces new buildings (q*) into the left diagram - the flow of new housing. The market remains in equilibrium until demand increases, pushing D1 out to D2, stock price rises to p1 and quantity q1 is produced. Since q1 is greater than the equilibrium quantity (q*) a new SRS is induced, SRS2. This leads to a new stock price of p2, it is still greater than the equilibrium price p* so net additions will continue to be added until the price returns to p*. Since at D2 the size of the housing stock occurs at Q**, long-run supply can be represented by LRS.
APPENDIX 2
Barr explains how the utility of a rich individual (R) will rise with an increase of a poor individual's (P) consumption of housing. However, R's utility will fall with 'bad' consumption of P. Thus, R would prefer to give £1000 in-kind than £200 in cash that may be spent on 'bad' consumption. Similarly, Oxley believes the same; consumer sovereignty may not prevail if the recipients of redistributed resources lack the competence to make optimum decisions.
