The Economic Case for more Social Housing

Rising house prices used to make cheery headlines in the papers. It was associated with economic success. We were all getting richer. If people can afford to pay more and more for houses, then the economy must be getting bigger and bigger. In truth, the rise in house prices had just as much to do with the easy availability of mortgages, which created an “effective demand”.

As a youngster, I remember how people’s excitement of buying their own council flat infected everyone else. Aspiration amongst the working population must be one of the most important factors to a thriving economy, and it was very much instilled in the east enders in the ‘80s. This is how Thatcher won.

Today we hear commentators speak of the “lack of animal spirits”, referring to an economy which is moribund. Few people are investing lavishly. Few new enterprises are born from a sketch on the back of a beer mat. There’s a general lack of excitement, of inspiration. A lack of moral.

The problem is that if we want to fix the problem of over-valued houses, then we would need to supply enough new homes to cause house prices to fall. However, deflation would stop developers buying land for fear of losses through falling prices. House price deflation would effect consumer spending. If people believe they are getting poorer in their assets they will avoid splashing out. How many politicians would choose policies that would have such an effect?

George Osborne must have considered these issues, when he chose to support the buyers, rather than the builders, of new homes. Such is his largesse that his subsidy will include houses up to a value of £600,000. So much for first time buyers.

The problem for the Tories is that they will only look at one section of the housing stock. When considering the solution, it helps to see housing as two separate stocks, with two separate economies. Private housing with it’s market economy, and social housing with it’s demand economy. They are both effected by supply and demand but in different ways. A lack of supply increases prices in the private stock, and waiting lists in the social stock.

The solution is to greatly expand the social because this can increase the amount of available housing without effecting the value of private homes, as social housing doesn’t compete with owner occupation. It would likely bring down private rents but we’re not so concerned about that, because falling rent puts money directly into the pockets of tenants, so the economic effect of rent deflation is more than mitigated.

A dramatic increase in the stock of social housing is an existing policy of Labour. Ed Balls proposes to build 100,000 new homes by providing 20% deposits to Housing Associations, who would raise the rest on the capital markets, using a business plan that combines homes for sale with not-for-profit rent. However, he should probably consider a figure closer to 300,000+ if he really wants to make an impact.

He should also make it his business to sell the economic argument for a greater expansion of social housing to the wider electorate, with a particular emphasis on the likely lower rents, as this provides a benefit to those who haven’t had the good fortune to get a social home themselves.

So it’s not just units that Mr Balls must contend with. He should also turn around the sorry reputation that social housing has developed from past mistakes. That makes a whole other challenge.

Leave a Reply

Fill in your details below or click an icon to log in: Logo

You are commenting using your account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s

%d bloggers like this: