Previous Home Next

2. The Costs of Housing Provision

Comparative costs

Housing policy should encourage the adequate provision of accommodation by every possible means, but it should also ensure that everyone is able to live in a decent home.

Before we continue this analysis, we should be aware of costs for the three main types of housing provision, shown in Graph 2.

  1. Buying a house for homeownership is an investment transaction.
  2. Buying a house for rented stock is also an investment transaction.
  3. Buying accommodation by private rent is a consumer service transaction.

Advantages of Investment

The graph shows the unsubsidised monthly costs for each type of provision. In the first year they are the same, because the costs of all three are based on the house value in that year. However, a private rent is a consumer service and rents increase each year to match the increases in the value of the house with inflation. Taking a loan for homeownership or to build a rented stock are investment transactions and the cost of the loan is based on the price that was agreed on the day of purchase. In the years that follow, these costs diverge rapidly. Private rents increase with inflation, while the cost of a loan to buy decreases with inflation. This is the first advantage of a transaction of investment; the second advantage is that it yields a growth of equity in the ownership of the property, in addition to the function of providing accommodation. Both of these advantages apply to homeownership (HO) and to rented investment housing (RIH), because they are transactions of investment.

The cyclic character of homeownership cost is because these houses change hands every 20 years on average. The departing owner withdraws the existing equity and the loan costs for the new buyer are restored to the new date of purchase. Homeowners have the freedom to use the growth of equity in whatever way they wish, but the equity of a rented stock is used entirely to reduce rents.

RIH is much more efficient than HO as a unit of accommodation and the reason is not difficult to grasp. Houses in a rented stock serve many generations of tenants, but they are financed by single historic loans, which decline with time all the way to zero. Multiple mortgages are required to service the loans of a single house in the homeownership sector, because a loan is renewed each time the house changes hands and this restores the loan and the mortgage profit to the new market level. A PRCS is by far, the least efficient policy for the provision of houses. It offers no investment advantage to the tenant.

Investment In A Rented Stock

Graph 3 shows the accumulative effect of investing in a large rented stock. The decline in the cost of investment is truly amazing. Loan costs fall at the rate of inflation and this decline is accelerated by the growth of equity in the stock. In effect, new houses are subsidised by well-maintained older houses. Rents can be calculated to anticipate the fall in cost of loans as the stock matures. This means that a seeding subsidy is required to hold down rents in the early years and prevent a situation where the first tenants would subsidise all those that follow.

As more mortgages mature, the average cost of the stock falls into the range of affordable rents and provides the capacity to fund an expanding stock, without subsidies, after about 30 years. This is a short time compared to the lifetime of a house and infinitely shorter than the lifetime of a stock that can last forever by implementing good policies of maintenance and replacement. Ultimately the cost falls to 1 or 2% of stock value, which is the cost of maintenance and replacement.


It is the claim of this paper that Council Housing began to mature into self-sustaining surpluses by the end of the 1960s and that the proof of this lies in the records of small towns and rural counties such as Colchester that house the majority of this country's population. With rents as low as 30% of half the national average wage, the stock becomes self-financing as seeding subsidies are gradually replaced by surpluses.

For three years from 1972 in Colchester, a Labour controlled housing committee built 600 houses per year on a balanced budget with no subsidies, adding 1800 houses to the existing stock of about 12000. Further building on existing estates was halted and half of the programme was built on much smaller estates that were distributed throughout the town.

The other half were built on infill sites of six to a dozen houses, which included the Dutch Quarter, where our Chief Architect Ken Bell won a national prize for town development. In addition to proving the economic worth of investment in rented stock, Colchester showed that large estates were an unnecessary feature of bad planning.


The failure of large cities to match the self-sufficiency of small town is not the fault of housing policy; it is due to poor planning under conditions of extreme commercial pressure on available land. Having listened to accounts of the problems in large cities, I can make little useful comment, except to observe that the accumulation of equity is scaled up in high cost markets, providing it is tied closely to keeping rents low and not given away to selected minorities in windfall benefits.

Carpetbag Policies

RIH is by far, the most efficient means of providing rented accommodation. It brings high quality houses into the affordable range of almost all low-income households. However, it is vulnerable to 'carpetbaggers'. In 1971, Mr Heath attempted to exploit the accumulated equity in council housing stock. He recognised that the growth of equity, had already caused the need for building subsidies to disappear in most parts of the country; but rather than rejoicing in the successful post-war policy of investment, he saw it as an opportunity to be exploited. He made his infamous 'apples and oranges' comparison and declared that council rents were uneconomic and he announced his intention to double them, but the market reacted violently against him. House prices doubled (see Figure 1) more quickly than he was able to enforce the doubling of council rents. In effect, he abolished the stabilising control of the low cost rented sector. He introduced a massive new system of rent subsidies that he thought would restore the dominance of the private rented sector and that he could do it by exploiting the resources of equity buried in the rented stock. He succeeded only in causing a massive destabilisation of the housing market. No one could afford to buy and the council waiting lists burgeoned.

Thatcher pursued even more ruthless carpetbag policies. She gave tens of thousands of pounds in discounts on each of her council house sales! In a 1979 Commons debate, she claimed "this policy alone is sufficient to persuade thousands of people to vote Conservative for the first time". No wonder, Labour is still intimidated by this policy! So what are we to do about morally corrupt policies that pull the plug on some of our most important social structures just to exploit their investment resources? They mark the depths of irresponsible public policy. They have been used to exploit pension funds for short-term gain, to destroy mutual building societies and they even caused the loss of school playfields; they are related to banking practices that new regulation is attempting to control and they are corruptions of our public life that the electorate is demanding to be better regulated.

This is the battle for democracy. It isn't a static condition that we achieve and can then sit back to enjoy. Billions of pounds wasted on bad housing policy, impact on our ability to support and maintain the NHS. We can't claim to have a better way and let it slip by, because focus groups show that the RTB is popular with the electorate. We must demonstrate the advantages of a better policy and show that it is important to the fundamental needs and aspirations of the public. The battle for democracy is just as relavent now as it was in the 1930s. It needs balance and conviction and the faith to present it as policy to the electorate. The 'property-less poor' are impoverished, not so much by a lack of property, but by the loss of independance imposed by artificial subsidies that sustain the High Rent Policy.

Previous Home Next