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5. The Cost Of Subsidies

Our history has proved that the UK housing market can support affordable housing by investment for both rent and ownership, but it cannot support the demand for affordable rents by means of a consumer service. Within my own lifetime, most working class households lived in PRCS slums. Typically, they were two up two down, single-clad brick houses, which were damp, used gas lights, had no electricity, one cold tap, a tin bath hanging on the wall and an outside toilet. Council houses transformed that situation in a single generation. Subsidies were needed to establish the stock. But the initial high subsidies fell quite rapidly and most stocks throughout the country proved to be self-supporting by the time that the 1972 Housing Finance Act abolished council subsidies.

But by then, the effects of residualisation had polarised homeowners and council tenants to the extent that they were widely portrayed as having opposite interests. This paper and the graphic evidence of House Price Inflation show that the opposite was true. Council tenants were regarded as a continuous burden on the taxpayer even when, in fact, the reverse had become the reality.

The seeding subsidies required to establish a low cost rented sector in the 50s-60s were almost trivial compared to the rent subsidies now required (£23 billion in 2010) to make private rents affordable to low income households. Even then, the Conservative strategy was to exaggerate council investment subsidies as an excuse to reduce building and to demote their role to the status of welfare housing. It was a divisive policy. By building too few low rent houses, they were able to pillory better off tenants for depriving poor tenants from their chances for a decent home. The Conservative press mounted vicious campaigns against "sponging tenants". Yet council subsidies soon fell below the subsidies to owner-occupiers. These games are being played out again as tenants are blamed because we cannot afford the subsidies of the PRCS.

The evidence is now clear; the rent subsidies and sales discounts that were necessary to stem the decline of the private rented sector have massively distorted the housing market. The lost alternative of a low cost rented sector has increased house prices, but more importantly, it has increased the critical risk faced by first time buyers; it destabilised the house price market.

New subsidies, which mean more distortions, are now being introduced to help first time buyers. But as shown elsewhere, subsidies to individuals are not accumulative and are dissipated within a generation. The real solution is to stabilise the housing market by abolishing the discounts of RTB sales and allowing the growth of equity to provide low cost rented housing.

Loan Costs

Graph 4 uses the same model as Graph 3; it shows the costs of building 200,000 houses at a rate of 400 houses per year for 50 years. The rent subsidies to support a PRCS are shown in red and the cost of building the same houses by investment is shown in blue. In both cases, costs are balanced against rents for two levels of affordability:

  1. Rents set to 30% of the national average wage
  2. Rents set to 30% of half the national average wage

The PRCS subsidies rise until building is completed and then remains high in perpetuity. But seeding subsidies are temporary. They 'mature' to yield a continuous surplus. The period of maturity depends on the choice of parameters, but this model is clearly conservative. It indicates surpluses after 40 years, but they were widely achieved after only 27 years.

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