Subsiding Subsidies: The Real Cause of Falling Housing Affordability?

UK Policy Housing

Subsiding Subsidies: The Real Cause of Falling Housing Affordability?

Commentary
Posted on: 18th January 2023
By Multiple Authors
James Browne
Head of Work, Income and Inequality Analysis
Christos Tsoukalis
Economist

With house prices in England reaching record multiples of average income, it’s no surprise that housing affordability has become the focus of growing political debate. But the rental sector has its own affordability crisis. The share of tenants’ income going towards rent is close to its highest for decades, and the demand for cash housing benefits seems higher than ever, even as the public finances look stretched. We need to think whether subsidies can be designed more effectively, with a return to support through the social housing sector playing a more significant role.

A series of policy measures over the past 40 years have reduced the value of housing subsidies. The introduction of Right to Buy reduced the number of households benefiting from sub-market rents for social housing. For the remaining properties in the sector, social rents have been raised closer to market levels. And the deregulation of the private rented sector during the 1980s and into the 1990s removed a big subsidy from landlords to tenants. In other words, non-cash housing subsidies have shrunk markedly over the past 40 years even as spending on housing benefits has increased.

How Have Overall Housing-Subsidy Levels Changed Since 1979?

In a paper published today in association with the Joseph Rowntree Foundation, we quantify for the first time the full impact of changes in these three forms of housing subsidy in England since 1979.

Between 1979 and 2010, there was a deliberate switch towards providing support for housing costs through cash benefits and away from interventions that reduced headline rents. From 1979 to 2009–2010, the social rented sector shrank from 31 per cent to 17 per cent of the English housing stock and social rents increased from just over half to around two-thirds of market levels.

As a result, the effective subsidy to renters from social housing fell as a share of total day-to-day housing costs in the national accounts by five percentage points. The disappearance of rent controls from the private rented sector contributed a further five percentage point fall in subsidy.

Housing Benefit took the strain, increasing from 2.5 per cent to more than 9 per cent of total housing costs over this period, offsetting around two-thirds of the decline. But reductions in the generosity of Housing Benefit since 2010 have further reduced the share of total housing costs covered by subsidies by one-and-a-half percentage points.

Overall, the generosity of housing subsidies fell from 16.5 per cent of total housing costs in 1979 to 11.5 per cent in 2019–2020.

Put another way, if the combined subsidies from social housing, rent controls and cash support for housing costs had remained at their 1979 levels as a share of total housing costs, they would have been worth £45 billion in 2019–2020 rather than their actual level of £31 billion. But subsidies were poorly targeted in 1979 – much of the reduction in subsidy levels has come from richer households. To restore 1979 subsidy levels for households below average income would require a £6.4 billion increase in subsidies.

This trend explains why housing has become so much less affordable for lower-income households. Had subsidy policies remained as generous, out-of-pocket housing costs for renters as a share of their incomes would have remained close to their levels in 1979.

Options for Improving the Affordability of Rented Housing

It is clear then that housing subsidies of one form or another have always been a central determinant of the affordability of rented housing. Since housing costs are closely tied to the typical incomes that can be earned in a given location, those with limited earning power will always struggle to pay market rents. By extension, attempts to improve housing affordability for poorer households simply by increasing general housing supply (as distinct from expanding access to social housing) are unlikely to be effective.

Since the Government can borrow more cheaply than private-sector landlords, it will typically be cheaper to use state-backed borrowing to increase the social housing stock than to pay housing benefits to private-sector landlords. Social housing also offers more-secure tenancies and stronger financial work incentives for tenants.

But despite these advantages, fiscal constraints will always put a brake on expansion of the social rented sector. The social sector has disadvantages for tenants too, who have little choice as to the location or type of property they are allocated. This may prevent them from taking up employment opportunities outside their local area, hampering productivity in the economy.

Different Types of Subsidy Are Appropriate for Different Groups

Housing policy therefore needs to offer a balance between these two forms of subsidy. The appropriate mix should be determined by differentiating between the needs of different household types.

There are currently 1.9 million pensioners, lower-income families with children and people with a disability living in the private rented sector for whom more-stable housing tenure is a priority. Some of these households could be helped into homeownership with appropriate policy reforms, but for others this will not be an option. This suggests significant need for additional social housing. An additional 700,000 social properties would allow the level of social renting among lower-income families with children to return to its 1979 level and the share of lower-income working-age disabled people living in private rented accommodation to be reduced below 10 per cent.

Housing Benefit meanwhile should be more targeted to particular types of households, such as the temporarily poor or for those whom labour mobility and choice are the most important considerations. If private-rented-housing affordability is to be improved, it will be necessary to make a positive case for the role of Housing Benefit, rather than seeing it as a cost to be minimised. To enhance the experience of renting in the private sector, policymakers should end the Local Housing Allowance freeze, re-link rates to the 30th percentile of local rents, and introduce the reforms to the private rented sector outlined in the recent “A Fairer Private Rented Sector” white paper.

There Is a Strong Case for Action on Housing Subsidies to Boost Affordability

Our analysis shows that the housing-affordability crisis for renters is firmly grounded in the waning generosity of the subsidies on offer to lower-income households over the past 40 years. Consequently, there is no credible route to significantly improving affordability that does not involve intelligently rebuilding some of those support systems. On both social and economic grounds, there is a strong case for action.

 

Lead Image: Getty Images

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