Monday 22 February 2010

Basic Home-Owner-Ist Maths

For a given outlay, what would any rational person rather have:

(a) a quarter of something (with no future net cost), or

(b) the whole of nothing (with higher associated future costs)?

In the topsy turvy world of Home-Owner-Ism, (b) is the preferred option. From the BBC:

Some councils in Somerset are offering private property owners money to rent out homes as social housing.

There are currently around 4,500 empty homes in the county and more than 30,000 people on the waiting list. Some of the properties are not suitable for living in and the owners of others do not want to rent as social housing.

South Somerset and Mendip district councils are offering potential landlords grants and loans to try to solve the problem. In South Somerset, grants of up to £12,000 are available towards renovation costs.


Meanwhile, in the real world, it costs about £50,000 per flat to build a block of two- or three- bedroom flats. If the council can build some new ones and rent them out to those on the waiting list who can afford to pay £80 or so a week in rent, the council (and hence the taxpayer) is better than breaking even; but if you give a property owner £12,000 to do up his property, he might well then be bound to let it to the council, but the rent will be considerably more than £80 and no doubt large chunks of that will be paid for by the taxpayer in Housing Benefit.

The problem is, that the Home-Owner-Ists are in charge - theirs is the real world.

7 comments:

Lola said...

Hmm. Lte's see:-

80 x 52 / 50,000 x 100 = 8.32%

That's not a bad gross return. It's 12 years purchase which is roughly what I reckon commercial properties should yield on a full repairing and insuring basis, so a bit light in real terms.

If we made it £100 per week the yield gets to 10.4% which passes my double figures test for let domestic property.

But £50K doesn't cover the land cost. Please explain Mr W?

Mark Wadsworth said...

L, that's the beauty of it - £50,000 covers the construction cost and as the local council is in charge of planning permission, it can buy up a bit of farmland for tuppence ha'penny and give itself the planning permission for free :)

Lola said...

Hmmm 2. Don't really like the sound of that - unless I am the council - given that the quality of most councillors is absolutely bleedin' useless.

Mark Wadsworth said...

L, OK, we can finesse this plan by judicious sub-contracting of various bits to private companies, but the general principle stands. It's not exactly as if all privately built housing is that fantastic.

Tim Almond said...

"It's not exactly as if all privately built housing is that fantastic."

You're not kidding. There's some houses in the modern estate near here which have had electrical wiring put in diagonally in the walls because it cut down on the cost (saving probably pence), despite increasing the chance of someone drilling through an electrical cable.

It's why I bought a 1930s house. Not much after that was built with any pride.

Lola said...

MW 21.39. Agreed. Wholeheartedly. My old Dad was a spec housing developer from 1947 to 1989, when he died. He knew a thing or two about house builing. His first company was bigger than Barratts in the early 60's. He did an exercise every year to see if he could build a decent house for 1st time buyers at a price they could afford and he could make money. By 1988 he could not build a 2/3 bed semi with decent space and storage for a price that a 1st time buyer could afford. So he didn't. The boxes that were built are dreadful things.

But this is as result of failed local planning and local and central politics as much as the builders themseslves.

As much as I argue this myself I come back to the point that we have to do something to undo Ricardos theory of rents. Somehow we have to make the cost of renting (whether buying or owning) a smaller proportion of NAE. Increasing the supply of council housing won't of itself do that.

Plus I am very much against government provision of anything. Due entirely to the fact that politicians are for the most part pathologically useless and skew the use of capital from where investors believe it will make the best financial return to where politicians think it will make the best political return.

Mark Wadsworth said...

JT, L, yes of course low standards are forced upon them by restrictions in supply of land (so more of purcahse price goes to land and less goes to the bricks and mortar), I'm not bashing developers generally or anything.

L, agreed on politicians, but if there are one or two million households on council house waiting lists, it's pretty safe to say that more capital should be allocated in that direction. If something's worth doing, it's better to do it badly than not at all.