Exam candidate now scoring negative marks

adamcollyer at As your teachers used to say, "Just answer the question:

Your maths is quite right of course. But your underlying assumptions are wrong.

Yes it is. And no they aren't.

Let's extend the example a little. Imagine that Mr A's brother, Mr C, has an exactly similar house to Mr A's. Now, if Mr C builds the extension he can charge Mr A £90 a week for letting Son A stay in his extension. So Mr C makes a huge profit.

Aha! So our candidate now claims that Mr C can make a "huge profit" while simultaneously claiming that Mr A would make a loss by building an identical loft conversion (and I never said "extension", so that's another two marks deducted). So this supports my original conclusion that Mr A is far better off having the loft conversion done than paying rent for his son to live elsewhere.

But the reason for that profit is that the rent in your example is ridiculously high compared with the cost of providing the accommodation.

No it's not. That's a fairly typical rent for a single furnished room and a fairly typical cost for building out the loft to provide one extra room.

In practice, with council housing, the rent available at market rates is NOT enormously higher than the (interest) cost of building the house. To take a concrete example, ex-council houses in my town go for around £100,000. Interest at 5 percent = £5,000 per annum. To rent a similar house costs about £500 per month = £6,000 per annum. Which, surprise surprise, equals the interest cost plus maintenance etc plus a small landlord's profit.

What the candidate has done here is first correctly refer to the "interest cost of building a house" and then compare this with "the interest cost of buying an existing building" (which of necessity is inflated by the value of the planning permission). When using notional costing as a decision making tool, you have to try and compare like-with-like.

As the planning permission, and hence the land for new housing (which is what we are trying to discuss here), costs the council nothing, and our candidate submitted on his own blog that it costs a council £50,000 to build a council home (as a rule of thumb, half the cost of a house is the planning permission, so that looks 'about right'), the interest cost on the bricks and mortar of a new build is about £50,000 x 3% (local councils can borrow very cheaply, especially if secured on buildings) = £1,500 per annum.

This works out at about £30 a week, which is roughly equal to the average rent paid by social tenants (net of Housing Benefit) of £30 to £40 per week. I rest my case.

Further marks deducted for referring to "small landlord's profit". The council probably originally sold off that council house for £25,000 (?), so if it now has to pay £100,000 to buy it back, the Tories' policy of selling off council housing is indeed a huge great loss to the taxpayer, with a corresponding huge great profit to the owner(s) of that council house in the interim.

And further marks are deducted for refusing to answer the question: what should Mr A do? Rent a room elsewhere or do the loft conversion?

So the candidate is now into "negative marks" territory.