Tuesday, 24 February 2015

Natalie Bennett on top form

The LBC have put up a transcript of her car crash interview.

As to building more social housing, they both missed the point.

It doesn't really matter what they cost to build in £millions or £billions, the important consideration is whether the overall annualised cost (minus rental income) is less than paying Housing Benefit to private landlords.

Gov.uk says there are 1.7 million HB claimants renting from private landlords at a total cost of £9.32 billion a year = £105 a week average.

Councils can wangle land virtually for free, and the build cost for a small terraced house or a decent flat can't be more than the £60,000 figure she gave*. Let's say councils borrow at 3% over 25 years, that's loan repayments of £3,500 per unit per year plus £1,500 annual maintenance and running costs = £100 a week.

So even if councils allow people to occupy them rent free, it's still no more expensive than paying Housing Benefit.

If you factor in rental income of £80 a week (the average charged for social housing), it is a considerably better deal for councils, tenants and the taxpayer. And it's a considerably better deal for working private tenants who are not claiming HB because private sector rents will fall markedly and/or lots of landlords will sell up**.

That woman is her own worst enemy. And I happen to know that she has been presented with itemised and robust calculations for paying for their suggested Citizen's Income; I accept that you can't her to remember the finer details but surely you can expect her to remember that it's all been worked out and costed?

If you join the dots, they can also claw back a lot of the Citizen's Income in rent, in other words you can choose between £72 a week cash or a roof over your head, however modest.

* Steven L points out in the comments that if the government spends money on having housing built, it claws back a fair bit of that (a third?) in CIS deductions, PAYE, corporation tax (housing is zero-rated for VAT).

So if it funds construction by borrowing, it is cash positive in the first few years. The 3% interest cost is further reduced by income tax thereon.

I cheerfully admit that £60,000 might be a bit on the low side and I did not factor in a cost for land. But all of these little adjustments net off to nil at worst, leaving the overall saving to the taxpayer intact.
** Bayard in the comments thinks that the latter effect will outweigh the former:

"If the Housing Benefit claimant market collapses, because either there are no claimants or the claimants are suddenly a lot "poorer", then the most likely outcome is that there will be a lot of houses on the market as the BTLers sell up."

Either way, it's all good, as most private tenants would rather be owner-occupiers.


Steven_L said...

And you're missing that if the government pay people to building houses, then under the current system, they get Xp back in VAT, payroll taxes, fuel duty etc for every £1 they pay the construction industry.

I'm sure HMT have some kind of figures on this sort of thing.

Mark Wadsworth said...

SL, excellent point, I have added a footnote.

Bayard said...

"because private sector rents will fall markedly and/or lots of landlords will sell up."

Ahem! Non-HB private sector rents should be unaffected, unless all those tenants suddenly become poorer, which there is no reason why they should.

The removal of HB-dependent BTLers from the housing market should depress prices at the bottom end, though.

"I cheerfully admit that £60,000 might be a bit on the low side"

I wouldn't have thought so, not if you are building five million of them, all the same, or even with, say, five different types. Excluding land costs, of course and the council would have to be its own main contractor.

Anonymous said...

«because private sector rents will fall markedly and/or lots of landlords will sell up.»

And every little girl will get a pony too! :-)

I am fairly disheartened by posts like this because they make sense only if one believes or pretends to believe that the massive redistribution from (largely Northern, male) people with no or less property to (largely Southern, female) people with more property is an inadvertent mistake that governments have made for 30 years and that will be easily corrected once a clever solution is found.

But most likely for 30 years both major parties have been trying to win elections with deliberate and hard policies to push up private sector rents and make sure that private landlords can see the value of their properties zoom up, like:

* boosting demand of housing, concentrating the spending of government money to create jobs in already very popular areas in the South East, supporting massive immigration and pushing down relentlessly the monthly mortgage interests payments with austerity policies;
* restricting the supply of houses, by way of hard restrictions on building and land use.

Given the politics of the situation many previous instances of similar situations show that governments stop redistributing other people's money to their supporters and cronies and stop giving them lots of cheap loans to do leveraged speculation only when it becomes simply impossible to do that because of a catastrophic crisis. Up to that point nothing changes:

«Yet the economic solution is seldom very hard to work out. No, the real concern of the fund’s senior staff, and the biggest obstacle to recovery, is almost invariably the politics of countries in crisis.
Typically, these countries are in a desperate economic situation for one simple reason—the powerful elites within them overreached in good times and took too many risks. [ ... ] They reckon—correctly, in most cases—that their political connections will allow them to push onto the government any substantial problems that arise. [ ... ] Meanwhile, needing to squeeze someone, most emerging-market governments look first to ordinary working folk—at least until the riots grow too large.»

The great innovations of the New Tory/New Labour governments of the UK (and of the USA, Australia, New Zealand, ...) has been to let middle income property owners join the "oligarchs", the "elites" described above, in a giant speculative bubble fueled by high debt leverage (5% down mortgages are 20 times leveraged).

And what did the current (and previous) government do after the "outset of the crisis"? Double down! Bailed out their friends in the City and their constituency among property speculators in marginal seats ("the oligarchs are usually among the first to get extra help from the government") by unleashing more cheap credit even at the cost of a ferocious recession that has cut most middle and low income people's earnings by 20-25% ("Meanwhile, needing to squeeze someone, most emerging-market governments look first to ordinary working folk").

Because property speculation has given 160% gross profits per year to South East middle income property owners (largely middle aged women who are swing voters in marginal seats and love funding their lifestyle with remortgages), and nobody wants to stop getting that kind of profit unless it becomes simply impossible to get it. And has contributed immense profits to City banks and their bonus pools.

Anonymous said...

«Given the politics of the situation»

As to the general politics of the situation here are some quotes from Wikipedia about the most obvious example of the political strategy, the Westminster

«a political scandal in the United Kingdom which involved the selling off of council housing to potential Conservative voters»
«Eight wards were selected as 'key wards' - in public it was claimed that these wards were subject to particular 'stress factors' leading to a decline in the population of Westminster. In reality, secret documents showed that the wards most subject to these stress factors were rather different, and that the eight wards chosen had been the most marginal in the City Council elections of 1986. »
«In services as disparate as street cleaning, pavement repair and environmental improvements, marginal wards were given priority while safely Labour and safely Conservative parts of the city were neglected.»
«Another vital part of 'Building Stable Communities' was the removal of homeless voters and others who lived in hostels and were perceived less likely to vote Conservative, such as students and nurses, from Westminster»

And this was the obvious result:

«In 1990, the Conservatives were re-elected by a landslide victory in Westminster, increasing their majority from 4 to 38. They won all but one of the wards targeted by Building Stable Communities policy. Porter stood down as Leader of the Council in 1991, and served as Lord Mayor of Westminster in 1991-2.»

That's a summary of UK, or rather South East marginal seat, politics of the past 30 years.

Steven_L said...

Thanks MW, but I reckon some of the money will be recouped by VAT even if it's just through extra demand in the economy.

Can homebuilders still claim back the VAT on their materials then?

Mark Wadsworth said...

B, if the government guarantees a rent of £105 a week and pays that for nearly one-third of all private rented homes, then non-claimants have to match that.

Pull away that rug and private sector rents will drop - by a lot at the bottom end and everything else falls in line. Does it matter whether somebody's rent falls by £5 a week or £50?? A fall is a fall is a fall.

And Bennett suggested building half a million social homes, not five million.

Bliss: "I am fairly disheartened by posts like this because they make sense only if [etc]"

I know all that stuff, that's the whole point of YPP. So why don't you join and stand at the next election? You know what we are on about off by heart.

SL, yes, indirectly, the govt gets a bit more VAT, pays a bit less in welfare in so on, but the supply of skilled labour and materials is quite restricted, so money spent by councils on building would to some extent crowd out spending by private builders.

And yes, homebuilders can reclaim all VAT on the new build (but not on extras like carpets or white goods).

The key to VAT (in the UK) is that banks are exempt and landowners (farmers, home builders) get full refunds.

Bayard said...

"then non-claimants have to match that."

I distinctly remember you proving that houses not for rent to HB claimants were less expensive to rent and in nicer locations than ones that were, i.e. that the HB claimant and non-HB claimant markets were separate.

"And Bennett suggested building half a million social homes, not five million."

I got caught by someone else's typo again.

Lola said...

Small house flat is about 600 sq ft. Say £100 / sq ft. £60 K not far off.

Mark Wadsworth said...

B, correct, it is "distinct markets" but not fundamentally different (like the market for iron ore and the market for mobile phone ring tones), they are just two ends of a scale (like the market for BMWs and the market for Vauxhall).

But what do you think would happen if half a million households moved out of 'private' housing and into social housing and HB is capped anyway?

L, thanks.

Lola said...

La Bennett is also clueless about the network effect of building more homes, that is it tends to increase prices, not reduce them.
Also, I think that we are, roughly, building enough homes to cope with population growth.
The problem with housing are not those of markets but of failed policies - taxation, subsidies, benefits, planning etc. etc.

Bayard said...

"they are just two ends of a scale (like the market for BMWs and the market for Vauxhall)."

The other end of the scale from the sort of housing rented to HB claimants on that analogy is housing rented to rich bankers over from the US, where the rent is in tens of thousands a month. Both HB claimants and non-HB claimants are renting the same sort of housing, but the insurance companies split that market into two distinct parts. HB claimants are never going to be renting from the non-HB claimant landlords, because those landlords won't rent to them and non-HB claimants won't be renting from HB claimant landlords, because, by and large they can do better elsewhere. Both markets are governed by Ricardo's Law, it's just the HB claimants are "richer", courtesy of our caring government and so pay more rent. If the HB claimant market collapses, because either there are no claimants or the claimants are suddenly a lot "poorer", then the most likely outcome is that there will be a lot of houses on the market as the BTLers sell up. Rents in the non-HB claimant sector of the market are not likely to be affected, as these would still be governed by Ricardo's law and the disposable income of the potential tenants would remain unchanged.

Of course, Ricardo could be wrong and it could just be supply and demand, but we've not seen much evidence for that have we?

Anonymous said...

Evan Davies did his own ready reckoner on how such building might be financed on Newsnight last night assuming unit costs of about 100K including land. He also made the comment that you could double this to allow for infrastructure spending on services and roads around the new developments. Looking for a bit more info I came across some data in a study by the Nat Fed of Almos [pdf 'Let’s get building']which said it was basing it's own assumptions on current estimates of building costs by councils [citing;local gov document] of about 116K per unit including land. If you allow another 100K per unit toward that infrastructure spend it comes out at 216K per unit. Not suggesting it's a bad idea at all or that it it isn't self financing, but much more expensive than suggested on here.

Mark Wadsworth said...

PC, come off it, the roads and drains and so on nowhere nearly double the price.

Let's stick on £20k per unit absolute tip top maximum and councils can get land i.e. planning permission for free.

It always comes out cheaper than HB.