Best To Be Bold

Daft - but not quite as reported*

Nobody said welfare reform was going to be easy. There were always going to be losers, and the welfare lobby was always going to scream very loudly.

But if we are ever going to grip our ballooning �200bn pa welfare bill and provide real work incentives, serious reform is absolutely essential. And to do it right, we must be bold. Nibbling away at the margins is very likely to leave us with the worst of both worlds - plenty of losers and screaming, combined with a welfare system that still isn't fit for purpose.

Take the row over Child Benefit. This morning we got the latest instalment, in which the Treasury is vowing to impose fines on any higher rate tax payer who fails to declare his or her partner is in receipt of CB.

Which is fine, except that the partner may not want to say. After all, a couple's tax affairs are separate these days, and CB is paid direct to the female partner specifically so she can keep it away from the nasty beer swilling brute she's forced to live with (well, that's what Pol says anyway). And what happens if the man/woman doesn't realise he's a top rate tax payer, perhaps because of an unexpected bonus?

The basic problem is that we currently have no way of taxing couples as a unit. Tax is levied on individuals, so HMRC doesn't automatically know the overall household income.

And that is a key reason why our own cuts package last year included the complete abolition of universal Child Benefit (see this blog). In its place, following an existing plan put forward by Reform, we proposed beefed up payments to poor families under the Child Tax Credit, which is means tested on household income. True, in an ideal world none us wants more means testing, but since this is the real world with an increasingly limited budget, that's something we just have to put up with.

Had George followed that line, he'd have avoided all these complexities with fines and the indefensible disparity between one and two earner families. He'd have had a clean workable solution - at least pending the more radical universal benefit reforms promised by IDS.

So why didn't he do it?

You know why. Universal Child Benefit is a totem - the very embodiment of the welfare state. Also, he didn't fancy explaining to those Ordinary Hard Working Families (OHWFs) on �30-40k that they are to lose a couple of grand a year - even though at some stage they could look forward to commensurately lower taxes.

So we've ended up with a dog's breakfast. Failure to be bold and go for a workable long-term solution has landed us in a mess.

Let's hope there's no backsliding on the the other great welfare change - cutting Housing Benefit. The much bolder reforms there find themselves firmly back under the spotlight, courtesy Boris's most unfortunate remarks yesterday about "Kosovo-style social cleansing"*. Here's the TPA's Matt Sinclair arguing the case last night against the Bishop:



We've blogged Housing Benefits many times, and we took a good look at the current situation here. We showed how under Labour, spending soared by 35% in real terms, although the number of recipients barely changed - in other words almost all the money went on pushing up rent levels:

We also showed how in some areas, Housing Benefit dependency has reached 30% of all households, and more. The record is held by Hackney, where an astonishing 43% of all households are on HB:

We noted how many landlords have done very well out of HB, driving returns on their equity as high as 50%.

And we pointed out that the serious economic research in this area shows that it is the landlords who will suffer the biggest hit from cuts. The evidence says that between half and all of the cut in rental subsidy ends up falling on the landlord not the tenant. In other words, rents fall pretty much in line with the cut in subsidy.

But according to the BBC and the rest of the left, the poor are about to be sent back to the workhouse. Indeed, the preposterous Labour MP Tristram Hunt reckons they'll soon be gnawing on bones and putrid horse flesh to stay alive. Tristram is the son of Lord Hunt and was schooled at University College School Cambridge followed by Trinity - we should probably assume he's never sampled bones, putrid horseflesh, or even KFC, and knows as much about life on low income as the Duchess of Buccleuch.

Admittedly George is from a similar background to Trist, but on HB reform he is a lot closer to reality. His bold HB reforms are a vital step in the right direction and he must not allow himself to be intimidated.

Everyone out here agrees that HB recipients should not be funded to live in houses the average taxpayer can't afford, and that may well lead to some relocation. But that's simply too bad - the money has run out.

Nobody's being sent back to the workhouse. And if the reforms lead to anything like the grim Dickensian world Trist describes, Tyler will personally gnaw on the first bone he can find lying in the gutter.

*Footnote  Boris was obviously daft to have referred to Kosovan cleansing. But when you hear the actual interview - as opposed to the hyped up reports of the interview - it's pretty clear he was actually just saying that he wanted to see good transition arrangements for the new system. He wasn't opposing the whole deal, as was reported subsequently. Well, that's what Tyler thinks anyway.

Council House Sales - Another Taxpayer Rip-Off

Tyler will have bored you many times with his cigar-puffing reminiscences of growing up on a council estate in the 50s. Deprived? Of course not - back then, a quarter of all families lived on council estates. With another one-third renting privately, for the bulk of the population owner-occupation still lay well into the future.

Today, the percentage who live in council rented property has fallen to just 9% (England - facts here). But add in the percentage living in other social housing (Housing Associations etc), and the total is 17%.

Which is a bit surprising. Given that since 1979, around 3 million council and social houses have been sold to sitting tenants under the right-to-buy scheme (and note this wasn't all down to The Evil Tories - the sales continued under Labour).

What that means - and I do apologise if this is the bleedin' obvious - is that councils and other tax-funded landlords have built more homes to replace those they've sold. In broad terms, across the UK, they started in 1979 with 6 million homes, and now have 5 million. Given that they sold 3 million, that means they built 2 million.

In effect, the taxpayer has been funding a speculative property developer. The developer - S Shopper Homes plc - has built millions of homes in order to flog them off later.

Unfortunately, unlike property developers in the real world, S Shopper Homes has sold its properties at below market prices. Well below market prices. Sitting tenants have been allowed to buy at considerable discounts.

Over the last decade, the price discount in England has averaged 37%. Which works out at nearly �11bn in cash terms. And going back, discounts were even higher. As recently as 1998-99, the average across England was an astonishing 50%.

We haven't been able to track down all the data going back to 1979, but on the basis of what we know about the last decade, we estimate that the total cost to taxpayers of these discounts in today's money has been well in excess of �50bn (ie roughly one-fifth of the sales took place in the last decade, and they cost us �11bn... plus, the historic discounts were higher).

Now, we do understand that the original Mrs T had other reasons for flogging off council houses. And we do understand all that stuff about a property owning democracy. But what we want to know is WTF did S Shopper sell these things at such huge discounts? It's our friggin' money.

And there's something else about council house tenancies as well.

Whether we like it or not, there are some people who just aren't capable of funding and/or managing their own accommodation. Sure, we can let them sleep in a ditch, or reopen the workhouses, but realistically, the Major aside, most of us would not sign up for that. Realistically, taxpayers are are on the hook to house them.

The real choice is between funding them in private rented accommodation - with all the expense and problems we blogged yesterday - or putting them into social housing of some kind.

But we need to remember one very important thing. As Cam said yesterday, allocation should be on a needs basis. Social housing must be seen as part of the welfare safety net, and there can be no right for a tenant to occupy a particular house for ever.

And in future, there can definitely be no right for sitting council tenants to buy out the taxpayer at a knock-down price.

Ripping Up The Rent Book

Good news for landlords

One element of the welfare bill that's got totally out of hand is Housing Benefit (HB). During the Labour government, it soared by 35% in real terms, and this year it will cost us well over �20bn.

There are currently 4.7m households receiving HB, which is getting on for one-in-five of all households. Or to put it another way, every family paying for its own housing is also paying a quarter of another family's housing costs.

In some areas it's even worse. 30% of all households in inner London are on HB, and in Hackney it's an absurd 43%. This chart shows the 11 Council areas above 30% (Aug 2009):

So what are we going to do about it?

In the June budget, George set out his plan. First, he imposed a fixed maximum cap on the reimbursement of housing costs, irrespective of where they are (�400 a week for a four-bedroom property and �250 a week for a two-bedroom home). Second, he announced that from 2012, the maximum reimbursable rent for each HB local area (there are 153 of them) will be reduced from the median of market rents for that area, to the 30th percentile, and will thenceforth be uprated annually in line with the Consumer Price Index, rather than market rents. He reckons those changes should eventually save �4.2bn pa.

Needless to say, he's picked up some serious flak. The left-wing press warns:

"Thousands of people will be made homeless as public spending is slashed because of a dangerous combination of higher unemployment, increasing repossessions and cuts to housing benefit...

The retired, disabled people, carers and working families will be hardest hit and charities predict it will trigger the steepest rise in families living in unsuitable accommodation and individuals sleeping rough since the 1980s.

Those in London will be the worst affected, forcing an exodus of poorer people from the centre to outer boroughs... The homeless charity, Shelter, said that some households in London currently receiving housing benefit will have to find a shortfall of up to �1,548 a month to meet their housing costs. The result, say opposition MPs, will be "social cleansing" of poorer tenants from richer areas."

"Social cleansing" - a slogan worthy of the great Bishop Snow himself. To be frank, we've never been able to understand why poor families should expect to be housed in rich areas at public expense. Apart from anything else, doesn't the left's position on equality say we're all much happier if our neighbours are not miles richer than us?

But setting that on one side, why does the left automatically assume HB recipients will be rendered homeless or otherwise cleansed? Why don't they consider the possibility that many landlords may be forced to cut the rents they charge?

Because what we have here is another classic escapade of the Simple Shopper. The very same S Shopper who managed to bungle us into the ludicrous GPs contract and all those overpriced PFI contracts (see many previous blogs on both). And what he's done here is to bumble his way into the private property rental market and spray huge amounts of our money in the direction of Britain's buy-to-let landlords.

A recent article in the Investors Chronicle gives a good flavour of how it has worked out:

"Nathan is an experienced investor who bought a portfolio of five terraced houses in Burnley in Lancashire five years ago, paying around �35,000 in total. "The houses are well built. The problem is the tenants aren't," he says. "I didn't buy for capital gain, I bought for income. In this area, everyone is on housing benefit, and there are guaranteed rents of �65 a week." In theory, this adds up to an astonishing gross rental yield of 48 per cent...

...Graham owns a substantial portfolio of property in the north east, and says he's been letting to tenants on benefit for donkey's years. "It's like being a second hand car dealer," he says. "The mark-up is high, but it's the shitty end of the stick."

In problem neighbourhoods, it is possible to buy houses for as little as �6,000 from desperate sellers. Graham claims he can receive up to �3,000 a year in rent on these houses from local authorities - a 50 per cent return on equity."

Now gross rental yields of 48% and 50% returns on equity are telling you something. They're telling you someone is paying through the nose. And there are no prizes for guessing who. The S Shopper has come into the market with a fat wad of cash and pushed rents far above where they ought to be.

Consider the facts. As we noted above, since 1997 the cost of Housing Benefits has increased by 35% in real terms. Yet the number of HB recipients has hardly changed - 4.7m now compared to 4.6m in 1997. Which implies that most of the increase has been driven by a sharp rise in rent levels.

So what happens now George has grounded the Shopper? Now that he's imposed his own lower rent levels over the heads of the landlords?

Well, the landlords are naturally saying it could mean the end of their participation. After all, they're dealing with some pretty scummy tenants, and the least they deserve is a sensible financial return. As one of them explained to the Investors Chronicle:

"Every now and then you get a nasty shock. Drug dealers operating from a property; someone found dead after ten days; a tenant who hacked into the attic and sold the hot water tank for scrap metal. The RSPCA once boarded up one of my properties as the tenant walked off, and left behind a menagerie of reptiles...

You don't know the tenant has moved out until the housing benefit stops, then you find out your property's been empty for 30 days and invalidated your insurance. If a tenant trashes the place, you have to fork out �3,000 on magnolia and new carpets."

All of which sounds pretty bad.

And as the always instructive Mr S and M points out, the economic research in this area confirms that it is the landlords who will suffer the biggest hit. The evidence says that between half and all of the cut in rental subsidy ends up falling on the landlord not the tenant. In other words, rents fall pretty much in line with the cut in subsidy - just like George intends.

The question then is how much will the supply of private rented housing to those reptile owning HB recipients shrink in response?

And the answer is we don't really know.

But set against returns of 50% on equity, our guess is that rents could fall quite a bit before from current levels before we hit a big fall in supply.

George is quite right to rip up the rent book.

Bubble Dependency

As we noted last week, the government's projections of tax revenue rest on some wildly optimistic assumptions. And none more optimisitic than what they are apparently assuming on house prices.

The chart shows what the Pre-Budget Report projected for total tax receipts from the housing and finance sectors combined (see here). Receipts have slumped since the onset of the financial crisis, but by 2014-15 they are projected to bounce right back up to 3.5% of GDP, or �64bn.

The projection is not broken down into its components, and the bulk is presumably reckoned to come from taxes on the finance sector. But you can bet they are also assuming a pretty sharp rebound in housing taxes - specifically stamp duty.

When Labour came to power in 1997-98, stamp duty on residential property brought in �0.8bn (see here). But a decade later, in 2007-08, it had increased eightfold to �6.6bn. After Labour's rate increases and the boom in house prices, it had become a major source of tax revenue.

Unfortunately, as the property market slumped, so did stamp duty revenues. In 2008-09, revenues more than halved to �2.7bn, and they are likely to fall further this year. That is the price of making your tax revenues dependent on asset bubbles.

So what will happen to house prices now?

The honest answer is nobody has the faintest idea.

But what we do know is that UK prices remain very stretched, both by historic standards and by comparison with housing markets internationally. One standard yardstick is house prices relative to income, and on that measure the OECD reckons we have the fourth most highly priced market in the developed world. Moreover, since Labour came to power, our price-to-income ratio has increased more than any other country's (see here).

Now, of course, you can argue that our valuation ratio has increased because with low low interest rates home buyers can afford to borrow more, thus jacking up prices. And there's some truth in that. But how long are interest rates going to remain at these rock-bottom levels?

And then there's the argument that we have very limited land resources, and what with our tight nimby-led planning restrictions and continuing mass immigration, house prices are pretty well a one-way bet.

Which puts Tyler in mind of conversations he had during a business trip to Japan in the late 80s. At the time, the Japanese property market was in the stratosphere, but nobody seemed at all concerned. Tyler was told it reflected the extreme shortage of habitable land combined with powerful demographic factors - in other words, a one-way bet.

I think we all know what happened to Japanese property prices over the two decades since then - they've been a one-way bet all right, but down rather than up.

Lessons for the UK? Here's a chart showing the Japanese and UK property markets over those two decades:

It couldn't happen here?

You wouldn't want to bet your fiscal projections on it.

Nor your retirement planning.

Fag-End Fascists Take One Last Swing At Guildford

A city targeted for significant change

Throughout the long dark night of socialist hegemony, the plucky folk of Guildford have stood tall. Their worldly goods may have been pillaged to fund the fatherland, their schools and hospitals may have been run down and closed, they may have been threatened with the installation of giant toxic waste incinerators, and their council may have been subjugated to direct Gauleiter rule. Yet despite all these grievous trials, they have never buckled.

But now, just when it seemed deliverance was at hand, they find themselves face to face with the ultimate Vengeance Weapon: the destruction of vast swathes of green belt land to accommodate the forced construction of thousands of new homes, and the designation of Guildford as a zone of "significant change".

Today the story has even made the national press:

"If the Government's regional plan has its way, the town of Guildford will extend another mile out into the Green Belt countryside. What is currently farm and woodland, laced with grazing cows, public footpaths, old oak and ash trees, will be transformed into a two -to-four thousand-home suburb with new access roads from the A3.

The small country station of Clandon will become a transport interchange. The 18th-century National Trust property of Clandon Park, noted for its white marble hall and its attractive gardens with parterre and grotto, will look out over the new sprawl of Greater Guildford. Guildford itself will be that little bit closer to joining up with Woking, and thus with a near-continuous line of development all the way up to London."

Now, let's be absolutely clear - the locals do not want this (well, they don't if we exclude the developers who've bought farmland in the expectation of cleaning up). The local council has launched a legal challenge to stop it, the local MP is opposing it, and local residents groups are up in arms.

The only reason the plan is even on the agenda at all is because Labour's entirely unelected regional planning quango says it has to happen.

Why does it have to happen?

Well, because there aren't enough houses.

And why aren't there enough houses?

Well, because some idiot allowed 3 million immigrants into the country in the last 12 years, and 75% of them have settled in London and the South East.

It's NIMBY to object?

Well, yes, it is... and your point? It's called my back yard because it is my back yard. It doesn't belong to some commissar to do with as he wishes. New housing development and planning generally should be under the control of locally elected councillors not quangocrats. Just like it always used to be.

True, the plan for Greater Guildford isn't actually going to happen. The Scots fascists will be out soon enough, and Guildford will live to breathe another day.

But we need to see Mr Cam actually delivering on those promises of localism pdq. We need to see him dismantling the instruments of state control, and handing real power back to local councils. Local communities should not be forced to accept huge irreversible changes to their lives just because of some fascistic masterplan dictated by Whitehall.

No Safe Way Down

Recently, Mr and Mrs T nearly traded up to a new house. It came on to the market in early summer and the Tylers made what they considered to be a most reasonable offer in these post-apocalypse days - to wit, 16% below the asking price.

The offer was rejected outright. The owners said at that price, they'd rather not sell at all.

Several months went by, and no other offers emerged. To show willing, the Tylers even nudged up their own offer a few percent. But the sellers remained adamant - our price or no price.

Which was really rather odd, given the property's price history. Because our researches on Mouseprice had immediately revealed that the owners had pitched their price 35% above what they themselves had paid just four years ago. Whereas the overall price increase for the general area had been less than 5% (a BIG UP followed by a BIG DOWN). Sure, they'd made one or two improvements, but nothing like enough to account for the difference.

So the Tylers decided to sit tight and let the mortgage famine do its work on the sellers.

Then, guess what - all of a sudden, another offer appeared, very close to the asking price. "Are they good for the money?" asked Tyler of the agent. "Oh yes, that's not going to be a problem - they're currently in a rental and he's in the City", the agent smirked. The Tylers politely declined the invitation to counterbid.

So there we are. The City is back in bonusland, and the housing market is back on the razz.

According to Rightmove, property asking prices are surging again. Fueled by bonus talk, London prices are now actually higher than they were during the 2007 peak. Which sounds absolutely stark raving.

WTF's going on?

You don't really need me to tell you, but I will anyway.

The lowest interest rates since the dawn of creation is what's going on. There is zero incentive to hold savings in cash and the money is rushing back into property.

And not just property of course. Money is also scrabbling back into the equity markets (eg unit trust sales are right back up). The FTSE is up 50% from its lowpoint and back to pre-crash levels.

Now, as regular readers will know, we are very concerned about all this - and not just because the Tylers lost their new house. It's all very well slashing interest rates and printing money in the immediate face of a meltdown, but how is the Bank of England going to get us back onto a sustainable footing? How is it going to find a safe exit? And how do we avoid a return to 70s style inflation?

In this morning's FT there's an excellent article by Wolfgang M�nchau asking the same questions. Noting that the current run-up in asset prices has all the hallmarks of another bubble, he says:

"Our present situation can give rise to two scenarios � or some combination of the two. The first is that central banks start exiting at some point in 2010, triggering another fall in the prices of risky assets. In the UK, for example, any return to a normal monetary policy will almost inevitably imply another fall in the housing market, which is currently propped up by ultra-cheap mortgages.

Alternatively, central banks might prioritise financial stability over price stability and keep the monetary floodgates open for as long as possible. This, I believe, would cause the mother of all financial market crises � a bond market crash � to be followed by depression and deflation.

In other words, there is danger no matter how the central banks react. Successful monetary policy could be like walking along a perilous ridge, on either side of which lies a precipice of instability.

For all we know, there may not be a safe way down."

No safe way down.

Hmm.

Don't like the sound of that.

Although we do take some comfort from the fact that whichever of M�nchau's two precipices we plunge down, the Tylers will be better off without their new house. May the Lord have mercy on its new winner's-cursed owners.

Stay solvent.