Last Monday, the Chancellor George Osborne announced a small number of plans to help stimulate housing supply in the UK. In my view, he fell significantly wide of the mark, so here I go with my own red box.
Rents are predicted to rise in excess of inflation over the next five years and of greater importance will continue to outstrip wages until the end of the decade. Savills predicts a rise in excess of 42% over this period.
The proportion of private sector tenancies has, for the first time, outstripped social housing and the proportion of owner occupation is falling. As house prices rise and the entry point for first time buyers is increasingly delayed, greater reliance is expected to fall on the private rented sector.
With housing benefit running at £16.9bn set within the context of a welfare cap of £119.5bn and a 2013 outrun expenditure of £160bn (Office of Budget Responsibility) the upward pressures on rent will challenge the government's determination to bring welfare spending under control. A housing benefit system that does not respond to this upward pressure leaves hard working families exposed to a cost of living crisis well into the next decade.
In this instance the best way to reduce housing benefit spend and to reduce the pressure on the standard of living of ordinary families is to reduce rents.
Over previous years the government has taken various steps to improve the supply of new rented housing. The PRS Underwriting Scheme offers valuable guarantees to large scale suppliers of private social housing but uptake has, to date, been disappointing. Adjustments are being made to this scheme to make it more accessible but more needs to be done to stimulate the building of affordable homes to rent.
With the current requirement to reduce public expenditure and borrowing, the grant regime cannot be increased to meet this challenge.
The government has looked at other nations, especially those who have been innovative in this regard, for solutions.
The German authorities deployed a subsidy to social housing by allowing the owner to depreciate the asset. During the late 1960s this was accelerated to 9% per year and allowed the asset to be depreciated over 10 years. This is a useful incentive to invest into social housing especially since the returns often occur later in the life of the asset. However, it only favours a direct investment into social housing, giving little flexibility beyond the current residential Real Estate Investment Trust regime that the UK government enabled via the 2011 Finance Act.
In the USA a system of investable tax credits has been employed. This allows, for designated developments, the award of tax credits to the agency developing affordable social housing. They in turn exchange these with investors in exchange for equity financing. It widens participation because the benefits can be traded outside of the direct investment into housing. This system also assists with the development of new projects because the investment is made in return for tax credits which relieve the cash flow burden and reduce risk.
Consequently I shall be announcing changes to the Finance Act to assist the Secretary of State for Communities to replace and enhance the current grant regime with a new issue of investable tax credits that will stimulate new housing supply.
The costs of this will be spread over the next ten years and the first issue of tax credits will be for the years 2015, 2016 and 2017. Each tax credit provides 100% relief on a pound-for-pound basis but in some circumstances may exceed that.
However, this is still not sufficient to stem the upward trajectory of rents over the medium term. This government has not shied away from the difficult decisions throughout this parliament and will not do so now.
We have previously introduced measures to reduce housing benefit claims that have fallen upon the tenant. The removal of the spare room subsidy was introduced to resolve the problem of under occupation and we stand by it but now it must be the turn of landlords to exercise restraint.
Accordingly, the Secretary of State for Communities will bring forward measures to restrict rent to a local cap which will be linked to the Consumer Prices Index for the periods 2015, 2016 and 2017. We must have stability in the market if we are to address this problem.
The government's help to buy scheme has proved a popular success and will be extended to 2020. However, some changes need to be made to ensure the housing market, particularly in London, does not over heat.
The government's objectives here must be to help first time buyers gain a foothold onto the property ladder and consequently the limit for Help to Buy will be reduced to £350,000.
Our public servants and private sector key workers have felt the full force of the difficult decisions that this government has had to take and continue to do so. Occupational requirements necessitate living close to the workplace. However, home ownership can present challenges especially for those serving our cities.
Consequently I will further amend the Finance Act to extend the proposed investable tax credit scheme to key workers buying their first home. This will bring the price of a home down to affordable levels and may be used in conjunction with Help to Buy.
Building new homes
Britain needs 200 000 new homes each year and the measures announced today will assist us in reaching that ambition. However, there is one further measure that needs to be taken to ensure success.
Although the investable tax credit will encourage the building of new homes it will favour larger developments. This is because limits have to be put in place for the purpose of administration. This will not assist small and medium sized builders.
Small and medium builders need access to development cash and this is still not flowing from the banks at a satisfactory pace. Consequently we are funding a new small/SME building fund. This is a loan fund of £2bn and will be administered by the banks. Most of the 140,000 building plots with current planning consent are small plots of just a few houses. They continue to remain undeveloped because the small builders cannot access the cash. Financing on reasonable terms for small and medium builders is a vital tool in housing supply and affordability.