POLICY INSTRUMENTS

While the focus of this report is on social housing and its impacts, one can only assess its appropriate role in the context of the other options available to achieve similar aims. These instruments vary in a number of respects, but three key dimensions are:

■ Whether the support is means-tested, and reduced or removed from those with higher incomes, with variations possible in the sharpness and rapidity of any withdrawal;

■ The extent to which it is tied to housing, or indeed to a particular house; and

■ Whether it is primarily a support for ownership or renting.

Figure 3.1 gives a stylised representation of the main policy instruments in use in England at present mapped across the first two of these dimensions, with the area of the circles drawn in proportion to the approximate annual flow of public resources involved (drawn from material presented later in this report). The major instruments illustrated are only a small selection of those available. It shows, for instance, the contrast between support for private rented housing, tied to housing but not a particular property and subject to rapidly-adjusted means-testing, and general subsidies to social tenants through the advantages of sub-market rents, which are tied to particular properties, but not means-tested.

Support connected to renting

■ At one extreme, people can simply be provided with and allocated free housing or hostels to live in, with no charge made, and probably with little choice over its form.

Tied housing provided by employers is more common than state provision of this form, but some local authority provision of temporary accommodation (or bed and breakfast hotel provision) where all of the rent is covered by Housing Benefit comes close in functional form.

■ More generally, housing can be provided at subsidised rents. The main focus of this report is on subsidised housing provided by local authorities and not-for-profit housing associations.⁴But in principle private landlords could be subsidised directly or through tax concessions in return for charging sub-market rents – and indeed in countries such as Germany this is exactly what has been done, with private

landlords agreeing to provide low-rent housing for a certain period in return for such subsidies (but with the housing reverting to the market sector at the end of the period). Some US tax credits achieve similar functions. On the demand side, the tax system could also in principle support payment of rents by making them tax-deductible. An increasingly common form of limited support in England is help for people to become private tenants through local authority rent deposit schemes.

4 Sometimes officially referred to as Registered Social Landlords (RSLs), but described by the more familiar term of housing associations in this report.

Net tax advantage of owner-occupiers 15.7

Economic subsidy to social tenants 6.6 Child Tax Credits, Working Tax Credits 14.0 Housing Benefit – Social rented sector 8.8

Right to Buy discounts 1.8 IncomeSupport, JobSeekers Allowance (IR), GuaranteeCredit 14.1

Housing Benefit – Private rented sector 3.2

Home improvement grants 0.3

Lowcost home ownership 0.3 Income Support for mortage interest 0.3

Degree of means-testing

Degree of link to housing

Not means- tested Mild means- test Sharp means- test Tied to particular property

Tied to housingUntied

Figure 3.1 Scaleand type of public support for housing (£ billion, 2004–05)

■ While we are used to rents that do not depend on the tenant’s circumstances, landlords themselves could in principle run systems where rents vary with income (although social landlords have not been allowed to do this in England since the 1970s). In the USA, new mixed-income and public housing developments often incorporate variable rent structures of this kind. Such systems have however potential draw-backs in terms of disincentives, increasing polarisation, and

uncertainty of rental streams for landlords that are discussed further in Section 13.

■ More familiar in Britain is the idea that people should receive assistance which varies both with the rent they pay and with their circumstances through Housing Benefit, although the extent to which assistance varies with either does not have to follow a particular model. Such support can be paid via the landlord (“rent direct”) or to the individual. It can also be made conditional in various ways – again, in the USA

“housing vouchers” are often restricted to use with accommodation above a certain standard, or in particular locations.

■ Support for those with low incomes to be able to afford housing can come untied to any housing consumption in particular. Retirement pensions, tax credits, or Income Support could all be set high enough to cover what was deemed to be the cost of housing of an acceptable standard, and then people left to make their own choices.

Administratively, this is much simpler, although it does not, of course, ensure that people reach that acceptable standard. In the UK, attempts to run more of the social security system in this way have foundered on what the 1942 Beveridge report identified as the “problem of rent” – that housing costs vary greatly across the country, and even within regions between properties of similar standard. This makes setting a fixed level of benefit difficult – if set high enough to cover expensive regions and properties, the system will be very expensive; if set at a low level, the result may either be hardship or the need for supplementary housing allowances. In the UK we have historically opted for the last route – keeping aggregate spending down by tailoring individual support to their actual housing costs.⁵

Support connected to owning

■ The most familiar form of support for owner-occupation in the UK was the system of mortgage interest tax relief, now abolished, under which mortgage interest was deductible against income tax, reducing its effective cost to the owner.⁶ But owner-occupation still benefits from favourable tax treatment by comparison with other assets. Other kinds of investment create returns that are taxable. In the case of owner-occupation the return to ownership comes in two forms, the value of living in one’s own home (the “imputed rent”) and a potential or actual capital gain.

5 Although the recent Local Housing Allowances pathfinders have been a move away from this – see Section 14.

6 The logic behind giving tax relief for mortgage interest was that in one model the income tax system should tax the net return on assets. Just as business can set interest payments against their profits for tax purposes, so mortgage tax relief for owner-occupiers could be justified when the value of living in a property was taxed, as it used to be under “Schedule A” of income tax. Interest-deductibility was retained when this was abolished in the early 1960s, however.

Neither of these is taxed. It is not only income tax that may be relevant here – construction of new residential housing (but not renovation of old housing) is free of VAT, while other taxes such as Inheritance Tax could theoretically be restructured to give favourable treatment to home-owners. To set against such advantages, there are other actual or potential offsets through other parts of the tax system: owners pay stamp duty when properties are bought; both owners and tenants are liable to council tax, which rises somewhat with property values; private landlords and

second home owners are subject to capital gains tax, not just on the real increase in the value of their property over and above inflation, but also on the nominal gains reflecting general inflation.

■ But owner-occupation can be supported through other routes, such as grants or concessional loans for home improvement, or means-tested support such as Income Support for Mortgage Interest (ISMI).

■ People are also supported into ownership through systems such as Right to Buy (RTB) discounts, where sitting tenants have been able to buy the property they occupy at below market value (see Box 11.2).

■ Similarly “shared ownership” or ”shared equity” schemes can involve either

favourable loans or subsidised rents on the portion not immediately purchased (Box 11.3). Such support can either come directly or via the supplier – for instance where developers agree to provide low-cost housing in the context of securing planning permission (offsetting part of the “planning gain” in increased land values when permission is granted; see Box 6.1).

■ Finally, of course, houses can simply be given away, as happened with some state housing after the collapse of communism in some Eastern European countries.

Beyond these systems of support for housing per se, there are of course other ways in which people can be supported with services connected with housing – such as help in finding housing, help with maintaining and repairing housing, and so on.

Summary

In principle there is a wide range of different forms that housing support can take, of which provision of housing by not-for-profit landlords at sub-market rents is only one. However, as Figure 3.1 illustrates, the system in England is dominated by just three: means-tested Housing Benefit; provision of social housing at below-market rents; and favourable taxation of owner-occupiers. The scale of these is large even by comparison with, for instance, other forms of support for those with low incomes such as Income Support. The scale of other kinds of intervention, such as support for “intermediate tenures” through shared ownership or shared equity schemes of one kind or another, is comparatively small. An obvious issue is whether this is the most effective balance in the use of resources.