New plans by Grant Shapps are a recipe for increasing homelessness

February 23, 2013

Housing minister Grant Shapps recently announced plans to make the unauthorised subletting of social housing a criminal offence, with offenders facing up to two years in prison. The stated rationale is to free up dwellings for those on council waiting lists. But the policy fails to address the distorted economic incentives facing social tenants and in practice it is likely to exacerbate housing shortages while extending official intrusion into the private lives of tenants, lowering incentives for family formation and reducing labour mobility.

Criminal sanctions will raise the costs associated with unauthorised subletting, and this will tend to reduce the activity. However, such a reduction also means that those who previously rented such property from social housing tenants will be pushed into alternative accommodation, adding to housing waiting lists (either directly or indirectly through displacement in the private rented sector).

Moreover, it cannot be assumed that reducing subletting will free-up enough dwellings to compensate for this effect. Given long waiting lists in many areas – and much higher private sector rents – tenants will be reluctant to give up their social tenancies. With the option of subletting less attractive, more may choose to stay put rather than cohabiting or moving away to seek work. Some may live with partners most of the time while visiting their official residence periodically to maintain the tenancy. (By vacating the dwelling they would risk moving to the bottom of the waiting list should the relationship break down). Thus the likely effect of the crackdown on subletting is to increase the proportion of social properties that are empty or under-occupied. This in turn may increase the risk that the dwelling deteriorates (e.g. from damp) or is targeted by vandals or squatters – as the government’s own research on subletting recognises. 

Then there is the question of enforcement. There are practical difficulties in determining whether the correct people are occupying a dwelling, particularly if traditions of privacy are respected. There are grey areas such as friends and relatives coming to stay for a few weeks. The crackdown is therefore likely to involve further authoritarian intrusion into private lives. The economic costs involved in employing specialist inspection teams, instituting contested eviction procedures, prosecuting offenders and imprisoning them are also likely to be significant.

Rather than trying to cure the unintended consequences of state intervention with more intervention (the flawed approach of the government’s welfare reforms in general), Shapps should instead focus on removing the distortions responsible for the shortage of low-cost dwellings. Liberalising the planning system and rescinding burdensome building regulations would free the private sector to provide cheap housing as it did in the 19th century. Social housing, together with the £20 billion annual Housing Benefit bill, could then be phased out, with voluntary organisations catering for those with special needs.

11 January 2012, IEA Blog

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Hammond’s Soviet-style rail policies

February 23, 2013

When Transport Secretary Philip Hammond announced last week that the government would procede with three big rail projects – High Speed 2, Crossrail and Thameslink – it was a bit like a Soviet commissar boasting how many new tractors he would be sending to favoured collective farms.

These schemes are almost entirely state-directed: taxpayers will pay for the infrastructure and officials will determine the details of the routes. And like so many socialist grands projets, the returns on the “investment” are likely to be negative, since taxpayers will in all likelihood have to provide substantial operating subsidies to support the new train services (as has been the case with High Speed 1). In addition to these direct costs, there will also be significant deadweight losses resulting from the associated taxation.

As well as imposing enormous costs on taxpayers to fund uneconomic rail schemes, it is also telling that the government has actively prevented major private-sector investment in new transport capacity through its airports policy and its prohibition of Heathrow expansion.

Students of Austrian economics will not be surprised that the misallocation of resources by the state is endemic in the transport sector. Transport is subject to a very high degree of central planning by politicians and bureaucrats, with new rail schemes representing just one example. And Austrians have explained why central planning authorities are incapable of making efficient resource allocation decisions.

In particular, central planners are hampered by the absence of relevant market prices and therefore find it very difficult to calculate accurately costs and outputs (see Mises, 1949, p. 696). While there are prices on Britain’s railways, these are severely distorted as a result of huge government subsidies, the regulation of many fares, the imposition of an artificial structure on the industry, planning controls and so on. A scheme that appears to have positive economic benefits may only do so as a result of other layers of harmful state intervention.

Moreover, since government decision-makers do not own the capital they are allocating they have less incentive to act responsibly or show initiative. They lack the “commercial mindedness” of entrepreneurs (see Mises, 1935). It is also worth mentioning the insights of public choice theory on the behaviour of politicians and bureaucrats – in particular how decision-making processes tend to be captured by concentrated interest groups such as the rail lobby at the expense of dispersed taxpayers.

If the government wishes the UK to have an efficient and competitive transport sector that does not burden taxpayers and which fosters prosperity by lowering the costs of trade, it should reject the central planning mentality, remove distortions, and shift the supply of infrastructure to the private sector.

1 December 2010, IEA Blog

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How to cut Britain’s £20 billion Housing Benefit bill

February 23, 2013

The cost of Housing Benefit (HB) has exploded over the last five years, rising from £13.5 billion in 2004/05 to £20 billion in 2009/10. This is a cause for deep concern, not just because HB is a major burden on taxpayers, but also because it produces severe disincentives for workless people to enter employment.

The benefit is withdrawn at a rate of 65p for every pound earned above a certain amount. For many claimants it is the main reason that it is not worth starting low-paid work. This withdrawal of HB is normally in addition to the withdrawal of benefits and labour market taxes that have to be borne at the margin.

The Housing Benefit trap is particularly pernicious in high rent areas such as London. The capital receives 26% of HB payments although accounting for 12% of the UK’s population. This may partly explain why parts of London have some of the highest rates of worklessness in the country despite the wide range of employment opportunities.

From time to time the newspapers print a story that illustrates the problem. Last month the Evening Standard looked at the case of a mother of six receiving HB to rent a £2 million house in St John’s Wood, at a cost of £6,400 a month. Once other benefits such as Child Tax Credits and Income Support are factored in, as well as Income Tax and National Insurance, it’s clear she would have to earn in excess of £150,000 a year to be better off in work.

Such perverse incentives, as well as the clear injustice of such cases, provide strong arguments for reform of the system both to reduce public spending and address high levels of welfare dependency.

A simple first step would be to phase in a requirement for HB claimants to pay a proportion of their rent out of their basic benefits (such as Income Support). This would act as a deterrent to those exploiting the system to live in luxury homes in exclusive areas and would encourage tenants to seek out low-cost accommodation.

A second measure would be to reform the “local connection” criteria which in effect provide claimants with an entitlement to live in a particular area, no matter how expensive. Councils should be far freer to house homeless families in low-cost areas. At the very least, they could be housed in cheaper areas within a short commute of the borough in question (for example, Westminster Council could house people in Barking and Dagenham).

The long-term solution to the Housing Benefit problem lies, however, in the liberalisation of planning and building regulations that prevent the supply of ultra-low-cost accommodation. A liberal approach to land use could finally bring an end to this costly, complex and counterproductive system.

15 March 2010, IEA Blog

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The slow death of private property

February 17, 2013

The part-nationalisation of Britain’s banks represents a further extension of state power and the erosion of private property rights. There is a huge danger that under political influence the banking sector will be compelled to pursue socialist objectives rather than maximise returns for shareholders. 

This development would be less worrying had it been an isolated example. However, the erosion of private property rights has been a long, gradual process. World War I played a key role, leading to a step-change in the role of the state and a huge expansion of its powers.

Taxation has been gradually extended ever since, particularly through the expansion of the welfare state, and now takes about 45p of every £1 earned (including indirect taxes). This in itself undermines private property, since the state takes a large share of any income earned from it and will confiscate property if tax is not paid.
 
The de-facto nationalisation of land, or at least development rights, with the 1947 Town and Country Planning Act was another important step. Owners were no longer permitted to use their land as they wished (subject to common law restraints on nuisance and voluntary restrictive covenants etc.). Instead government technocrats would direct land use centrally in a communist-style system.
 
Equality laws, whether based on gender, race or disability, have also undermined private property or, at the very least, freedom of contract. They have given government the power to enforce access by various groups. Yet it is impossible to impose equality laws without engaging in unfair discrimination. For example, disability rules have discriminated against certain businesses, forcing them to pay out for wider doorways, lifts and ramps. For the first time, the Disability Discrimination Act had retrospective effect in this respect.
 
However, there has been something more pernicious about recent acts by this government to undermine private property. The nationalisation of both Railtrack and the banks seemed to come about after government incompetence (or deliberate policy) undermined their values so that they could be bought on the cheap. And regulation has increasingly been used to move control of private property from the private sector to the government without any compensation. One of many examples is the ban on smoking in private pubs and clubs – a policy which has already led to the closure of many businesses.

23 February 2009, IEA Blog

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Can we afford affordable housing?

February 17, 2013

Yesterday it was announced that the Greater London Authority (GLA) is to create 50,000 ‘affordable’ homes. But do such schemes actually increase the affordability of housing?

When developers are forced to allocate a share of their dwellings (or land) to social housing or part-ownership it reduces their returns, since these properties will not be sold at full market value. Since the financial incentives to build are reduced, fewer homes are likely to be constructed. This reduction in supply will make housing in general less affordable – and it should be remembered that most people, even those on quite low incomes, have to find accommodation in the normal market.

The effect is exacerbated because full-price buyers will pay less when they know their neighbours are likely to include housing association clients, who may be more likely to engage in anti-social behaviour because of the inability of so-called social landlords to have appropriate clauses in their letting contracts to ensure that tenants meet acceptable standards of behaviour.

And because ‘affordable’ homes are subsidised by government, it means taxpayers have less disposable income available to spend on housing.

There is also significant moral hazard, particularly when social housing is prioritised, as in the GLA plans. If social tenants are allocated brand new, high-specification dwellings – often in expensive, desirable areas – it increases the incentives for people to choose a life of welfare dependency rather than working hard to improve their living conditions.
The policy is also unfair to existing residents who live near Boris Johnson’s social housing projects. They will see their properties devalued and their neighbourhoods degenerate as social tenants are moved into their area. Under the current planning system they will receive no compensation.

Given that land supply is currently relatively fixed, the proposed schemes simply make housing more affordable for one group at the expense of another group and of general welfare. If there is subsidy to the housing sector as a whole then it simply encourages the sorts of bubbles that have got us where we are today.

If the GLA really wants to solve London’s housing shortage it must focus on increasing the supply of land to private developers. This means abolishing the green belt – much of which is not very green – selling off under-used parks and playing fields, and reforming planning rules that wastefully allocate valuable land to industry and warehousing. Tinkering with ‘affordable’ housing will only make the problem worse.

21 November 2008, IEA Blog

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Planning policies that brought flood misery

February 17, 2013

Tighter planning and building regulations are at the forefront of the Government’s efforts to tackle global warming.
New homes must adhere to strict insulation standards and they must be packed closely together, both to economise on land and to encourage public transport use.

On some schemes, councils restrict the number of parking spaces to discourage car ownership. Moreover, a high proportion of new houses are built on brownfield sites, often reclaimed from industrial uses.
Such measures enjoy widespread support across the major political parties. Yet the negative environmental effects of these policies are substantial, and there are far more efficient ways of limiting carbon emissions. As the Government proposes to build three million homes by 2020, it is critical it looks again at its policies on how and where new houses are built.

Severe problems are caused by the locations that developers are being forced to build on. Many brownfield sites are particularly vulnerable to flooding – as disastrously demonstrated in recent weeks.

Traditional industries clustered in flood plains to take advantage of flat land and easy access to canals and railways. Given the high costs, it seems unlikely that such locations would have been redeveloped without generous government grants and restrictions on building on more suitable greenfield sites.

Planning policies must therefore take part of the blame for the scale of the flood damage.

And there are other risks facing property owners. One new development near Leeds is squeezed in between a busy dual-carriageway and a railway line. It also sits underneath a run of electricity pylons. Unfortunately, such substandard sites are all too common thanks to current planning policies.

High density housing also has negative consequences. Small gaps between homes mean that nuisance from neighbours is more likely. Everyday annoyances such as screaming children, loud music and unpleasant cooking smells are far more intense when households live cheek by jowl.

While housing in other developed countries has been gradually improving over the last few decades, this has hardly been the case in the UK. Regulations mean that Britain’s new homes are now the smallest in Western Europe. They are probably smaller now than they were in the 1930s when the country was only a quarter as rich.

It is also notable that the planners have severely limited the size of gardens in new developments. This doesn’t seem sensible in the light of government exhortations that children should play more sport. In many new developments there simply isn’t room for the games of football and cricket that helped ensure physical fitness in previous generations.

In locations where new private developments border older council estates, such as Sunnyside in Rotherham, the contrast is particularly marked. The council houses, many of them occupied free of charge through the housing benefit system, often have larger gardens than the new private homes.

Many council tenants are also benefiting from the Government’s lavish Decent Homes initiative. They are getting brand new kitchens, bathrooms, central heating systems and double glazing.

Meanwhile, their owner-occupier neighbours are working hard to pay expensive mortgages to obtain the same facilities, as well as subsidising the council tenants through their taxes.

This policy undermines the Government’s stated aim of providing incentives for people to move away from welfare dependency and into work.

There is therefore a strong economic and environmental case for liberalising planning and building regulations. Allowing developers to build larger new houses on more spacious plots would help ensure that today’s younger generation can enjoy the same standard of housing as their parents.

While liberalisation would involve using more greenfield sites, this is preferable to cramming more houses into urban areas and making our cities more congested, with less and less open space.

The environment of homeowners would also be dramatically improved. Lower densities would reduce the impact of neighbourhood nuisances and facilitate the large gardens that are ideal for family life.

The development of poor quality brownfield sites next to rivers at risk of flooding as well as roads, railways or crime-ridden social housing estates would no longer be necessary. Britons could enjoy the high quality of housing that is taken for granted in other industrialised nations.

If the Government wants to reduce carbon emissions, it should tackle them directly rather than imposing complex and expensive regulations on housing and other sectors.

There are effective ways to reduce carbon emissions while actually benefiting the economy. These include reducing power consumption within the public sector, raising VAT on domestic fuel to the standard rate (with compensatory tax cuts elsewhere) and reducing foreign aid when it causes deforestation. Such measures would be far more effective than cramming homeowners into small houses on tiny plots.

Economists have known for years that regulation is an inefficient and often counterproductive way of achieving a given objective. Unfortunately, the bureaucrats, planners and politicians make their living from regulation – at the expense of the rest of us.

16 July 2007, Yorkshire Post

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