According to an article on the BBC, the Government are likely to announce major cuts, possibly as high as 50%, in the Comprehensive Spending Review tomorrow. The article also floats the idea that “council housing for life” may be cut, with council tenants re-assessed every five years, to see whether they still need help from the public sector.
OK, before we dive into the analysis, a few points to remember.
Firstly, this is just a story on the BBC. The CSR tomorrow may confirm it, but a common politicians trick over the last 10 years has been to leak an “extreme” version of a proposal, and then announce a reduced-scope version, which looks good in comparison. (I can’t complain, because the technique, when applied to negotiations, is called “framing the negotiation”.)
Secondly, even if it does go into the CSR in this form, there will still be political deals to be done. While it may appeal to the Tory faithful, there are a lot of Lib Dems who, while supportive of the need to reduce public sector spending, would be very unhappy at the size of the cuts.
Thirdly, you can safely assume that Labour is in “new opposition, new leader mode” – at this stage in the electoral cycle they don’t actually need workable policies – they just need to criticise government policies to make people unhappy with the coalition. They can reveal actual policies of their own nearer an election. So, expect to hear criticism-heavy, workable-alternative-light speeches.
Fourthly, doing nothing is not an option. We are not in a situation where we can carry on as we were. Something needs to give – and if not social housing, then health care, education, or higher taxes, all of which have their own problems. Whatever is done, many people are going to be worse off than they were – because lots of debts that were hidden have been revealed, and need paying.
OK, so what would a 50% cut in Social Housing Budgets actually mean.
There are two separate questions we need to bear in mind.
Firstly, to what extent should a government subsidise services like housing. Secondly, to what extent should a government be in the business of direct provision of such services. (I’m going to side-step the question of whether I’m talking about local or national government, by the way, since to me the question of “which part of the public sector” is secondary to the question “public or private.”)
The first question – for the last 100 years, Western Europe has moved towards statism. Statism is when a government gets more and more involved in more and more things. The Conservatives argue that Britain has gone too far in this direction, and the government need to intervene less. Margaret Thatcher took things a very long way in the direction of non-intervention, to the extent that most people realised that there are things in which the government needs to get involved in order to have a working society. Labour, on the other hand, favoured central control and government regulation / intervention in more areas. (Except, bizarrely, high finance, which was left relatively unfettered!) Most votes in the UK, and in a democracy, it is voters’ views that matter most, agree that the government need to provide some sort of safety net, however the last election could be read as that many, many people think that the safety net is much too wide. As such, of all the things that might be cut, it’s maybe an OK target in the view of the majority.
So, it’s clear that social housing spend is an obvious place to be cut.
What about the second question – should the government provide things like housing directly. The generally accepted answer is that governments need to do two things. One, provide a framework of “rule of law” and “secure rights” in which the private sector can operate. Two, get involved in things that the private sector cannot or will not deliver.
These “things that the private sector cannot or will not deliver” broadly mean either things that have to be done in a consolidated way at a government level (for example, the army – we don’t want private companies having their own regiments!), or things for which it is so hard to divvy up the cost workably, that it’s sensible that they are just provided through general taxation. (With a few exceptions like the M6 toll section, and the London Congestion zone, think roads!)
Notice that I said divvy up the cost “workably”, not “fairly”. Social Housing is an area where, in practice, the tenants can’t afford to pay market rent. That, at least, is the theory.
There are, doubtless, many people for whom this is true. And it’s entirely right that the government need to be supporting these people.
However, there are, doubtless, many people for whom this is not true, but who have worked out how to “game the system”, and get a subsidy they don’t actually need. Maybe not as many such people as some papers make out, but doubtless some. When I have a friend who works in a benefits office telling me that some of her clients make more money in benefits than she earns for working full-time, AND they have low-cost housing, something is clearly out of kilter.
Whether this means a 50% cut is sensible is another question, of course, but the general thrust that council tenancies should be reviewed every five years does strike me as fair. Likewise, it doesn’t feel right that a council tenant can bequeath their tenancy to their adult children! Surely, the government should be assessing the next generation to see whether they need the subsidy that our taxes provide?
So, what does this mean for property investors?
In the short term, not much. Whatever the announcement tomorrow, it will take a while for the ripples to come through. It’s unlikely that anyone will actually be kicked out of their homes this year – most likely is that harder rules will come in for new council tenants, and that (whatever is claimed tomorrow), things will gradually percolate back up to existing ones over the next few years.
There’s an opportunity there, though – namely people still need housing, and if the government isn’t providing, the private sector will need to. So, there may be a new wave of private tenants coming onto the books. HMOs may prove to get a new lease of life.
Keep in touch with local letting agents – make sure that you understand the tenancy-demand mix in the areas in which you invest. Don’t assume that the mix will stay the same. Of course, you should be doing this anyway, but this is a particularly turbulent time, and one where fortunes will be made by understanding which bits of the market are in for a boom.