Download Housing Consumption - Commission on housing and wellbeing

Housing and Consumption
1. Introduction
1. A fundamental aspect of any housing system’s outcomes concerns the
level and distribution of housing consumption by households and, by
implication, policy measures required to address inadequacies in that
pattern, be it insufficient or excess consumption. The key issues
addressed in this paper involve:

The co-existence of excessive consumption in some parts of the housing
system and other households facing excessive and unaffordable housing
cost burdens.

The dynamic nature of housing consumption over the lifecycle and its
relationship with housing need.

The relationship at the aggregate level between housing equity, debt and
economy-wide consumption.

The importance of housing consumption at the core of the Commission’s
remit and indeed to society and the economy.

The scope for policy reform on both an incremental and a more radical
scale to improve affordability and the sustainability of housing
consumption.
2. This short paper is organised around four elements:
I.
A conceptual discussion of these interlinking points above.
II.
A descriptive account of the stylised facts of housing consumption,
affordability, housing wealth, debt, the importance of benefits-funded
housing consumption.
III.
A short review of what we know about a select set of key issues that are
problematized and have policy relevance to the Commission (defining,
measuring and bounding the issue of need; identifying key problems for
the most vulnerable to under-consumption; incentivising efficient
consumption levels; reforming housing benefit and tax systems, etc.) .
IV.
An overview of the key policy challenges arising from the housing
consumption debate e.g. the long term impacts of unaffordable private
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housing and its impact inter alia on the cost of new affordable housing
and land.
2. Background
3. A first point to stress is that while an important dimension, consumption
is not just about household expenditure but it is about opportunity cost in
the basic sense of the consuming of housing services, depreciation of
existing housing and the use of energy and other resources. Because it is
such a fundamental aspect of the housing problem, it is highly
interdependent with other major concerns of the Commission.
4. Second, and while there is every reason to look closely at affordability and
unaffordability in the housing system, it should also be clear that at the
same time as some households face excessive housing cost burdens and
cannot access housing in the appropriate or required levels, other
households are influenced by other f incentives which encourage excess
consumption, particularly of second hand (non-productive) housing. It is
well known for instance that most under-occupation occurs in the home
ownership sector. Excess consumption would on the face of it raise
worries about inefficiency, inequality and sustainability. An assessment of
disequilibrium consumption patterns needs to address both of these sorts
of problems.
5. Third, housing consumption is dynamic and reflects life course stages in
terms of demand but also results in changing demand for types of
consumption, obsolescence and again via policy incentives such as
welfare benefit reform. Preferences for housing type, neighbourhoods,
location and tenure – evolve and not just because of changing relative
prices. New supply only changes the stock very slowly with the result that
the existing built environment and housing stock dominate both the
housing system and individual preferences and opportunities (social
scientists talk usefully here about path dependencies – historical initial
conditions that continue to shape contemporary outcomes and for which
policy has only a partial impact before for example these conditions
reassert themselves).
6. Fourth, there are contrasting views about how best to understand
affordability: as a housing cost to income question, in terms of residual
income after housing costs (appropriately adjusting for household type,
size and circumstance), or assessing when households have enough
income to no longer require housing benefit support. More
fundamentally, other commentators such as Duncan Maclennan, in
criticising the vagueness and imprecision of affordability, question the
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validity of the concept; others like Glen Bramley want an explicit element
of minimum housing standards added to the concept. Others have asked
whether the problem is inherently about income distributional issues
or/and housing market failure? Do housing markets work tolerably well
but are swamped by problems caused by low income and income
inequality? Or, is it that housing markets do not work well enough? Or,
might both sets of problems apply? The point here is that different policy
responses are suggested depending on the source of the affordability
problem. Affordability therefore has to be defined and empirically
understood before it can be used to evaluate whether various housing
policy generate affordable outcomes.
7. Fifth, when we consider housing consumption and what we mean by it,
there is a tricky market versus non-market issue concerning the relative
merits of market based measures of consumption and housing needs
assessments (contrasting the overlapping relationships between housing
demand, aspirations and housing need). A market based measure of
consumption, which is the basis of demand analysis, is usually based on
the annual rental value of a given asset and can be thought of in terms of
the housing services produced by that stock – statistical techniques can
isolate and quantify these concepts (e.g. hedonic regression). Housing
need on the other hand is a quantity that drops out of a series of
accounting calculations that seek to estimate the sum of number of
households captured by a range of housing deprivation measures (e.g.
homeless, overcrowded, unable to afford market housing, etc.)i. This is
more than a technical matter of definition in that it has implications for
policymaking and prioritisation.
8. Sixth, since mortgage deregulation in the 1980s (and thereafter), there
has been an acute awareness that rising house prices (actual and
anticipated) has via additional borrowing and spending based on rising
housing equity, been associated with volatile increase in aggregate
consumption and debt. This has made it harder to on the one hand
forecast the shape and level of aggregate demand in the economy but at
the same time it has also arguably helped to unbalance the economy and
make it less manageable. This is a controversial area of monetary
economicsii but it undoubtedly points to the importance of housing as a
key source of personal sector wealth, mortgage lending and volatile prices
as key variables in the macro-economy. The policy issue here is that the
volatile deregulated housing market is distorting non-housing
consumption and that this is to the detriment of the wider economy
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9. Finally, there is the question of housing equity and its uses for
consumption. This might be about providing resources across
generations, or paying for old age or care or for maintaining or extending
standards of living through using up free housing equity. There is clearly
a wider set of questions relating to older households and inter
generational transfers of wealth (see the Mind the (Housing Wealth) Gap
project for Leverhulme run by Beverly Searleiii). This also speaks across
the theme to affordability problems where the young cannot access home
ownership and to other questions of under-occupation, housinghousehold mismatch and housing debt.
3. Key Facts
10. Looking at data for 2010, Wilcox and Pawson (2013)iv suggest the value of
aggregate UK housing wealth (i.e. gross housing assets equal to mortgage
debt plus housing equity) was £4,036 billion (£2,797 billion of which was
equity). In real terms gross housing assets have grown from an index of
100 in 1970 to 947 in 2010. In contrast, in the same year (2010), total
aggregate consumption, ie all spending by households and the personal
sector was worth just £904 billion. This means that relatively small
proportional injections of borrowing based on withdrawing housing
equity can have large spending implications. Equity withdrawal is highly
pro-cyclical and therefore it is not surprising that it has been negative
during the recession and market downturn (in other words people are
repaying debt not adding to it) but prior to the bust in 2006, Wilcox and
Pawson calculated aggregate equity withdrawal from the housing market
at £53.566 billion or 6.55% of all consumer spending in the economy.
This borrowing/consumption channel is one reason why the housing
market is so important to the wider economy. Equivalent figures are not
calculated for Scotland but similar trends are anticipated (the mortgage
market is a UK rather a regional market).
11. Housing consumption is fundamentally about what we consume and
important dimensions of that are housing tenure and property type.
Wilcox and Pawson (2013, Table 21) show that contrasting 1991 and
2011, the UK stock of swellings in home ownership grew by 14%, social
renting fell by 15%, private renting grew by 116% and all dwellings grew
by 16%. In Scotland, the respective figures were: 45% (owner occupied)
99% (private renting, -33% (social renting) and 16% for all dwellings.
Thus, Scotland's home owning sector grew more, from a lower base, and
the social sector fell more than for the UK as a whole, from a higher base.
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The big increase in private renting was substantial but less dramatic than
for the UK. Scottish data from the House Condition Survey for 2011
suggests that 65% of Scottish households live in houses and 35% in flats.
Although detached houses comprise 50% of the houses built since 1981 a
large proportion of the remaining pre 1919 dwellings are tenement flats..
For the UK as whole, newer properties are either more likely to be found
in the owner-occupied or housing association sectors with the private
renting sector possessing the oldest dwellings (Wilcox and Pawson, 2013,
Tables 30a and 30b).
12. Benefit help to support housing consumption was taken up by 484,000
Scottish tenants in 2012 (97,000 of whom were private tenants) receiving
an average of £67.95 a week - the lowest of any region in Great Britain
(Wilcox and Pawson, ibid, Table 118). This is generally attributed to
lower social rents and a smaller private rental market. Recent figures for
Housing Benefit spending in Scotland (IPPR 2014v) suggests for 2010-11
that HB cost £1,661 million in Scotland and was 10.61% of all regionally
identified spending and compared with 12.6% for England and 9.07% in
Wales. This does not include support for mortgage interest (for those
qualifying on income support). Note that for the same year, council tax
benefit was £387m (2.48% of the identifiable total, less than the 2.87%
identified for England).
13. Housing affordability is, as we have seen, a tricky thing to measure. This
has not stopped people trying. Wilcox and Pawson have constructed a
regional affordability index over time using mix adjusted house prices for
first time buyers and regional household earnings data (higher scores
measure greater unaffordability). The model assumes an 82% loan to
house price ratio and is based on average mortgage lender rates. A
standard 25 year repayment mortgage is assumed. This synthetic index is
set at 100 for 1994. The UK index peaked in 2007 at 200.9 and has since
fallen back to 137.5 in 2011. Scotland's comparable figure peaked at
166.7 in 2007 before falling back to 105.7 in 2011.
14. The last national level analysis of housing needs in Scotland was carried
out by Bramley and colleagues in 2006. This analysis suggested a central
estimate of 10,000 between bounds of 8,000 and 13,000 households in
unmet housing need, This was a desk-based modelled analysis of the
problem. An update the following year of the same model suggested a
figure of between 10,000 to14,000vi. Local analysis has been updated and
guidance (2008) issued by the Scottish Government’s Centre for Housing
Market Analysis as part of the Housing Needs and Demand Assessment
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(HNDA). This way of measuring housing need builds on structure
planning infrastructure and geographyvii. Note that there may be a
discrepancy between needs estimates summed from individual local
authorities and needs estimates calculated across functional housing
market areas that straddle local authority boundaries. The latter are more
robust but it is the former council level boundaries that matter (and are
now used in sub-national resource planning work involving consistent
estimates of housing need by COSLA and the Scottish Government).
15. Housing taxation is complex. Housing consumption is taxed via the
council tax (net of means-tested benefits and discounts) - if you think that
the council tax is a tax on the value of housing consumption rather than
say a tax on housing wealth. VAT is exempt on new build properties but
does apply to repair and improvements. Taxes on transactions are
organised through Stamp Duty (to be replaced in Scotland by the
proposed Land and Buildings Transaction Tax within the 2012 Scotland
Act). Private landlords pay income tax and capital gains tax but also can
deduct loan interest form their tax (and can claim on other limited tax
breaks). Owners pay no investment taxation on their primary residences.
The housing sector is thus a long way removed from either internal
consistency between tenures let alone with respect to consumers or
investors in general (cf the Mirlees Review). While we have seen the
under-occupation charge (the bedroom tax) on social tenants with spare
rooms and also tighter limits to the size criteria capping benefit in the
private rented sector, there is no tax incentive other than the very blunt
council tax, to encourage a more efficient use of the home ownership
stock, a tenure where it is widely recognised that there is far more underoccupation than elsewhere in the UK sector.
4. Policy Challenges
16. Addressing affordability problems is not straightforward. As with all
sensible policy design, corrective policies need to be tailored to meet the
specific problem. This is made difficult by the lack of a clear definition as
to what is affordable and what unaffordable (it is even less clear than the
definition and measurement of housing need – see below). Evidence of
high burdens of housing cost to income or low residual incomes after
housing costs, for instance, may be telling us several different stories.
They may be the result of persistently high housing costs or they may
represent only a cyclical problem in the upswing of a market cycle. Third,
there may be affordability problems not captured by the indicator – for
instance, a high ratio may be borne by a household by simply cutting back
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on other non-housing expenditure – and this will only be measured if we
have reliable residual income data. Also, households may make strategic
long term choices that involve high initial costs (front end loading) in the
belief that the pain will be worth it when equity replaces debt over time –
is this unaffordable?
17. At a more general level, pursuing a consistent long term raft of policies
that sought to moderate house price and rental inflation, stimulated
housing supply and offered a wide range of tenure choices at different life
stages - would help but it would arguably only be a necessary condition
for more affordable housing. London is highly unaffordable in part
because it is a magnet for people, jobs and investment – land values and
ultimately housing costs reflect variations in regional economic demand
and consequent inequalities. Until the economy is more spatially
rebalanced and regional policies make an effective contribution to that
end – it is hard to see how fundamental housing cost problems in high
demand regions can be entirely addressed. This is one of these areas
where the Commission’s work needs to go with the grain of broader social
and economic trends.
18. The obverse is the low demand problem. The focus of the last decade’s
Housing Market Renewal Pathfinder Programme was to redevelop
English Northern/Midland low demand housing markets to create more
sustainable viable private housing. This was about creating viable
markets that would encourage individuals to invest in home ownership
and stabilise communities – moving owners from a dysfunctional
consumption market of poor quality housing to owners of assets that can
yield a return. A similar logic has applied to efforts in Scotland to inject
home ownership into the regeneration of public housing estates (and was
one rationale for the GRO Grant policy).
19. Turning to policies that might address over-consumption, here the
problem is that the housing (and indeed broader investment) options can
encourage under-occupation particularly for older households (but not
just them) while, at the same time, other households are over-crowded or
without permanent housing. There is a mismatch between households
and the occupied housing stock. Different tax regimes, local and
nationally, the care financial regime’s means-test, the inheritance tax
thresholds – do not create incentives to encourage a more efficient use of
the stock (though perhaps high energy bills will?). An obvious place to
start might be to think more creatively about the taxation system – is it
right that one in three households enjoy the single adult council tax
discount? More generally might we move to a system of property taxation
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better assessed on actual consumption (the Mirlees Review proposal for a
tax on the excess returns made by housing, or a Land Value Tax proposal,
or a tax on current property values as in Northern Ireland)? In the longer
term, we could consider bigger changes to the housing tax system, e.g.
capital gains tax, the moderating impact of the Dilnott Commission’s
proposal to cap and moderate the impact of care costs on housing assets
but also remove taxes on transactions like stamp duty or to change the
way CGT is levied to a recurring basis or some form of deferred payment.
Again, there is the wider question about attitudes to inheritance taxation
and the inter-generational transfer of wealth. Do we want to go there?
20. A further reason to consider tax and indeed monetary policy regulation of
mortgage lending concerns the macro-economic impacts of the housing
market. In recent months commentators have argued for some form of
anti-speculation tax particularly aimed at foreign investors purchasing
housing as speculative assets mainly in London. But at the same time the
Bank of England has been considering the use of its regulatory powers to
try to control mortgage lending to moderate inflationary house prices.
This is also in the context where Help to Buy 2, which guarantees an
element of property lending up to £600,000 purchases has widely been
seen to be an untargeted demand-side fillip that will increase prices and
reduce affordability.
21. The issue for the Treasury is that rising house prices, and expectations
that prices will continue to rise, changes the spending behaviour of
households. Thus, home owners feel more wealthy because of these rising
paper asset values and borrow and spend more, Savings fall, indebtedness
increases and this may also bring in more imports and push the general
level of inflation upwards as well as arguably weakening housing
affordability and labour mobility. Some economists argue that this is
facilitated by lax mortgage lending, equity withdrawal borrowing and the
like (the so-called monetary transmission mechanism); others argue that
the real driver is expected increases in household income that encourage
more spending in general. In this context, note that the recent budget OBR
forecasts predict a fall in the aggregate savings ratio and this is in part
explained by rising house prices as the economy grows and Help to Buy 2
among other measures stimulates house prices.
22. The Smith Institute have argued for a tax on speculation – essentially a
capital gains tax that is reduced the longer is the holding period between
buying and selling a property. The Bank of England are considering how
the monetary policy committee might operate to influence commercial
bank mortgage lending in order to smooth out demand and hence house
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prices. One member of the committee (David Miles) in particular has
looked closely at the scope for these countervailing measures that reduce
mortgage loan to value ratios by promoting a private market in equity
loans to make up the difference. There is also convincing complementary
international evidence review research that has concluded that tax
policies may offer some basis for evening-out housing volatility.viii
23. Housing need numbers are a critical parameter for assessing policy
effectiveness in global and more specific terms. Are we building enough
affordable units to meet new and existing need? Are we producing
enough in situ and new units to meet specific specialist housing needs?
How are we faring at a more disaggregated e.g. local authority level?
Housing need figures are also critical to decisions locally on affordable
housing agreements that allow a proportion of a planning permissionapproved site to be given over for social or affordable housing. Relative
housing need is also used to shape sub-national housing public spending
allocations.
24. The concept of housing need and its underlying components are in
general terms accepted by the broad sweep of commentators and analysts
but their operational counterparts and how they are calculated remain
contested (e.g. the guidance for individual council level analysis is much
more detailed, encourages survey work and triangulation, whereas the
national modelling and its local counterpart is based on the statistical
analysis of secondary data sets using specific modelling assumptions). We
also rely on quite old national figures for Scottish housing need though
there is work underway that will update the national figures and also
other work seeking to construct a bottom up national figure from council
level data. Fundamentally, we need to recognise that housing need is a
subjective judgemental assessment of the elements that should be
included and is not a technically objective statement – rather there is
consensus on its components and the over-riding methodology,
5. Implications for the Commission’s work
25. This is a wide-ranging prospectus and a complex set of connected issues.
In terms of policy issues that might require further work and ultimately
recommendations from the Commission, the following questions or topics
might be considered:
1. Developing and assessing empirically for Scotland a settled policy target
indicator for housing affordability.
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2. Assessing the contemporary levels of unmet housing need for Scotland
and consistently at more local levels.
3. Exploring further the use and distribution of housing equity and its role in
sustaining non-housing consumption for the cash-poor asset-rich and also
in terms of funding care and intergenerational equity
4. Exploring further reformed housing taxation of consumption and as an
asset with a view to supporting fairer, more efficient and sustainable
housing behaviour.
5. Ensure that the macroeconomic dimensions and consequences of the
housing sector are fully recognised and teased out in our work.ix
See: http://www.scotland.gov.uk/Topics/Built-Environment/Housing/supplydemand/chma/hnda
i
See O’Sullivan, A and Gibb, K (2012) ‘Housing Taxation and the Economic Benefits of Home
Ownership’, Housing Studies, Vol.27 (2), pp. 267-79
ii
iii
http://wealthgap.wp.st-andrews.ac.uk/
See Wilcox, s and Pawson, H (2013) UK Housing Review 2013 at
http://www.york.ac.uk/res/ukhr/ukhr13/index.htm
iv
Lodge, G and Trench, A (2014) Devo More and Welfare: Devolving Benefits and Policy for a
Stronger Union. IPPR: London.
v
See Scottish Parliament Infrastructure and Capital Investment Committee Draft Budget Report
2013-14, p.26.
vi
A recent 2011 example is the Glasgow and Clyde Valley HNDA – see
http://www.gcvsdpa.gov.uk/index.php?option=com_content&view=article&id=39:housingneeds-and-demands-assessment&catid=1:latest-news&Itemid=8
vii
See: Kenneth Kuttner and Ilhyock Shim (BIS Working Paper 433) entitled: ‘Can non-interest
rate policies stabilise housing markets? Evidence from a panel of 57 economies’. Miles paper can be
found via http://www.bankofengland.co.uk/publications/Pages/news/2013/132.aspx .
viii
The speculative housing tax can be explored in Haywood, A and Hackett, P (2013) ‘The Case
for a Property Speculation Tax’. A Smith Institute Discussion Paper. http://www.smithinstitute.org.uk/
For instance O’Sullivan and Gibb (2012) distinguish between the monetary aggregate demand
issues and the aggregate supply questions relating to things like the Oswald hypothesis [see
employment paper] on the other. They also separate out macro from micro impacts of policies
promoting home ownership, concluding that it is difficult across this se of issues to find general
economic arguments in favour of promoting home ownership per se (though there might be
specific micro arguments based on e.g. evidence about parenting).
ix
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