There’s a strong economic argument for building more low-rent homes to address the massive shortage of housing according to a new report by Capital Economics for SHOUT (Social Housing Under Threat) and the National Federation of ALMOs. In fact there are two good arguments – that the capital investment boosts the economy and helps pay for itself through taxes, and that low-rent dwellings eventually save more than they cost because tenants need less housing benefit to pay for them.

Although the arguments have been made before, the first in the report Let’s Get Building and the second by both the IPPR and John Healey MP, for the first time the new analysis brings them together to give a long-term assessment of the costs and benefits. Investment that costs taxpayer money in the early years will, according to the report, soon offer very significant benefits in public spending, government debt, the structural deficit and the wider economy.

Basing the case on the present value of the housing benefit savings over 25 years by itself provides an economic justification for building social-rented homes in many parts of England, such as London, the home counties and some cities in the Midlands. After taking account of how much landlords can raise in capital towards the building costs from their rental income, the gap that would need to be covered by government grant is smaller than the present value of the savings in benefits the government gets by housing people at lower rents. Furthermore, the tenants themselves also see an improvement in their disposable income. In other words, in these high pressure areas everyone gains. In addition, there are other ways of closing the gap – via free land or contributions through the planning system (section 106). The costings also ignore the residual value of a house built now after 25 years – which if taken into account makes the economic case for building viable practically everywhere in England.

After looking at individual examples Capital Economics then examine the arguments for building up to an output of 100,000 social rent homes by 2020. Arguing fairly conservatively, they show that costs to the public sector peak after about four years then fall steadily and in about 20 years the scheme starts to produce a growing surplus. In the meantime, the effects on public sector debt are small and in the long run they, too, are beneficial.

Interestingly, this long-term perspective shows not only the benefits of low-rent building but the consequences of failing to do it. An extrapolation of current trends over the next 50 years – if perhaps unlikely to carry high levels of statistical confidence – shows that by 2065 nearly two-thirds of housing benefit claimants could be private tenants, and that as a result the annual cost (at constant prices) could rise eightfold to nearly £200bn compared with under £25bn now. While it is difficult to see any government ignoring such an increase, it is a fair question to ask – if current policy is heading in that direction – what is going to be done to arrest these trends?

The report argues that while a building programme requires government investment now, this is entirely compatible with the government’s austerity measures because it addresses the current system’s long-term instability and lack of sustainability. The problem, of course, is that the solution really does require a long-term view because it involves short-term costs.

The Capital Economics report follows one from the Office for Budget Responsibility showing that in coming decades the sustainability of government finances is threatened by the extra costs of an ageing population, that will have to be carried by a smaller proportion of younger people. Although the OBR report doesn’t address housing market issues, it could have added that the young will be much more dependent on rented housing and for longer periods of their lives than older generations and their housing costs will form a high proportion of their incomes. This means that those that want to buy will find it far harder and will wait longer to save for a deposit, while those on lower incomes will be more dependent on benefits than they need to be, drawing more from the system than they put into it.

CIH has long argued that solving the housing crisis needs more direct action by government to address the needs of those millions of households who cannot buy a home now and may not be able to doso for many years. Rather than this being a drain on government resources, the new report from SHOUT and the NFA shows that investing to build homes for letting at genuinely affordable rents could make a vital contribution to the government’s aim of long-term economic sustainability.

Original post: Chartered Institute of Housing