Who really gets subsidised housing?

27 Jan 12
John Perry

Subsidised housing is often equated with council housing, yet there are plenty of government subsidies for homeowners too. It’s time to review housing subsidies to ensure they are fair and justified.

Housing Minister Grant Shapps – among others – makes frequent use of the word ‘subsidised’ to describe social housing. Indeed this month council housing was said to 'fantastically subsidised'. But is he right and who actually gets government housing subsidies?

This is an issue regularly addressed by the Chartered Institute of Housing’s UK Housing Review, and this year’s issue (see below) enables us to assess the latest evidence. Let’s start with the sector that’s really cushioned by the government. Yes, that’s right, it’s owner-occupiers, especially those who have paid off their mortgages. Of course, significant benefits to mortgage payers were wiped out when tax relief was cut by Margaret Thatcher’s government and eventually ended twelve years ago. But all owners still enjoy capital gains tax relief, currently worth almost £6bn. Those with no or only small mortgages also benefit from not being taxed on the value of their home (as used to happen through the old Schedule A tax). This is now valued at over £11bn.  Taking both these into account and adding back in the Stamp Duty and inheritance taxes of about £5bn that owners do pay, the net subsidy they receive is still a surprising £12bn per year.

Now, of course it’s true that no government is likely to restore Schedule A tax, but even disregarding it the outcome is that owners pay no net taxes at all (council tax doesn’t count as tenants pay it too). As Professor Steve Wilcox, one of the Review’s authors, points out, the existence of these tax advantages means that house prices are far higher than they might otherwise be, benefiting existing owners at the expense of those struggling to enter the market.

Even so, there are also various forms of direct subsidy to owner-occupation which are often left out of account. In the past, millions have had renovation grants, now much reduced in scale but still available in some circumstances.  Owners in difficulty get support with mortgage payments. All governments have provided subsidy to shared ownership, as a first step on the ownership ladder, and about 170,000 homes have been built on this basis. The biggest subsidy of all – for the individual households who’ve benefited – has been the right to buy, benefiting two million house buyers with a typical current discount of £26,000. The UK Housing Review gives the total value of these subsidies as £1.6bn for the year 2009/10 and in the recent past they have been even higher.

Private landlords don’t enjoy the same tax advantages as owner-occupiers.  However, the recent growth in numbers of landlords who own only one or two houses is undoubtedly fuelled by homeowners who can afford a deposit to buy another house to rent out. Landlords also find it much easier to get interest-only mortgages. Taken together, Steve Wilcox argues that the effects of the tax and regulatory regimes strongly benefit existing owner-occupiers. Landlords follow behind, with first-time buyers (especially those who can’t afford a deposit) at the end of the queue.

Let’s turn to subsidy for renting. All tenants, of course, are eligible for Housing Benefit. The average benefit payment for private tenants, at £114 per week in England, compares with £82 for housing association tenants and £73 for council tenants. Obviously, this is largely a function of higher rents. But those who claim that social housing is ‘subsidised’ because it charges lower than market rents often fail to point out the extra costs that would fall on the welfare budget if rents were raised to private market levels.

This ‘economic subsidy’ due to lower social rents is worth some £7bn annually. But this will fall gradually as the government’s new ‘affordable’ rents start to take effect – pushing up Housing Benefit costs. It could be argued that the economic subsidy for social housing is as artificial as the implicit tax reliefs for homeowners, given that no government is likely to raise social rents to full market levels. But, oddly enough, those who focus on social housing being ‘subsidised’ don’t tend to draw attention to the hidden subsidy for owner-occupiers.

Surely social housing gets direct subsidy? Well, of course, new homes normally get government grant, although the average grant level is falling fast. Council housing has low rents in part because of historic subsidy for the loans to build it, but in fact much of this has now been paid off: the average council debt is only about £17,000 per house and few new homes are being built.  Indeed, council housing has been making a ‘profit’ since 2008, which has been paid to the Treasury. When council housing becomes fully self-financing on April 1, all subsidy to existing homes (except of course Housing Benefit) will cease. Councils will actually take on extra debt at that point, to reflect the future surpluses they would have paid to the Treasury. This cost will be met from rents.

Grant Shapps deserves credit for pushing ahead with council housing finance reform and ending the notoriously complex subsidy system, so that from April  council tenants will have a much clearer idea of how their landlord is spending their rents. We could all acknowledge his success by no longer referring to council housing as ‘subsidised’. Furthermore, to ensure that subsidies to different housing sectors are fair and justified, it would be timely for the government to do its own review. While there may be disagreement about what counts as subsidy and what doesn’t, surely no one can dispute that the present range of incentives is simply the haphazard result of different initiatives by different governments? In an environment where we badly need to look at how government stimulates more housing supply, a more rational approach to housing subsidies is now needed.

The UK Housing Review 2011/2012 is available at www.cih.org/thebookshop

This post first appeared on the Guardian Housing Network


CIPFA latest

Related jobs

PF jobs