Matthew Pennycook's in-tray: the social housing sector
What are the challenges the new housing minister will face? This week we'll look at the social housing sector - next we will do building safety
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With the Conservatives running their campaign as if they have money on a big Labour majority (which, to be fair, some of them probably do), we might as well start talking seriously about the challenges which will face the incoming Labour government, and specifically the man who will become its first housing minister: Matthew Pennycook.
I’ll do building safety next week, but let’s start with social housing more generally.
It’s quite hard to work out quite how highly social housing will be prioritised within the forthcoming Starmer administration.
It really isn’t that long ago that Lisa Nandy, as shadow housing secretary, was telling the party conference that social housing would be “at the heart” of its house building plans, and happily signing up to a target to make it the second biggest housing tenure again (making up an eye-watering differential of 300,000 on the private rented sector). I remember being told by a couple of sources that Nandy’s ambition was described by aides as “fuck loads more council housing” in private meetings.
But since then things have gone very quiet. While the “bigger than the private sector” target has never officially been dropped, it’s also never been mentioned again and wasn’t included in the manifesto. Now Labour is promising the biggest rise in a generation which - depending on how you define generation - could be a very modest rise indeed.
What changed? Well, a few days before Nandy took the stage in Liverpool, Kwasi Kwarteng had stood up in Westminster and delivered his “growth plan” which tanked the economy and trashed an entire country’s financial plans with the increased mortgage rates that followed. Labour appear to have put an electric fence around any promises which involve big public borrowing since then, and “fuck loads more council housing” does, unfortunately, meet this definition.
The question (and this is the big question about what sort of government we’re about to get in any number of policy areas) is whether they are downplaying their true ambitions to avoid difficult headlines about future expenditure, or whether they’ve genuinely scaled down and canned their ambitions because a low-spend, small state approach was always a better match with the ideology of those running the party.
Time will tell, but I have a fairly glum feeling that the latter will prove closer to the truth.
The problem for Labour, as far as social housing is concerned, is that what it will inherit is a crisis which the small state, small spend approach can no longer solve. Either it will use of the government balance sheet more than it is currently promising, or it will make very difficult policy trade offs which will have major political consequences.
To explain, for the uninitiated, there are a shade over 4.4 million ‘social’ homes in England, about one in every six households. Of these, 2.8m are owned by private housing associations (mostly not-for-profit businesses that reinvest the surplus from the rents they collect in maintenance and new build) and 1.6m are owned by local authorities.
Labour, on coming to office, will be faced with various challenges. These 4.4m social homes need a good deal of work. The tower blocks are rife with fire safety defects which, seven years on from Grenfell, we are still in the thick of fixing. The problems with disrepair, particularly damp and mould, have belatedly become a political talking point in the last two years. The last Labour government’s Decent Homes Programme is more than 20 years old and in dire need of a repeat.
And that is before we get to the challenge of decarbonising them - with its requirement for energy efficiency upgrade and electric heating.
In short, we need to make up for 40 years of underinvestment and shoddy construction, at the same time as modernising 20th century homes for the 21st century. This entails a weighty price tag, which simply goes beyond what can be derived by bleeding a ‘surplus’ out of the rent payments.
And that is before we get to new build.
In 2023, about 63,000 new ‘affordable’ homes of a range of tenures were built by social housing providers, around 14% by councils and the rest by various types of private housing association. But only 9,500 of them were for ‘social rent’, which means we got a shade over one tenth of what experts say we need. If we want to start making a dent in the number of families in temporary accommodation, or even to sustain the construction industry through the current downturn, we need this number to tick up - and quickly.
The trouble here is that the current funding model for new build social housing is bust: the Conservatives dreamed of housing associations merging into larger and larger providers, generating enormous economies of scale in their management costs, building up profits from the private sales market and borrowing vast sums against their future rental streams to fund new build with little or no state support.
But this was always a dream, and it has come crashing down particularly hard in the last two years as soaring construction costs, rising interest rates and the aforementioned cost of investing in the existing homes hit all at once.
This business model cannot be sustained for much longer. Social housing providers are already in technical breach of many of their loan agreements, only surviving insolvency due to voluntary waivers from lenders. Some of the biggest private providers have simply stopped building new homes and the ambitious plans for council housing expansion that came with Theresa May’s borrowing flexibility in 2018 have come to an abrupt halt.
Put bluntly, Labour will have to decide whether to do less or spend more.
But all the ‘do less’ options come with consequences. We cannot accept fire safety defects, we cannot accept non-decent housing stock. And we cannot give up on the challenge of decarbonisation in social housing, which remains the only realistic catalyst for starting the process in the rest of our housing stock.
But at the same time, we cannot give up on new build if we want to have any claim to be solving the housing crisis. The cost of not providing enough social housing is currently written in the crippling financial and social price tag of 145,000 children in temporary accommodation.
So if doing less is not an option, then the only answer is spending more. But where will this money come from?
There is a push from within the sector for it to be rents. Social tenants’ rents currently rise at inflation plus 1% per year, and a re-introduction of ‘rent convergence’, where the lowest rents rise substantially faster than this, is being offered as an answer to the funding crisis in some quarters.
Others have picked up on the ‘warm rents’ model in Europe, where energy efficiency work is paid for by increased rent which is then supposedly recouped by the household via lower energy bills.
But neither solution is free - not for the exchequer and not for society.
It is a myth that all social tenants are on benefits, but many are - due in part to it being the only realistic housing option for people medically unable to work. Raise rents and you raise the benefit bill, so this is still asking the state for more money, just through a different route.
And well rent convergence is made more palatable by describing the rents in question as “historically low” that masks the fact that it still entails a rapid, sustained increase for some of our poorest families who may well be forced into severe hardship to pay it. It must be remembered that social housing is only of any value because the rents are low. Undo that to solve the funding crisis, and you might as well not have bothered.
I’m also deeply sceptical about the warm rents model. Calculating genuine energy savings from retrofit work is extremely difficult, and may not deliver what was promised by the slick talker who sold you the insulation.
So if we can’t reduce the scope of what we need and we can’t make up the difference by hiking rents, where does that leave us? The answer - much as Rachel Reeves will dislike it - becomes the public balance sheet.
What Labour - a strong Labour, with a big majority - should do here is not break its fiscale rules but change how its public accounting works.
A new social rented home is a publicly-owned revenue generating asset and should be recognised as such on the public balance sheet.
Over time (a long time), the rents which the tenant pays will repay the debt the government took on to build it. The process of building it and providing it will also generate economic growth in myriad other ways. If the Treasury saw it like this, and was willing as a result to use its balance sheet and borrowing power to fund a much larger share of the new build we need, you suddenly create the capacity for the stock investment we need to come from the sector via the rents it already collects.
There are other substantial, long-term challenges in social housing, and in housing more generally.
As the population age and the healthcare system struggles, we will need to get much better at providing homes for people who need care. Supported housing and properly adapted housing is one of the major challenges facing Britain in the 21st Century. It is a problem we are nowhere near having a solution to, and have at times over the last decade, surrendered it to shark-like investment funds who have turned it into a cash grab.
We have also made the mistake of viewing housing and climate change as only a question of decarbonisation when it will rapidly need to become a conversation about adaptation as well. How are we going to stop our homes from overheating, or becoming livable only with air conditioning which we do not have the capacity to provide? How are we going to make them safe from the surface water flooding events which will be common place in the next decades? How do we continue to insure them in the face of these risks?
And where does our workforce come from to build them and maintain them? As the current workforce ages out, or disappears via the post-Brexit immigration system, what is our long-term plan for replacing them? What are we going to do with the poorly maintained PFI housing projects whose contracts will expire in the coming years? What about the challenge of for-profit housing providers increasingly seeking to cannabalise the sector?
And how do we meet with the post-Grenfell promise (and desperately needed reform) of genuinely giving social housing tenants voice and agency in the political process and at a local level in conversation with their landlords? The new regulatory system has its merits, but does not yet provide an answer to this question.
I could go on. But really, all of these questions come down to the state’s investment decisions. Are we willing to see the need for social housing and invest in it or are we going to allow it to continue to decline and disappear?
The former option requires a different economic philosophy to the one which has dominated for the last 40 years, and which Reeves and Starmer are currently signed up to. But it is still the only realistic route to success. The only others are what degree of failure they are most willing to accept.
This content is not behind a paywall, but since it takes time to create and upload each piece, do please consider becoming a paid subscriber (especially if this project is something that you value, and you have the means to do so), which is either billed monthly at £3.50 or annually at £35. A paid subscriber has full access to the back catalogue of posts.
If you pay £40 or more for an annual subscription, I will send you a signed copy of my book. Or you can buy a copy here.