London’s housing market is an anomaly. House prices are high, the population is continuing to rise, and we are told that global investors see London property as one of the few ways to make money in today’s low-interest environment. But none of this seems to feed through to building more bloody houses; house prices and rents continue to push upwards every year.
The result is more and more Londoners being priced out of the city, and a rising housing benefit bill, as government pays more and more subsidy over to private landlords – more than £6bn in 2014-15, 15 times more than the annual sum allocated to support affordable house building.
You have to ask yourself whether this money could be better spent. In No Uncertain Terms, a report published last week by the Centre for London, suggests that it could. Our paper, written by Jamie Ratcliff, argues that developers could borrow money to build more affordable housing, repaying these loans through rent, supported by the housing benefit that would otherwise go to existing landlords.
There is plenty of money out there; the key is getting the right terms. Institutional investors – like pension funds and insurance companies – are keen to invest in London property; what they crave above all is a reliable rate of return that keeps pace with inflation. Our paper argues that a government guarantee that housing benefit levels would rise in line with inflation would give lenders certainty, and bring the cost of borrowing down.
We estimate that guaranteeing an annual £2.4bn of housing benefit in this way could fund the construction of 250,000 affordable homes over ten years, each of which would be let for 45 per cent less than average market rents.
The guarantee would need to be rock-solid to get the best interest rates, and would be in place for 60 years, rising in line with the consumer price index each year. Initially, it would cost government nothing more than their existing expenditure on housing benefit; over time, however, if rents continued to rise faster than inflation, it would actually save money year on year.
Westminster has traditionally been cautious about giving guarantees; civil servants worry about making long-term commitments of government resources, post-dating cheques decades into the future. But every government makes such commitments – for major transport projects, for investment in power stations, for military hardware.
We need to start seeing housing as infrastructure, every bit as essential as these, giving the guarantees that will unlock many billions of capital investment – and translate London’s housing benefit bill into an investment in the city’s future.
Richard Brown is Research Director at Centre for London. He tweets as @MinorPlaces.