The economy: where are we? Kellie Beirne provides an analysis.
The crisis
In November 2008, the Bank of England announced that the UK officially entered recession in the middle of 2008. In its most recent quarterly inflation report, the Bank highlighted the dramatic change in the economy over the relatively short period since August 2008. The expectation is that inflation will drop to 1% by 2010, well below the 2% target, taking us into the unchartered waters of a deflationary economy. The Bank further predicts that the UK economy will contract 2% by early 2009 and that unemployment figures, which have already hit an eleven year high, will have reached 2 million by the end of 2008. Sterling continues to decline on international financial markets and we’ve seen a dramatic cut in interest rates. Analysts are predicting that rates will drop below 2% within a year, the lowest Bank of England base rate since it was established in 1694.
Even amongst the most optimistic of economic commentators, there is an acceptance, however unpalatable, that recession will continue well into 2009.
The picture is decidedly gloomy even before we move on to examine the housing sector which has played both a cause and effect role in the crisis. We’re seeing the lowest levels of house sales for 30 years, 200,000 households in mortgage arrears and a ‘computer says no’ response from lenders to many would-be first time buyers. The Chancellors £20billion package of pre-budget tax cuts designed to boost the economy, reflects the view of Government that interest rate adjustments alone are not going to be enough to stimulate the housing market and hence, the economy. The housing market is arguably the biggest influence on fiscal policy and success – globally, nationally and locally. So it has been the cause of some consternation that the Chancellor’s announcement contained no ‘new’ money to meet house building targets and instead relied on bringing forward existing funding. The looming spectre of a new comprehensive spending round next year adds an interesting dimension to the debate. In the banking sector, RBS has stepped things up by extending the three month moratorium on possession proceedings to six months – but similar agreements have not been reached with other lenders leading to calls to ‘nationalise more of them!’
Whether you view the situation we find ourselves in as an economic or ethical crisis, there is no getting away from the fact that times are tough.
The response: what can we do?
We’re knee deep in the ‘worst of times’ – but isn’t there something in the old adage that necessity is the mother of invention? Recession should make us re-evaluate and look for creative solutions and opportunities. It would be easy to say ‘let’s give up and go home’, but we can’t because we know better than most, that many of the people whose lives we aim to improve don’t have the same luxury.
That said, our focus in the credit crisis cannot be on the delivery of affordable homes in isolation. If there’s an insufficient housing supply, choice and options become constrained and house prices are pushed up, compounding affordability problems. There’s no doubt that planning applications are dwindling, that sites and schemes conceived in warmer climes are being mothballed and as a consequence, there is a palpable squeeze on supply generated through Section 106 agreements. But this is where and why innovation is needed. Volume developers are not in the market for large sites, but public-private partnerships and joint ventures between local authorities, registered social landlords and home builders will minimise risk and secure the kind of mixed tenure, mixed use communities that will meet housing requirements and secure jobs.
In England, the Local Housing Company model is starting to take off and local authorities are re-asserting their interventionist roles by taking more risk and more responsibility in the partnership arena, but in relation to an outcome that they can direct and influence. Limited liability partnerships and community land trusts are also emerging and are starting to deliver success in the form of affordable housing. Local government has a clear opportunity to test and demonstrate its community leadership powers and, although public investment may be needed up front, to be replaced with privately-led investment over time, the returns to the public purse could be great, heralding a spirit of public service entrepreneurialism.
However, the lynchpin of action has to be stimulating the powerhouse of the economy – the lending market. There is no one accepted solution and a package of measures is clearly required to assist market recovery. But reinvigorating the commercial lending sector will create the liquidity needed to get first time buyers and developers back in the game. And let’s not forget, the nationalised banks are now major shareholders in a number of the volume developers.
The laissez-faire approach has not worked and state intervention is necessary to help mend the economic infrastructure, drive forward sustainable development and to protect against the kind of apartheid that we still see in some communities with ghettos of single tenure housing.
The Crosby Report published by the Treasury at the end of November 2008, identifies the lending revival as the single biggest factor in triggering fiscal recovery. Recommendations include incentives to get banks lending again and the possibility of the Government underwriting mortgage losses.
It is also clear that ongoing work to review the Housing Revenue Account subsidy system must form part of the healing process. In addition, reinvention of the private rented market as set out in Julie Rugg and David Rhode’s report will provide for a better regulated and more professionalised sector. The other big regime under review is Housing Benefit. We spend a lot of time talking about the millions injected into new housing by home builders – but what about the £19billion of public subsidy going into housing benefit? Tackling empty properties must also form part of the game plan – numbers of empty homes are increasing – yet another symptom of the credit crunch. The powers to enforce possession already exist, but we need to talk frankly about the factors preventing action being taken on the scale needed.
Rethinking housing: how do we do it?
One of the questions I keep pondering is would the downturn have hit the housing market this hard if we had a system of flexible tenure in place? There are question marks about the mechanics of such a programme – but would it be that difficult for housing subsidy to be more closely matched to the person and not the property? A stair-casing model that could incorporate social and sub-market renting, low cost home ownership, rent to buy, equity release and mortgage rescue might help provide the flexibility and agility needed to promote housing options and help withstand the bust times as well as sail through the booms. This is not about challenging ideologies around security of tenure; on the contrary, it’s about recognising that times have changed. There is a real need for the public sector to play a more active role in market intervention, but from a number of different positions in order to promote stability and choice across the board.
However, it would seem that the Government’s thinking on holistic housing reform has become yet another casualty of the credit crunch and whilst there remains a will to deliver house-building targets (‘ambitions’), radical change is on the backburner. I have already made reference to the Crosby, Rugg and HRA Subsidy Reviews as well as Housing Benefit reform. The Cave and Hills’ Reviews were published only last year and Essex has been our main talking point in Wales for the last 12 months. Co-ordination and cohesion across all of these currently disparate agendas should be an urgent objective for Government. And yes, the implications of all these reviews will fundamentally affect Wales! However, in practice, house builders, local authorities and registered social landlords are already delivering some of the more innovative products I have suggested which could feature under a ‘flexible tenure’ banner. So isn’t reform already happening on the ground, if not at national level?
The most important thing of all has to be challenging our apparent acceptance of ‘boom and bust’ economic cycles (I’m guilty of it myself). How many times have you heard someone say recently ‘I’m not going to sell my house now – I’ll wait for the boom’? Up until the bubble burst, in Wales we saw a 200% increase in house prices over a six year period. Surely what has happened in the UK and global financial system since 2007 is something we do not, and should not, want to revisit? To rethink housing in a far reaching, rational and sustainable way, our job is to think about how we have a public debate and engagement about the role of the state and its partner agencies in mitigating the negative impacts of our global financial systems on housing markets and vice versa. It’s not about ‘nanny state vs free market’, it’s about common sense.
Kellie Beirne is Housing Strategy Manager at Torfaen County Borough Council, Kellie.Beirne@torfaen.gov.uk. This article takes account of developments and announcements up to 2nd December 2008.