Housing Finance Policies - Essay Example

How successful are government’s housing finance policies in producing affordable social housing I. Introduction The formulation of an effective housing finance policy is not an easy task. One of the most significant factors that can lead the application of any relevant policy to the failure is that the prices of all goods that created the basis for the calculation of inflation tend to change on a daily basis presenting usually significant differences during periods of crises in the international political or financial field. Towards this direction Garino et al. (2004, 777) have supported the ‘widely held view among academics and practitioners that the time-series behavior of house prices of several major industrialized countries may have been characterized by explosive bubbles, which are not present in the underlying fundamentals and which, therefore, may drive an explosive wedge between house prices and their fundamental determinants’. Specifically for UK the above researchers referred to the studies made regarding ‘the two booms experienced by house prices in the early 1970s and late 1980s, providing some tentative evidence in support of the view that speculation on expected future house prices might have been an important force driving actual house prices’ (Garino et al., 2004, 777). Another issue that has to be taken into account is the fact that Britain is a country with an extended coastline, an advantage that has been noticed by several professionals in the housing industry who have managed to upgrade the value of the areas near the coastline by changing the views of people regarding the quality of life in the specific areas. Bateman et al. (1998, 269) also noticed that ‘one of Britains principal geographical features is its extensive coastline (12429 km) created by a multitude of land and ocean processes, subjected to anthropogenic influences and characterized by a variety of formations and coastal environments; coastal areas are increasingly valued by society, both directly and indirectly, and undoubtedly provide an essential overall service to humankind’. The reason of the reference to the specific area (coastline) of British territory is that the increase of the area’s value is noticeable and the local authorities (also the national ones) should take this fact into account when designing any housing policy. From a different point of view Barrell et al. (2003) studied the housing policies designed and applied throughout the years in UK using as a main criterion of evaluation their relevance with the consumption behaviour in UK. The above researchers notice that ‘the housing market, which has been particularly cyclically volatile in the past 30 years, has contributed to cycles in consumption through its impact on housing wealth; Increased house prices increase the value of assets held, and impact on consumption, making the economy more cyclical’. As a result of the above phenomenon, it has been proved that ‘there is a clear relationship between the level of real financial plus housing net wealth as a proportion of income and the savings ratio’ (Barrell et al., 2003, 53). Current paper examines the housing finance policies of UK government and specifically the level at which they have managed to produce an affordable social housing. II. Housing policies in UK – trends and performance Current governmental housing policy in UK could be described as ‘(i) maintaining a tax-favoured treatment which has the effect of raising prices despite the fact that this imposes a burden on future generations, (ii) avoiding anything which might depress house prices, (iii) probably adjusting the inheritance threshold to protect the direct descendents of house owners from the collective burden on future generations created by high and rising house prices and (iv) hoping that house prices do not rise sharply in the future’ (Weale, 2006, 6). It should be noticed however that although these issues have been included in the relevant legislation, in fact their application still presents weaknesses mostly due to the absence of an authorized body that could handle all issues that arise in the housing market. In this context, Chinloy (1995, 407) presented a series of statistics related with current conditions of the UK housing market. More specifically, in accordance with the data included in his study ‘in the U.K. in 1992, 2.1% of all mortgages were 6-12 months in arrears, as compared with 0.4% in 1982, and 1.5% more were over a year in arrears, as compared with 0.1% in 1982 while the average annual real growth of house prices from 1988 to 1992 was 9%; the decline has been concentrated in high-priced housing markets in the South East of the U.K., increasing the magnitude of the overall wealth reduction in pound terms’. The reference to the above statistics has been considered as necessary in order to present an integrate and valid image of housing market in UK. The issue of job’s location is also examined when planning and applying any housing policy, mostly because it’s the work of the interested party (borrower) and more specifically the remuneration of this work that define the ‘purchase power’ of people in all industrial areas. On the other hand, it has been noticed by Barrell et al. (2004, 57) that ‘house price inflation in the UK has been particularly high in recent years; this has led to much discussion concerning the future path of house price growth; whether the future scenario involves a moderation or instead a sharp correction in house prices has important implications for the short to medium path of household consumption expenditure’. The above views of Barrell refers mostly to the house of priced in Britain, however it could be used as a point of reference for the financial situation of similar industries in other territories (e.g. Germany). Moreover, it seems that – the current period - in UK ‘house prices have stabilised; the Governments house price index has moved erratically but showed a rise in November after a fall in October and the general feeling is that sentiment has improved; the stabilisation is widely attributed to the interest rate reduction from 4 3/4 to 4 1/2 per cent per annum last August, with the possibility that it has created an expectation that further interest rate reductions are likely. At the same time five and ten-year interest rates have fallen; for people who take out fixed rate mortgages these are more relevant than the Bank of Englands base rate and even for people who have floating rate mortgages they may be a better guide to interest rate expectations’ (Weale, 2006, 4). The reference to the prices of mortgages has been inserted in the examination of current issue, trying to show the cooperation of companies that operate in the UK area. From a different point of view Hendershott (2002, 2) stated that forecasting could help to the production of a completed housing policy in accordance with the trends and the needs of the specific market. In this context, Hendershott et al., (2002, 1) found that ‘forecasting changes in housing finance (instruments and institutions), housing demand (tenure, quantity, and real price), and housing production requires forecasting numerous exogenous factors--inflation, government policy, and demographic forces being the most obvious--and interpreting their impacts on the housing market’. The reference to the current trends related with the mortgages and the forecasting has been decided on the basis of the coordination of these two social elements with the housing policy (as it can been proved by the relevant statistics and studies referring to the government’s housing policy). III. Governmental housing finance policies in UK Local Authority Council In order to decide on a specific housing finance policy, the authorized Body has to examine all the parameters that have to be taken into account in a particular region. Frantatoni et al. (2003) found that there is a relationship between the national and the local markets. Their study was bases on the evaluation of the ‘the importance of heterogeneity for monetary policy using a new heterogeneous-agent VAR (HAVAR) model that integrates national monetary/financial markets with regional housing markets via the mortgage rate; although the HAVAR model has linear regional VARs, its aggregate impulse responses exhibit two nonlinearities: (1) time variation, stemming from aggregation over heterogeneous regions, and (2) state dependence on initial economic conditions in regions’ (Frantatoni et al., 2003, 557). The above results show that there is an interaction between the national and the local housing markets, however the formulation of the latter can be influenced from a series of factors that may be unknown to the former (like the level of financial development of the region, the performance of the local industries throughout the years, the ‘purchase power’ of the local community etc.). One of the most important governmental bodies regarding the housing policies in UK is the Department for Communities and Local Governments (DCLG) which was created on May 2006. According to DCLG the main ‘duties’ of the Government regarding the housing policy in UK focus on the following issues: ‘a) To enable all local authorities effectively and efficiently to manage their businesses as landlords and better to fulfil their role as strategic bodies; b) To encourage sound investment decisions and good overall performance, making maximum use of the resources provided; and c) To ensure all available housing resources are distributed fairly in the light of the above’ (DCLG, 2006) In order for the above objectives to lead to the production of an effective housing finance policy, there are certain initiatives that have been developed in UK and which can be applied in the particular local housing markets. More specifically, according to DCLG (2006) a first step towards this direction is the ‘Housing Revenue Account (HRA) operated by every local housing authority as an income and expenditure account for local authority housing; income in the HRA is made up of rents and housing subsidy, whilst expenditure covers the management and maintenance of the councils properties’. It is also added that the equality in the distribution of this account’s benefits is guaranteed through a particular type of calculation, a Housing Subsidy calculation which include two main elements: ‘Housing Element and Rent Rebate Element. Housing Element is the subsidy for management and maintenance of a local authority’s properties, Rent Rebate Element meets the cost to the authority of Housing Benefit for which their tenants are eligible’ (DCLG, 2006). The introduction of the above account in the local housing market is also followed by a series of particular measures and plans which have been considered as supportive tools towards the development of local housing markets around UK. The table presented below prove that the level of financing of housing policies is not stable throughout the years but it tends to be differentiated – probably in accordance with the level of performance of the national economy. £m 2003-04 2004-05 2006-06 Total Housing 3,581 4,017 3,941 11,539 Market Renewal 60 150 290 500 Growth areas 80 256 274 610 Liveability 41 79 81 201 EP 163 179 179 521 Total 3,925 4,681 4,765 13,371 MRA 1,473 1,394 1,312 4,179 Total 5,398 6,075 6,077 17,550 Table 1 – Resources available for public services in UK (DCLG, 2006) Introduction of a proper business planning regime for the Housing Revenue Account (HRA) In order for the Housing Revenue Account to be used effectively by the local businesses, the local authorities have decided to develop an advanced business planning which will be characterized by the high quality and the provision of low cost services. At a next level, this strategy will help the local firms ‘to assess whether they are in a position to meet the decent homes target within available resources, and if not, to look at how they might do so’ (DCLG, 2006) Moving the Housing Revenue Account onto a resource accounting basis, including the introduction of the Major Repairs Allowance (MRA). The provision of the above allowance has been decided by the legislator because the assets possessed by an individual/ business usually have a series of ‘hidden costs’ which tend to be really high. The introduction of this allowance and the relevant changes in the accounting systems applied in the Housing Revenue Account will provide to the local authorities all the necessary information for the local houses/ assets presenting their real cost (i.e. their value as assets and their costs for specific tasks which are necessary from time to time for their restoration/ restructure). The removal of the Receipts taken into Account mechanism for allocating capital resources. Such a strategy has been imposed as necessary because ‘until recently, the main capital allocations given to authorities each year took account of a proportion of receipts that authorities had generated (for example, from Right to Buy sales); they were assumed to use a proportion of the receipts that they were not required to set-aside to repay debt to meet capital spending’ (DCLG, 2006). The above technique which has been applied for a while in the local housing markets, although effectively redistribute some of the available resources, it has been avoided by the locals and as a result it has been limited due to its failure to achieve the targeted aims (a fair and equal distribution of capital resources among local population). Rent and housing Benefit policies Introduction of rent restructuring and related reform of the Housing Revenue Account (HRA) subsidy system. The need for the restructuring of the rent is emergent in the local housing markets of UK. Such a finance strategy will protect the weakest ‘teams’ of the population offering also the chance to the local economies to be developed (through the limitation of the inflation). According to the above strategy the ‘average social rents will remain below market levels and they will be calculated taking account both of affordability and relative property values across the stock (based on the valuations used for resource accounting and business planning purposes); restructuring means that it will be much easier for tenants to make proper comparisons between properties, for example under choice based lettings schemes. It will also help towards business planning decisions’ (DCLG, 2006). Although the benefits of the above housing finance strategy are many, it has to be noticed that its success is depended on the existence of an integrate planning which will include provisions for all the participants offering an equal and fair ‘social behaviour’ towards the parts of the population that have particular characteristics of special needs. In this context, it has been stated that ‘it is important to recognise that low-income households are a significant proportion of the population’ (Housing Challenge, 2006). Moreover, in accordance with a survey presented in the above professional site (Housing Challenge, 2006) it has been found that ‘the statistic of "average wage" is heavily weighted towards high-income earners; if nine people earn £100/wk and one person earns £1100/week, then the average wage is £200/wk but nine out the ten people wouldnt think so whereas the meridian wage, which marks the boundary for 50% of the population is much less, but is rarely quoted as in 1988 when 62% of households earned below average income and 22% earned less than half the average income’. The above statistics show that the behaviour of the public tend to be differentiated in accordance with the current financial and social conditions and the level of development of the local market. Social housing capital programmes In order to face successfully the problems related mostly with certain parts of the population and to ensure the equality in the relationship between the state and the public, the government decided to introduce a series of capital programmes related with the social housing. These programmes will be financed (DCLG, 2006) ‘partly from their own resources and partly from resources provided by Central Government while the Local Authority Housing (LAH) Division will be responsible for policy development on housing capital issues and managing the annual resource allocation process’. It should be noticed that ‘the resources allocated to each LA depend on indices of the relative need for housing capital expenditure and assessments, made by Government Regional Offices, of authorities’ performance, relative to others in the region, in delivering housing and their strategic housing role’ (DCLG, 2006). This means that the structure and the operation of Local Authority will not be stable throughout the years but it will be revised in accordance with the changes made in the finance and social environment of a specific region. The above strategy seems to be supported by the views of Marsh 2004, 7) who stated that ‘if a commitment to the policy goal of combating social exclusion is not to be an open-ended task of indeterminate magnitude it relies on having some idea of the size and nature of the problem of social exclusion; yet, vagueness in the way the concept has been used means that uncertainty exists at a fundamental level; similarly there is no consensus over what people are being excluded from; rather there is a diversity of views--but frequently authors remain silent--regarding how we should understand not excluded’. The above statements of Marsh prove that the planning and the application of a housing finance strategy is not an easy task as there are a series of parameters that can intervene in the relevant procedure changing its result. For this reason, local authorities should be prepared in advance for any possible unexpected turbulence in the finance and social sectors of local societies. The introduction of the Single Capital Pot for all capital allocations (including Housing). The measures introduce by stated regarding the finance of the housing sector include the Single Capital Pot (SCP) i.e. ‘the capital resources, including borrowing approvals and grants, allocated to authorities by central Government each year and which are now channel led through the SCP, allowing council’s maximum flexibility in the way they use their resources meaning that resources provided for one service can, at the authority’s discretion, be used on another service if that is the greater investment priority at the time’ (DCLG, 2006). The above measure could offer to the local councils the chance to be developed faster by managing more effectively their capital programmes and by delivering their services faster reaching a high level of financial performance. Introducing new regional arrangements for allocating housing capital resources and more robust arrangements for option appraisals. In accordance with the measures introduced by current legislative initiatives, the local authorities will be changed as of their structure and their nature of operations. More specifically, ‘each new Regional Board will advise Ministers on strategic investment priorities in their region, with special arrangements applying to London, South East and East of England; on the basis of their advice, resources for major new development in each region will be allocated to the Housing Corporation to administer, whilst resources for improving council stock, for supporting renewal of privately owned dwellings and for smaller scale new build will be allocated to local authorities or other agencies’ (DCLG, 2006). The increase of the political and financial power of the local authorities (as described above) will help local housing markets to achieve a high rate of growth based on a continuous support of the Central Government in all of their operational activities. IV. Conclusion The development of the local housing market in UK is stable although there are periods when significant turbulences cause delays and losses for the participants. As of the mode of the behaviour of the public in the above conditions, it seems that people around the country continue to choose to acquire a property. It should be also noticed that although they may have negative equity they keep on making their mortgage payments regularly. This detail is mentioned in order to prove the importance of housing as a necessary element of the personal development. In this context, the research of Chinloy (1995, 407) showed that ‘both income and wealth appear to enter the households decision-making while income is shown to be a significant determinant of the decision to default, with liquidity acting as a constraint but as real income is reduced, the risk of default rises’. The above issues are been mentioned as they should be included in the elements examined by the legislator before starting the planning of any housing finance policy. Moreover, Wallis (2004, 72) has found that ‘the use of past forecast performance as an indicator of likely future performance is like any other forecasting problem, now addressed to measures of the dispersion of forecasts, but subject to the same difficulties of forecast failure as point forecasts’. This means that the use of forecasting as a tool for the design of a specific housing finance policy can be proved significant but it has to be based on certain criteria taking into account the current trends of the national and the local markets. In UK, the Government will proceed to the provision of ‘an extra £400 million for investment in local authority-owned housing, an amount which is being added to £60 million of existing resources, and put into a special pot of £460 million, available to authorities which have set up arms-length management companies and demonstrated excellence in their performance under the new Best Value regime’ (DCLG, 2006). The above initiatives of the British Government are really helpful towards the development of the local housing markets and the only issue that should be examined is their application in the particular areas of England taking into account the character and the level of development of each region. References Barrell, R., Kirby, S., Riley, R. (2004). ‘The Current Position of UK House Prices’ National Institute Economic Review, 189: 57-62 Barrell, R., Kirby, S., Riley, R., Weale, M. 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(2006). ‘The Housing Market and Government Policy’ National Institute Economic Review, 195: 4-9 Read More