Privatizing Housing: an Assessment of U.K. Experience

Privatizing Housing: An Assessment of U.K. Experience

Christine M. E. Whitehead London School of Economics and Political Science

Abstract

This article describes the way in which the government of the United Kingdom has implemented the policy of privatization with respect to housing since coming to power in 1979. It details the main elements and diversity of the policy; it evaluates the results in terms of tenure change, allocation of housing services, prices, and investment; it examines the emerging problems of affordability and access; and it suggests that there have been considerable benefits from both privatization and deregulation in terms of greater efficiency and responsiveness.

However, it also stresses the extent to which government involvement in housing, although undoubtedly shifting away from direct provision, has reemerged through both income-related and supply subsidies to other landlords. The article concludes that in the United Kingdom, unlike the United States, the provision of adequate housing for all is still regarded as a government responsibility.

Introduction In many ways, the United Kingdom is the country from which the closest parallels with the United States might be drawn. The basic structures of the legislative framework in terms of how property rights are defined, the development of the taxation system, the emphasis on markets for allocating resources, and even the general approach to social values stem from similar sources—at least compared with other countries represented in this series of lectures. Neverthe- less, many of our housing experiences, especially in the second half of the 20th century, have been quite different. To a significant degree, these differences result from our different perceptions of the nature of housing. These differences are clear even in the generality of political rhetoric. In the United States, the preamble to the 1949 Housing Act states, for instance, that the national housing goal is to provide “a decent home and suitable living environment for every American family.” The equivalent in the U.K. context is the 1945 White Paper (Ministry of Health 1945), which states that “the 102 Christine M. E. Whitehead

government’s first objective is to afford a separate dwelling for every family which desires to have one.” The distinction is clear: In the first case, it is a general aspiration; in the second, while there is no suggestion that the objective will be achieved, it is clear that the responsibility to provide the housing lies with the government, although the choice of a separate dwelling lies with the individual family. The history of implementation of these general goals is also very different. In the United States, commentators argue that the stated objectives have been seen as little more than congressmen talking to themselves and that there is no true political will to generate viable policies. On a more fundamental level, in the United States, housing has always been regarded as a private good that should be bought and sold on the market, with tax relief for investment, regulation of some of the principal actors (especially in the field of finance), and some income assistance to make housing more affordable for poorer households (Grigsby 1990). In the United Kingdom, however, throughout the postwar period there has been political agreement that housing should be regarded as a social, and indeed a merit, good (Cullingworth 1979; Whitehead 1991). In other words, it has been generally accepted that it is the government’s responsibility to ensure that the objective of a decent home for every family is achievable and that government funds are made available to achieve this aim. As a result, general aims have been developed into more specific and meaningful goals. The Housing Policy Review published in 1977, for instance, started by reiterating this general aspiration: “The Government believe[s] that all families should be able to obtain a decent home at a price within their means” (Department of Environment 1977). This general objective was then broken down into eight distinct elements, including standards, the balance between new investment and rehabilitation of the existing stock, housing costs, special needs, and tenure choice. The review also specified a time limit of a decade in which to attempt to achieve these goals. Perhaps most important, U.K. policy has always recognized that acceptable housing standards cannot be achieved unless the housing provided is affordable for the households concerned. Dif- ferent parties have placed different emphases on how to do this— the Conservatives putting more emphasis on choice and the Labour party putting more emphasis on public provision—but there remains a basic agreement that it is the government’s Privatizing Housing: An Assessment of U.K. Experience 103

responsibility (Department of Environment 1977, 1987). This is not to deny that housing should be provided by the market when the result is adequate standard housing at affordable prices—as in the United States with generous tax relief and relatively tight regulatory controls—but it should be provided and allocated by government to those who cannot achieve acceptable standards, either because of lack of income or because of lack of market power. What has happened since 1979 is that the government’s view of the nature of housing has been changing rapidly from seeing it inherently as a social good to seeing it as a private good where there are important market failures and distributional problems that must be addressed (Whitehead 1983, 1984). As a result, policy has been turned upside down with the emphasis shifting from public to private provision, from directly allocating adequate housing to those who cannot afford it to increasing choice, and from directly ensuring that rents are affordable to the vast majority of households to the provision of income-related housing benefits for those who cannot afford cost or market rents. This shift in basic policy attitudes about housing has evolved partly because of rising incomes—and therefore both a wish for higher standards and greater freedom of choice on the one side and greater overall investment on the other. However, it has mainly resulted from a change in ideology away from an emphasis on administrative control toward a view that public provision is inherently inefficient and unresponsive to demand and that greater productivity and consumer satisfaction can be achieved only through privatization and liberalization of markets (Veljanovski 1987). On the surface, this view is similar to the one held in the United States. Yet the underlying emphasis remains very different because the change in attitudes concerns the most efficient way of achieving given goals, rather than the nature of these goals. The Conservative government’s attempt to change basic attitudes with respect to the role of the state was perhaps the fundamental attribute of Thatcherism. The whole idea of large-scale privatization was conceived in the context of housing policy and was only later applied more widely to nationalized industries and the social services (Forrest and Murie 1988; Ray, Mayer, and Thompson 1986; LeGrand and Robinson 1984). Privatization made Thatcher world famous and has been applied across the world—notably in developing countries and in the suggested reforms for Eastern Europe. But at home, especially in the 104 Christine M. E. Whitehead

housing field, many commentators saw it as a move toward American-style policies and American-style problems (Maclennan and Williams 1990). U.K. commentators, especially on the left, are therefore inclined to regard some of the aspects of the situation in the United States as an awful warning about what might happen in the United Kingdom in the 1990s (Ball, Harloe, and Martens 1988; Forrest and Murie 1988; Merrett 1991). Even so, there are undoubtedly lessons to be learned in both directions. The aim of this article is to provide an overview of the ways in which the Conservative government has restructured the housing system in Britain with respect to provision, allocation, and pric- ing, and particularly the role played by privatization in that restructuring. To do so it is first necessary to provide some background about the situation in 1979. The next three sections concentrate on the Conservative government’s objectives with respect to privatization and housing; the mechanisms by which the policies were implemented; and the results to date. The conclud- ing section presents some lessons for the United States based on both negative and positive findings with respect to U.K. policy.

The policy framework in 1979 In 1979, all sectors were highly regulated and tenures were very strictly de1ineated.1 Most households were owner-occupiers (see table 1), but more than 30 percent of the stock (and indeed over 70 percent of the rented stock) was owned by local authorities; about 2 percent was owned by nonprofit housing associations, leaving about 12 percent that was rented from private landlords. The main constraint on access to the owner-occupied sector lay in the way the finance market operated. Mortgage finance was provided by specialist retail finance institutions that supplied funds at below-market interest rates and therefore could pick and choose their mortgagors. Funds were rationed by income, the security of that income, wealth in terms of the capacity to provide a down payment, and type of dwelling. The relationship of these institutions with the central government was fairly close,

1 For a detailed description of housing conditions, see the chapter on housing published annually by the Central Statistical Office in Social Trends. See also the Annual Report published by the Department of Environment for the first time in 1991. See Whitehead (1989a and 1990) for a brief description of the institutional, regulatory, and financial framework and of the changes that have taken place during the decade. Privatizing Housing: An Assessment of U.K. Experience 105

Table 1. Housing Stock by Tenure, 1979 (Great Britain)

Units Percent of Percent (m) Total Stock of Rented Stock Owner-occupied 11.5 55.3 Rented 9.3 44.7 Local authority 6.6 31.5 71 Housing association 0.4 2.5 5 Private landlord 2.3 11.0 25 Total stock 20.8 100 100 Source: Department of Environment, Housing and Construction Statistics. sometimes involving agreeing on interest rates as well as imple- menting policies to assist marginal buyers. The tax framework provided (and in the main still provides) tax relief on mortgage interest up to £25,000 and did not impose either income tax on imputed rental income or capital gains tax on the principal home. In addition, within the general finance market small investors had a very limited range of other opportu- nities; investing in owner-occupied housing was therefore by far the best investment opportunity available. As a result, almost anyone who could afford owner-occupation and could overcome the capital constraints chose to become an owner-occupier. How- ever, many households that in a competitive market would have been able to afford to buy were excluded through mortgage rationing. The local authority sector was the main source of social housing and was wholly funded by public sector finance. Local authorities were empowered to borrow both to build and to improve existing stock and were provided with large-scale subsidies to cover the difference between those costs and affordable rents. Rents were restricted to those necessary to cover costs net of these subsidies. Local authorities had the power to allocate their property as they wished, usually taking into account current housing conditions (and location) and the household circumstances of the appli- cant. They also had a statutory duty to house homeless families and other vulnerable households. In many areas they acted as a near-monopoly provider of rented housing, especially because they usually had allocation rights to the other main form of social housing—that provided by housing associations. 106 Christine M. E. Whitehead

Housing associations are nonprofit organizations that receive capital grants from the government to build and improve housing to be rented at an affordable price to those in need. Rents in 1979 were set by “fair rent” principles by which rent officers estimated what the rent would be in the absence of a shortage. Grants then covered the difference between the capital cost and the capital that could be serviced from these rents net of running costs in the first year of operation. Rents in all parts of the social sector were thus far below the cost of provision and in most cases the quality of what was available was relatively high. In the case of housing associations, most dwellings were either new or fully renovated. In the local authority sector, there was a growing problem of disrepair and, at least in some mainly inner-city urban areas, the existence of difficult-to-rent estates. In general, tenants were receiving good-quality dwellings, most of which were houses, at far below market rents. If households were unable to afford owner-occupation or to gain access to local authority or housing association accommodations, their only option was the private rented sector. This sector had been declining almost continually since 1939, in part as a result of slum clearance but also because landlords had sold their prop- erties to either the owner-occupied or (to a lesser extent) the local authority sector. Of the remaining stock, perhaps one-quarter was accommodations linked to employment, while an additional 60 percent was rented to tenants who had been in the sector for many years and whose tenancies were subject to rent control and security of tenure. This left perhaps 2 percent of the total stock in the easy-access private rented sector, much of which was technically covered by the rent acts, but which in practice was normally perceived by both sides to be outside regulation (Todd, Bone, and Noble 1982). Those in the controlled part of the sector usually obtained poor-quality housing but at low rents, while those in the easy-access part usually paid high rents for small units, often with shared facilities. Finally, households receiving supplementary benefits (in Ameri- can terms, those on welfare) and those working for low wages were eligible for income-related assistance to help pay their rent. As a result of all these measures, average expenditure on housing in relation to income was between 9 percent and 15 percent of income; very few households spent more than 20 percent of their income on housing (Department of Employment, annual survey). This proportion is considerably lower than in the United Privatizing Housing: An Assessment of U.K. Experience 107

States, with its largely unregulated and unsubsidized stock (although it must be remembered that the ratio relates only to rents and does not include either services or local taxes). In this context, it is worth noting that U.K. housing policies are national rather than local in character. One important aspect of these policies is that those dependent on the government for their income receive it net of housing costs. As a result, housing does not bear more heavily on households living on income support in high-cost rather than low-cost housing areas. Another relevant aspect is that local authorities had started to act more and more as agents of the central government in housing provision. Their own powers to invest were curtailed considerably during the 1970s, but at the same time they were given greater statutory responsibilities to house the homeless. How- ever, there were growing worries about the difficulties of controlling public expenditure on housing, especially as the proportion of local authority costs covered through rents declined in the face of inflation. It is obvious from this quick sketch that the U.K. housing system in 1979 was extremely constrained. It was also very generous in many ways to those able to gain access to accommodation in the majority tenures. Those with income and wealth gained from preferential access to owner-occupation, while those in the social sector obtained relatively high-quality housing at low rents. Perceived housing problems were concentrated mainly in the private rented sector, both in terms of adequate access to housing and value for money. There were also more basic uncertainties about the growing size of the government’s financial commitment and about the overall inflexibility of the system.

The conservative government’s privatization policy Objectives When the Conservative government came to power, its privatization policy had hardly even been specified. The only element included in its manifesto was the right to buy, that is, the sale of local authority housing to sitting tenants. During the last decade, the fundamental principles behind the policy of privatization have become far clearer, so that it is possible to distinguish at least seven general aims, all of which are relevant to housing (Forrest and Murie 1988; Vickers and Yarrow 1988; Whitehead 1988). They include the following: 108 Christine M. E. Whitehead

1. Controlling inflation and in particular reducing the public sector borrowing requirement, which was seen by the Conserva- tive government as the macroeconomic control mechanism. This policy depended on the realization and the restructuring of publicly owned assets and on increasing revenue from assets remaining in the public sector, as well as on direct reduc- tions in spending and therefore borrowing. It also did not take into account the extent to which privatization and deregulation would lessen government control over macroeconomic vari- ables, especially private sector borrowing against the value of housing assets.

2. Increasing productive efficiency. Here the argument is straightforward: Market incentives and constraints are directed at maximizing profits and therefore at minimizing costs. Adminis- trative mechanisms are far less effective at controlling these costs, because managers and policy makers often have other objectives, because property rights are ill-defined, and because the penalties for failure are usually smaller. It was believed, therefore, that transferring assets to the private sector would ensure that unit costs of production and management were reduced.

3. Extending consumer choice. Privatized suppliers are thought to be more likely to respond to what consumers want in terms of the type of product, its quality, and its price, because responsiveness helps them achieve higher profits or at least sur- vive. The managers of publicly provided services tend to be supplier- and employee-oriented rather than consumer- oriented, not least because they have a captive market.

4. Reducing the dead hand of government. Governments tend to impose inflexible administrative rules that may be inappropri- ate for efficient production. In particular, because government wishes to control the borrowing requirement for the public sector, it sets borrowing limits that are unrelated to appropriate investment criteria. Housing investment is therefore generally constrained below that which would satisfy demand at prices the government regards as appropriate. Governments can rarely avoid day-to-day involvement when they face more general difficulties. Thus, for example, in times of inflationary pressure, they have controlled social sector rents as part of wider anti-inflationary policies. Such interventions mean that managers have limited control and therefore little incentive to be as efficient as possible. Privatizing Housing: An Assessment of U.K. Experience 109

5. Applying more appropriate investment criteria and ensuring that decision-makers face the true cost of that investment. Within the public sector, the dilemma is that the finance market assumes that ultimately the government will bail out organizations that fail to achieve the required rate of return, so the interest rate does not reflect the true risks involved. Priva- tization means that owners and managers have to raise their own financing at the market’s risk valuation and that they have to bear the costs of their own decisions. Such decisions should improve the allocation of resources.

6. On a political level, extending the idea of a property-owning democracy with the aim of developing a more stable society. This idea included redistributing wealth and income away from communal ownership by the whole society to ownership by individual members, so that they had more control over that wealth. Such redistribution is also seen as increasing these members’ stake in society and therefore their wish to maintain that society.

7. Providing an incentive to vote Conservative to maintain the value of that property. Arguably, if housing ownership does modify voting behavior, this effect would be concentrated particularly in marginal constituencies where a large proportion of the vote comes from younger family households able to purchase their homes for the first time. Clearly, privatization policies do not stand alone. Most important, to meet the economic objectives listed under items 1 through 5, privatization must normally be accompanied by liberalization. Deregulation and increasing competition are seen as the mechanisms by which monopoly power is constrained and incentives are established to ensure that suppliers provide what consumers demand at the true cost of production. Without such liberalization, the outcome could be only a transfer of power from the public to the private owner. Privatization was also linked with the distributional objective of targeting subsidies more effectively to those in the greatest need, while simultaneously increasing consumer sovereignty (Hills et al. 1990). This goal was to be achieved by cutting back rental subsidies, available to all those who gained access to the social rental sector, and by substituting a much greater reliance on income-related support. In principle, these subsidies could be as generous in total as the baseline subsidy system. In practice, however, there was undoubtedly pressure to reallocate public 110 Christine M. E. Whitehead

resources away from housing to other higher priority spending areas. What the government stressed was a different sort of equity: Pri- vatization of housing would give people who had been denied the choice of owner-occupation by past controls, particularly in the finance market, the rights that they had missed. This policy would make for equity between those buying and those who had already managed to buy (Department of Environment 1987; House of Commons, Environment Committee 1981a). Only later did the government turn to privatization policies aimed at improving conditions for those remaining in the rented sector.

Mechanisms At its simplest, privatization can be seen as simply the transfer of ownership from the public to the private sector. In fact, over the years the idea of privatization has become far more complex, so that it is necessary to distinguish at least four different elements: the transfer of residual rights (i.e., the ownership of the relevant equity); the transfer of management of the assets, which may introduce certain market incentives without necessarily transferring equity; the transfer of finance, by which the private sector provides all or part of the necessary funds for investment, management, and ownership; and the transfer of risk, by which the private sector takes on the management of the risk involved and pays the market price for finance arising from that risk. Early privatization policies were very straightforward, in part because privatization was a new policy and there was little under- standing of how markets, particularly the finance market, would respond. As experience was gained and as government encoun- tered different constraints, privatization policies became more so- phisticated and often more partial. In particular, policies that linked public and private initiatives started to develop. Such partial approaches in principle could allow many of the objectives of privatization to be achieved while maintaining the capacity to meet wider social objectives. A listing of the main privatization policies introduced since 1989 is found in table 2. The initial emphasis was undoubtedly on the transfer of ownership from local authorities to the occupiers of that property. When it became clear that there were limits on the extent of such sales and that there was a need for a continuing rented sector, more emphasis was placed on the transfer of ownership to other landlords and particularly to the development Privatizing Housing: An Assessment of U.K. Experience 111

Table 2. Mechanisms for Privatization Right to buy Tenants may purchase their property at a (Housing Act 1980) discount depending on length of residence Right to a mortgage Maximum discount 70% (or £50,000 if lower) Shared Ownership Local authority and some housing (Housing Act 1980 and later acts) association tenants Housing association provision DIY shared ownership Rents to mortgage Sales to other landlords At initiative of local authority (Housing and Planning Act 1986) • Tenant ballot • Valuation by Department of Environment • 100% private finance package • Business plan and contract with tenants • Agreed sale between local authority and purchaser (Housing Act 1988) At initiative of tenants • Tenants may find suitable landlord • Tenant ballot accepted if majority do not say no Private financing for Housing associations expected to raise social housing on average 25% of the costs of new (Housing Act 1988) developments Implicit use of deferred interest finance to increase program Private management for Estates action social housing Tenants charter (Housing Act 1988 and Complusory competitive tendering current consultation) Local authority enabling role Sales of land to housing associations (Housing and planning acts and “Planning gain” for affordable housing circulars) Joint ventures

of the nonprofit housing association sector. This change in emphasis entailed a shift in policy so that such associations were no longer funded wholly by government and so that private financing was introduced into the association movement. Even so, the vast majority of social rented housing remains in the local authority sector; thus, the current emphasis is on introducing 112 Christine M. E. Whitehead

private management into these local authorities. Finally, the power of local authorities to initiate new developments was heavily restricted and their housing role in this context was limited to enabling other suppliers to provide social housing. In addition to the growing number of privatization policies, there have been many complementary measures. Some of these were equally or more important in their own right and were aimed at changing the wider context in which housing was only one important element. These included liberalization, particularly with respect to the general finance market, simplification of the tax system, greater targeting of subsidies toward those with the lowest incomes, and reduction of the political powers of local authorities, especially in the urban areas where such authorities were usually controlled by the Labour party. Liberalization policies were absolutely necessary for the success of privatization. In the housing finance context, it meant that more households were able to obtain private sector mortgages and therefore enter owner-occupation directly (Boleat and Coles 1987). It also meant that the right to buy could be financed by the private sector thus allowing public expenditure to be reduced and the housing debt of local authorities to be paid back. Liberalization was also applied to the independent rented sector in relation to both rent controls and security of tenure (Whitehead 1989b). In the social part of the sector, housing associations were given the power to set their own rents—a necessary condition before large-scale borrowing from the private finance market could be viable. This change also freed up the profit-oriented part of the sector, so that commercial landlords could set market rents under specified contractual relationships. Thus was established the possibility of a market response to demand for rented housing, although there are continuing problems arising in particular from the political risk that a Labour government would reintroduce rent controls and increase security of tenure. Simplifying the tax system had no direct effect on the privatization policy since housing-specific tax benefits remained in place. However, reducing income tax rates decreased the value of these benefits, while extending tax breaks to certain financial assets increased the range of investments available to the individual and put housing more on a par with these other assets. Thus, although the incentives to enter owner-occupation remained, the incentives to increase investment in housing declined. Privatizing Housing: An Assessment of U.K. Experience 113

Targeting subsidies involved increasing local authority rents and thus cutting general subsidies (Hills et al. 1990). Tenants with low incomes were protected from these increases, just as those in the independent sector were protected from the effects of deregulation by their eligibility for housing benefits that pay the cost of any increase in rent for those receiving benefits (although the subsidy is scaled back rapidly as incomes rise). Thus, in principle, no low-income tenants suffered from these changes; those with incomes just above housing benefit levels, however, were made considerably worse off. Finally, public expenditure was reduced, not only by these cutbacks in subsidies to local authorities, but also by privatization sales, by the introduction of private finance, and by the restric- tions placed on investment by local authorities. This last is tied to the emphasis on privatization that was forwarded not only by incentives to change tenure but also by stronger and stronger constraints over the capacity of local authorities to act as direct providers of housing.

Specific measures In the early 1980s, privatization was regarded as synonymous with the right to buy. Under this policy, all who had been tenants in public housing for more than three years had the right to buy their property at a discount, dependent on their length of residence in the council sector. They were also given the right to a mortgage if they and their families met minimum standards. Initially, there were problems in ensuring that local authorities processed applications expeditiously. Contractual aspects such as maintenance agreements also had to be developed. Once under way it was seen as a very successful, vote-winning policy by which more than 1.3 million households have been empowered to purchase their own homes. The minimum discount was 30 percent of the valuation price, increasing to 70 percent for some types of apartments. The average discount has turned out to be about 50 percent. Most of those who have bought dwellings have been very pleased with their decisions (Glendinning, Allen, and Young 1989; Kerr 1988). It was soon clear, however, that the right to buy could not enable all tenants to purchase. Many households could not afford even the discounted price. Many others were either pensioners or outside the labor force and could not qualify for a mortgage. 114 Christine M. E. Whitehead

Finally, even with generous discounts, more than half of all tenants did not want to buy. One way to move forward was to introduce shared ownership by which purchasers could buy a proportion of the dwelling with a mortgage and rent the remainder, at least until they were able to “staircase” (i.e., step up) to 100 percent equity (Allen 1982). Doing so was cheaper than a full purchase because the rent charged on the residual element took account of the supply subsidy available to either local authorities or housing associations and because purchasers were also eligible for housing benefits on that rental element. The program was initially restricted to new investment by local authorities. Later it was applied to investment by housing associations and to existing local authority dwellings. Currently, a new form of do-it-yourself shared ownership is being introduced by which association tenants find a suitable dwelling on the private market and ask the association to purchase it on shared ownership terms. Such a purchase not only allows existing private sector dwellings to be transferred into partial social ownership, but also releases a fully subsidized dwelling for a household in greater need. In the mid-1980s the government turned its thoughts to what to do with the remaining stock in the council sector (Department of Environment 1987). First, it introduced the possibility of allowing local councils to initiate large-scale voluntary transfers to other landlords, particularly to housing associations. Later it ex- tended this initiative to either tenants or potential landlords. There were to be constraints; in particular, a suitable majority of tenants had to agree to the transfer, while the government had to agree to the purchase price (which could be negative). The main requirement was that such transfers be financed wholly privately, meaning that the new landlord had to be able to raise very large amounts of funding on the market on the basis of future cash flows (only possible once rents in the independent sector had been freed up by the 1988 Housing Act). So far 16 such transfers have occurred (accounting for about 85,000 units), almost all in the form of management buy outs where the local authority sets itself up as a housing association (Whitehead 1993). Most transfers have been by relatively small- scale authorities and of relatively good-quality housing. All have involved the transfer of the authority’s entire stock to one owner. As yet, individual estates have not been sold off; nor have tenants been directly involved in purchasing the equity. As a rule, a near-monopoly by local authorities has been replaced by the Privatizing Housing: An Assessment of U.K. Experience 115

same group of people managing the property, but within a rather different set of rules determined by contractual arrange- ments and by the constraints set by private financiers. Because the Conservatives won the 1992 election, it was thought that there would be a rush of such transfers, but there are reasons why the process may turn out to be slower than predicted. First, and most important, are the limitations placed on the process by the private finance market, which currently views investment in the social rented sector with considerable uncertainty, thus resulting in a significant risk premium on the price of finance (European Capital Company Ltd. 1991; McIntosh and Utley 1992; Pryke and Whitehead 1991). The amounts that would be required are very large, perhaps as much as £2 billion annually. Second, the government has signaled its intention to limit the size of individual transfers to generate a larger range of landlords. As a result, existing associations may take over particular estates or the tenants may set up cooperatives, but these approaches raised many other problems in relation to contract specification, to raising private funds, and simply to determining what is feasible within the current legislative and fiscal environment. Finally, the government has begun to recognize that it may simply be replacing implicit price subsidies, through historic cost rents, with explicit income-related subsidies that must be paid for through public expenditure. Privatization goals may be achieved, but at the expense of other more immediate objectives. A different privatization mechanism is the introduction of private finance into normal housing association funding (European Capital Company Ltd. 1991; Pryke and Whitehead 1991). Hous- ing associations have always been technically in the private sector, but they receive large central government grants to enable them to provide additional accommodations at affordable rents, and they are heavily regulated through the Housing Corporation. They have therefore acted as public sector agencies. Since 1988, to introduce market incentives into their operation and to increase the output from a given level of public expenditure, the government has required them to raise an average of 25 percent of their funds on the private market. Moreover, in setting grant rates, the government assumes that funds will be raised on deferred interest loans to keep initial rents down. The problems with this approach are obvious. To 116 Christine M. E. Whitehead

ensure both that private finance is not counted as public expenditure within treasury rules and that associations take into account the risks they run, the government will not guarantee this financing. The private market is uncertain about the value of the assets and the risks involved because of the property rights that tenants have (rentals are made on assured tenancy terms that give tenants rights to continuing security as long as they can pay the rent), the fact that two-thirds of tenants receive housing benefits and so depend on the government for their rent, the complex nature of these hybrid organizations, and the uncertainties of the regulatory framework in which they operate. As a result the private market charges a risk premium resulting in rates well above the treasury rate of interest. At the present time, wholesale market issues are trading at some 170 basis points above the London Interbank Offered Rate (LIBOR), whereas the best established intermediary (the Housing Finance Corporation) has only an implicit A rating with the agencies. The market is also loath to provide deferred interest loans or loans for shared ownership schemes. So far, the money has been forthcoming both for new developments by existing associations and for large-scale voluntary transfers. However, the number of players remains limited and there is a very real fear that the market may dry up once the economy revives, at least in terms of providing adequate funds at a price that will produce acceptable rent levels in policy terms. The government is moving toward a rather different form of partial privatization—the introduction of private management into local authority housing (Department of Environment 1992). The main constraint here is the lack of an existing large-scale private market that can be drawn on to enable government to introduce compulsory competitive tendering for housing management, as they already have for many other local services. There will probably be significant difficulties initially in specifying standards effectively, in ensuring tenant participation, and in controlling costs as aspirations rise. Other initiatives have included the introduction of subsidies to improvement, especially of run-down estates dependent on tenure diversification and involvement. Tenant charters, which emphasize the potential for tenant involvement in management and decisions, have been introduced. These ideas are in their infancy, but significant progress can be expected during the next few years. Finally, as local authorities have lost their direct investment role (except with respect to improving existing dwellings), their role Privatizing Housing: An Assessment of U.K. Experience 117

as enabler in the provision of affordable housing has become more significant. This role involves two main powers: (1) the sale of the local authority’s own land (especially in urban areas where local authorities own much of the land available for development) at below-market prices to make investment possible (again involving the restructuring of public sector assets built up over many years), and (2) the organization of the land-use planning system to ensure that some of the benefits of permitting development go into the provision of housing. In addition, the local authorities may be involved in large mixed- development projects that include some form of cross-subsidy to housing (Audit Com- mission 1992; Royal Institution of Chartered Surveyors 1992). This approach owes much to the United Kingdom’s under- standing of how such powers are used in the United States—the major difference being that in the United Kingdom there is no co- herent body of law for enforcing such contracts and each must be negotiated separately in an environment that historically has regarded planning gain as limited to investments necessary for the development to take place. What started as a relatively simple policy concentrating on the sale of local authority housing assets to their occupiers has become a highly complex range of instruments, all of which inter- act to achieve, at least in principle, greater choice for consumers, prices more in line with costs, and a better utilization of the stock, but not in general higher levels of investment in housing.

Housing outcomes When assessing the outcomes of these policies it is necessary to stress two factors: The different strands of the privatization policy form part of an overall housing strategy in which it is not normally possible to say exactly which outcomes arise from which strand; and to a significant extent outcomes arise from more fundamental relationships—such as changes in the distribu- tion of income and in the health of the wider economy—as much as from housing-specific policies. At least at this stage, one can do little more than describe and, to some extent, evaluate trends. The most obvious outcome is the very large change in tenure structure (table 3). From 1979 to 1990, the number of owner- occupiers increased by almost 4 million, compared with about 2.6 million in the decade before. It is clear that even without the Conservative government’s privatization policy, owner-occupation 118 Christine M. E. Whitehead

Table 3. Housing Stock by Tenure, 1990

1979 Change 1990

Owner-occupied Units (m) 11.5 3.9 15.4 % total stock 55.3 + 34 67.2 Rented Units (m) 9.3 – 1.8 7.5 % total stock 44.7 – 19 32.8 Local authority Units (m) 6.6 – 1.5 5.1 % total stock 31.5 23 22.4 % rented stock 71.0 – 2.9 68.1 Housing association Units (m) 0.4 0.3 0.7 % total stock 2.1 + 75 3.0 % rented stock 4.8 + 4.0 9.0 Private landlord Units (m) 2.3 –0.6 1.7 % total stock 11.0 – 26 7.5 % rented stock 24.7 – 1.8 22.9 Total stock 20.8 2.1 22.9 Source: Department of Environment, Housing and Construction Statistics. would have continued to grow throughout the 1980s, probably by at least the rate observed in the 1970s simply because of the cohort effect and the growth in real incomes during the period (Kleinman and Whitehead 1988). It would be facile to regard the difference as being the direct result of right-to-buy sales, which reached approximately 1.5 million during the period. Such an assessment would take no account of the extent of earlier right- to-sell sales by local authorities, which amounted to at least 220,000 during the 1970s. Nor would it reflect the number of households that purchased as sitting tenants in the 1980s and that otherwise would have purchased on the private market, a process that continued in the 1980s but at a much reduced rate. If both these elements are subtracted, the net effect of the right- to-buy policy was probably little more than half the gross total. The other major structural change that undoubtedly enabled large numbers of additional households to become owner- Privatizing Housing: An Assessment of U.K. Experience 119

occupiers was the deregulation of the finance market, which meant that many more households could obtain mortgages from mainstream institutional sources. This change allowed newly forming households as well as others already in private rented accommodations to enter owner-occupation more easily, as well as enabling the right-to-buy program to be financed. As a result, the number of outstanding mortgages increased by almost exactly the same amount as the number of owner-occupiers. Perhaps little more than a third of the increase in owner- occupation in the 1980s can be directly related to the government’s privatization and deregulation policies. What these policies did modify was the source of additional owner-occupied dwellings. In the 1970s the increase in owner-occupation was made possible by new building and by transfers from the private rented sector. During the 1980s, new building in the private sector continued at much the same rate as in the 1970s rather than increasing, as might have been expected given the low level of public sector output. At the same time, transfers from the private rented sector decreased by about half. Thus, right-to-buy dwellings substituted at least in part for new private investment, as well as for transfers from the private rented sector. The decline in the size of the local authority sector is almost wholly accounted for by the right-to-buy policy, together with other individual sales to the owner-occupied sector under low- cost homeownership schemes. Sales to other landlords have only become relevant during the past few years. If these sales continue, the effect will be to expand the housing association sector even more rapidly than in the 1980s when it was the most rapidly growing tenure as a result of the government’s concentration of supply subsidies. In this context, what is most difficult from the point of view of the provision of housing for lower income households has been the continuing decline in the size of the private rented sector, which decreased more than one-quarter during the decade. Most units were purchased by owner-occupiers, but housing associations also purchased dwellings as part of their improvement programs. This decline may have been reversed or at least limited during the past two years as the deregulation aspects of the 1988 Housing Act take effect and the recession has made it worthwhile for some owner-occupiers to rent because they are unable to sell on acceptable terms. Even so, the pressures for decline, in at least parts of the sector, remain (Best et al. 1992). 120 Christine M. E. Whitehead

What is most obvious is that policies have not yet modified the position of the local authorities within the rented sector, where the local authorities still provide almost 70 percent of the rented units. More generally, choices have apparently increased for those higher up the income scale both because of the removal of constraints and through direct subsidies. For those unable to afford owner-occupation, however, choices have become even more limited. The continuing increase in owner-occupation has clearly reflected people’s preferences. In the early 1980s, more than 75 percent of adults said that they wished to be owner-occupiers in two years; by 1989, this portion had increased to more than 80 percent (Council of Mortgage Lenders 1991). The right to buy has been one of the most popular government policies, proving that it is politically acceptable to provide large-scale lump-sum subsidies to a relatively small number of households, mainly on the basis of the luck of past allocation at the expense of the taxpayer and future tenants. The households that have bought have generally had attributes very similar to other first-time buyers, except that they have been older (Glendinning, Allen, and Young 1989; Kerr 1988). As a result, it is possible to see a sort of equity—those who were unable to get into owner-occupation while the finance market was so regulated have now been given the chance to catch up—and been given a subsidy to offset that exclusion. There is no evidence that these households have regretted the change, which is hardly surprising given the size of the discounts. The policy continues to be popular, and the government continues to bring in new ideas to expand choice at the margin between social renting and owning through portable discounts, shared ownership, and rent-to-mortgage schemes. Another success of the right to buy has been how readily it has been financed by the private sector. Originally it was assumed that private institutions might be wary—so much so that tenants were given the right to obtain a mortgage from the local authority. However, this option was found to be unnecessary in a deregulated finance system, and the transfer has been almost wholly privately financed. In retrospect, this is not surprising because the discounts were very large, even compared with valu- ations or market prices, and because what has been sold has mainly come from the better part of the stock. Certainly problems of arrears and foreclosures are not concentrated among those buying from the local authority sector. Privatizing Housing: An Assessment of U.K. Experience 121

Table 4. Changes in Houshold Composition in the Local Authority Sector 1981 (%) 1989 (%)

Household type Large families 11 7 Large adult households 19 12 One adult older than 60 20 27 Gender of householder Male 69 59 Economic activity Skilled 27 17 Semiskilled 16 11 Economically inactive 42 60 Income as percent of national average Economically active 76 56 Economically inactive 88 66 Type of dwelling House 65 61 Apartment 35 39 Source: Office of Population, Census and Surveys, General Household Survey, 1989.

One obvious prediction about the privatization policy was that the local authority sector would become more polarized (Forrest and Murie 1988; House of Commons 1981b). In terms of the household attributes of those remaining, this finding is undoubtedly true (table 4), although one can question to what extent it is a change in timing rather than a structural shift. The right to buy allowed those who otherwise would have missed out to enter owner-occupation. As a result, the proportion of middle-aged households, large families, and large adult households has declined, as has the proportion of those in skilled and even semiskilled employment. This change probably would have occurred in the next cohort as a result in part of easier financing and of more general trends. In addition, the proportion of elderly persons has increased, as has the proportion of nonparticipants in the labor force, especially single mothers and widows. As a result, those outside the labor force now account for 6 of every 10 households. Perhaps as important, those who are working are receiving a far lower proportion of the national average income than at the beginning of 122 Christine M. E. Whitehead

the decade. Those working are in very low paying jobs, while those receiving pensions and other benefits are receiving only basic government assistance and have few occupational pensions or other sources of income. In this context, it is worth noting that a new survey carried out for the Rowntree Foundation showed that very few local authority tenants had any significant savings (Maclennan, Gibb, and More 1990). In household terms, therefore, it is clear that the council sector is becoming far more of a welfare tenure in the sense that those who remain in council housing have a high probability of being outside the labor force and dependent on government support. What is not clear from this analysis is how great the specific effect of the right-to-buy policy is. Very roughly, one can say that it probably transferred about half a million tenants into owner- occupation who otherwise would not have moved from the social sector. Most of these households were traditional social renters in low-income employment. However, unless other more general policies that favor ownership had been reversed, it is likely that this transfer would have happened anyway, but only in the next generation. Moreover, because of the way privatization was undertaken, this shift does not imply neighborhood polarization. In the main, the same people who have always lived in the dwellings are still there or have sold the dwellings on the market to similar, although probably younger, households. What is not clear is what will happen in the longer term. Over time, a concentration of poorer owner-occupiers may build up, but these will probably be households very similar to the original tenants. There may also be greater tenure diversification as housing associations repur- chase property from certain low-income households that face mortgage difficulties. In 10 years, there is likely to be a significant tenure mix in the estates with higher amenities, but polarization by tenure will be even more obvious. The result is a stigma based on tenure (especially because credit institutions tend to regard local authority tenants as being relatively un- creditworthy). Resale values may also be less than for equivalent private sector dwellings, thus allowing more households to afford owner-occupation, but helping to maintain segmentation by location (Forrest and Murie 1991). A much more immediate problem from the point of view of adequate housing for poorer households is the extent to which privatization has reduced both the number of rentals available to social rented housing and modified the type of accommodations Privatizing Housing: An Assessment of U.K. Experience 123

Table 5. The Allocation of Local Authority Housing (England and Wales)

1981–82 1989–90

Allocation of new tenants (%) Homeless 16 28 Waiting list 67 56 Other 11 8 Nonsecure tenancies 6 9 Total 265,000 240,000 % of stock let to new tenants 5 6 Transfers and exchanges 173 168 Total rentals 438,000 407,000 Stock turnover (%) 8 10

Source: Department of Environment, Housing and Construction Statistics. that such households obtain. One obvious outcome is that the better quality and more “private” units have been sold. In particular, the proportion of houses has declined slightly (and the proportion of houses becoming available has declined more). In terms of the capacity of local authorities to house new tenants, the effect has not been significant as yet in terms of numbers (table 5): 240,000 rentals to new tenants in 1989 to 1990, compared with 265,000 in 1981 to 1982. These averages hide important regional differences; in particular, there has been an especially large decline in the numbers of rentals available for family households in London, where access to owner-occupation is also at its tightest (Bramley 1990; Kleinman 1988; Kleinman and Whitehead 1991). A large part of this decline does not result from the right to buy, because most of those tenants would have remained in their homes whether or not they had purchased them, but rather from the cutback in public sector new building that started in the mid-1970s, (Kleinman and Eastall 1989). In terms of rentals, these cutbacks have been offset in part by increasing turnover in the stock, arising from the changing nature of the client group and from the increasing use of dwellings and hotels leased from the private sector to provide short-term accommodations for homeless households, particularly in London. Another major area of concern with respect to privatization has been its effect on housing investment and particularly on new building. In the mid-1970s building by local authorities accounted for almost half of all new output (table 6). By 1990, this proportion had decreased to less than 10 percent. Although both 124 Christine M. E. Whitehead

Table 6. Investment in Housing: New Building—Completions

Housing Private Sector Associations Public Sector (%) (%) (%) Total 1971 54.6 3.0 42.4 351,000 1975 48.1 4.7 47.2 313,000 1979 57.4 7.3 35.3 245,000 1982 71.3 7.5 21.2 176,000 1988 86.2 5.3 8.6 229,000 1990 82.5 8.7 8.8 187,000 Source: Department of Environment, Housing and Construction Statistics.

Table 7. Investment in Housing: Gross Domestic Capital Formation (at Constant 1985 Prices) in Millions of Pounds

Total as Percent of Private Sector Public Sector Gross Domestic Product

1979 9,665 3,615 4.6 1982 8,680 2,282 3.9 1988 12,568 2,549 4.4 1990 9,360 3,100 3.5 Source: Department of Environment, Housing and Construction Statistics. private sector and housing association output rose during the 1980s, these increases were certainly not enough to offset the effect of public sector decline. In addition, output has been far more volatile, because it is more dependent on market factors. Private sector investment (including both new building and rehabilitation of the existing stock) clearly followed the booms and slumps of the 1980s but showed only a limited overall upward trend (table 7). In the public sector, although the new building program almost disappeared and overall investment undoubtedly fell, investment in existing stock did pick up again in the later part of the decade as local authorities recycled some of the capital receipts they had realized under the right to buy into improving their existing stock (Hills 1990). The extent of this restructuring was limited by central government constraints on capital, but in principle could be one of the most important outcomes of privatization not only in terms of the remaining stock activity of local authorities, but also with respect to large-scale Privatizing Housing: An Assessment of U.K. Experience 125

voluntary transfers. For transfers, the prices are set to reflect the need for investment in improvements. In the short term, there has been some difficulty in maintaining expected levels of such investment because of problems with cash flow, but in the longer term projected rent increases together with right-to-buy sales should be adequate to allow such investment to be financed. The important question from the point of view of the provision of new affordable housing is the growth in activity by housing associations (National Federation of Housing Associations 1992). Although the proportion of new dwellings built by associations has risen during the period (table 6), that growth has been en- tirely dependent on government subsidy. During the mid-1980s when the government’s emphasis was on cutting public expenditure and when the financial framework was changing, housing association output fell considerably. The introduction of private finance for new investment since 1988 so far has been approximately £1.5 billion, allowing perhaps 20,000 more units to be built. Because the market does not understand the nature of housing associations and therefore the nature of the risks involved, the process of introducing such private finance has not been painless (Pryke and Whitehead 1991). Early money was raised at perhaps 50 basis points over LIBOR, although only by associations with a very large, unencumbered asset base. This figure rose to 200 to 250 basis points, in part because of the amount of funding required and in part because of changing perceptions of the risks of housing, particularly social housing. The gap has currently fallen back to between 170 and 200 basis points in what might be regarded as a buyer’s market. The risks, however, are real; rental income depends on maintaining the housing benefit program, the costs of which are increasing very rapidly. Government may not always be prepared to allow associations to increase rents and therefore pass the costs back to the government in this way; grant rates are expected to decline, thereby putting further pressure on both rents and unencumbered reserves. These and other related factors suggest that the associations may not be able to continue to raise funds on current terms, especially if their programs were to be significantly expanded. The United Kingdom differs from the United States in that there is no government involvement in guaranteeing private sector debt. There is a regulatory body, the Housing Corporation, that monitors associations very carefully. Registration with the Housing Corporation is seen by the market as a prerequisite for 126 Christine M. E. Whitehead

raising funds at even current interest rates. There is also considerable discussion about how to introduce credit ratings for associations as a prerequisite for commercial credit enhancement. Many associations are pressing for a government guarantee of last resort, but such a guarantee would be contrary to the ethos of privatization as well as raise difficult practical issues with respect to the public sector borrowing requirement. Equally important in terms of the longer term investment program is the extent to which funding for new investment will compete for funds to transfer local authority housing to the independent rented sector. So far there have been only 16 such transfers involving some 85,000 units and roughly another £1 billion. This type of private investment is very different because it involves 100 percent private funding, usually in the form of debt financing to enable management to purchase the equity. The basis of such funding is the cash flow from rentals, much of which depends on the government’s commitment to providing housing benefits. The security is the capital value of the stock, which is reduced compared with open-market prices by the property rights of tenants. If there is a continuous flow of authorities wish- ing to transfer, it is not clear how effectively the finance market will deal with these demands. Certainly the costs will increase for new investment as well as for transfers. The most obvious point to make about these transfers is that, like the right to buy, they do not immediately change housing circumstances. In particular, they do not allow a single additional household to be housed, and they require a great deal of private financing. The benefits have to come from better management and allocation policies (i.e., the greater efficiency of the private sector) and possibly from recycling some of the funds into additional investment. This last possibility seems unlikely because when large-scale voluntary transfers are involved, local authorities are basically getting out of direct housing provision alto- gether, so the funds raised are used to pay off debt or to fund other services and to improve housing access only to the extent that the funds are allocated to help housing associations. The position with respect to the funds realized from right-to-buy and land sales is rather different. In principle, authorities might wish to use these funds to increase provision. In practice, such policies have been heavily constrained by central government and, despite the current short-term incentives to spend, are likely to remain so both because of difficulties arising from the growing public sector borrowing requirement and because Privatizing Housing: An Assessment of U.K. Experience 127

encouraging local authority investment is against the privatization ethic. In any case, the spatial pattern of capital receipts is poorly correlated with the need for such expenditure. Capital restructuring may thus allow greater flexibility and more investment by new landlords in the stock, but it also allows government to withdraw financing from housing, particularly the provision of new housing. The particular emphasis on the right to buy has had adverse effects on incentives of local authorities and tenants alike. It has, to some extent, undermined other low-cost homeownership initiatives, which involve additional investment rather than simple transfer, as well as having some adverse effect on the lower end of the private sector home- building industry. Most important, it is clear that the private market will not fully substitute for the public sector, at least without further large-scale supply subsidies. There is therefore a continuing problem about how additional affordable rented housing is to be provided. In this context, government has recognized that provision by local authorities will remain an important source of social housing for many years to come and is beginning to restructure housing provision within the public sector, first by forcing authorities to operate within cost limits and soon by requiring compulsory competitive tendering for management. This is an interesting development because even five years ago such a move would have been regarded as impossible. However, the ethos of privatization has permeated local authorities to such an extent that most are happy to accept business plans, tenant involvement, an emphasis on efficiency, and ways other than direct provision of meeting le- gal responsibilities. Indeed this change of attitude permeates the whole privatization program. As a result, many of the efficiency benefits appear to be realized during the period of restructuring before actual privatization rather than after the transfer has occurred (Bishop and Kay 1988). One problem, however, is that the change in ethos has brought with it a crisis of confidence in the local authorities with respect to their capacity to run a reasonable service, even though the vast majority of households in the local authority sector are satis- fied with their housing and even though the costs of management and maintenance are as low if not lower than in the independent sector (Centre for Housing Research 1990). Many local authorities feel that they are now so heavily constrained by central government that the best solution is simply to opt out through transfer and confine their role solely to that of enabler. 128 Christine M. E. Whitehead

This change might seem ideal from the point of view of both central government and tenants. Yet there is evidence that such may not prove to be the case. The tension between raising money from sales and providing an incentive for tenants to transfer through higher standards and relatively lower rents is becoming more obvious. Average house prices in the latest transfers are still only about £8,000 per unit, but they generate potential rent increases that in the longer term are sure to be comparable to those being imposed on local authority tenants. Rents for new tenants are already increasing rapidly. It is not therefore as clear as in the earliest transfers that tenants are getting a good buy relative to remaining with their existing landlord. Moreover, as a result of the transfer, central government takes on direct responsibility for housing benefits, whereas if the stock remains within the council sector, some of the cost will usually fall on other tenants. In this context, it is likely that public expenditure objectives may take priority over continuing pressures for privatization of the rental stock. The emphasis on transferring to individual ownership, including shared ownership and rent to mortgage, is likely to remain, but attempts at the radical restructuring of ownership in the social rented stock may be replaced by continuing pressure to raise rents and to generate increasing efficiency within the existing structures.

Emerging problems: Affordability and access The most obvious emerging problems relate to affordability and access. This fact is not surprising in a system where there has been considerable emphasis on introducing market incentives and constraints but where supply is inherently slow to respond. A more fundamental question relates to the capacity of the private sector to generate adequate investment to ensure adequate housing standards at affordable prices and rents. With respect to affordability, housing has become more expensive for everyone in a deregulated and privatized regime. Housing costs as a proportion of income have increased by more than 50 percent during the decade (table 8). Particular problems are concentrated among those just above benefit levels in the rented sector and among marginal owner-occupiers whose circumstances change after taking out the largest mortgage they think they can afford. These problems are evident both in the growing problems of rent arrears in the social sector and of mortgage arrears and repossessions in the owner-occupied sector. Privatizing Housing: An Assessment of U.K. Experience 129

Table 8. Rents and Prices

1980 1985 1990

Dwelling prices (U.K.)£ 23,000 31,876 64,657 Index 1985 = 100 (unadjusted) 70 100 199 Proportion of household income 12 16 19 spent on housing (%) Local authority rents 401 811 1,237 (England and Wales) £ per annum Index 1985 = 100 50 100 153 Proportion of tenants receiving 40 62 62 housing benefits, income support (%) Proportion of household income 9 11 15 spent on housing (%) Retail price index 1985 = 100 72 100 142 Source: Deparment of Environment, Housing and Construction Statistics.

Affordability problems in the social sector arise from an increasing emphasis on reducing supply subsidies while linking rents more closely to capital values in the local authority sector and to net costs in the housing association sector. These rent increases have significantly increased the burden of housing costs for those who are not eligible for housing benefits and who are concentrated among low-paid workers in the sector. The same is true for those in the private rented sector where not only has there been a move to market rents for new rentals, but there have also been pressures to increase regulated rents faster than inflation and to give such rents a closer relationship to capital values than in the past. Those receiving housing benefits are protected from these increases, so most problems are again concentrated among those not eligible for or claiming benefits, mainly mobile households and those in low-paid employment (National Federation of Housing Associations 1992). Rent increases widen the range of the employment and poverty traps (the range of incomes over which the earner keeps only a small proportion of each additional pound because benefits are withdrawn as income rises), as well as the government’s bill for housing benefits. Other government departments such as Social Security, Employment, and the Treasury therefore have an incentive to keep rents down. As a result, although rents have increased in real terms during the decade, they have not increased 130 Christine M. E. Whitehead

as much as was anticipated in 1979. Supply subsidies are still very significant (Hills 1990, 1991). Equally important is the lack of significant investment in the private rented sector in response to deregulation in the 1988 Housing Act. The business expansion scheme has generated considerable short-term interest but involves significant subsidies. In the past two years, most of the interest has been from housing associations and universities rather than from commercial landlords. Only if there is a change in attitudes of financial institutions and potential landlords, which probably can be generated only by further tax or subsidy incentives, can the private rented sector be expected to play a central role in the provision of se- cure long-term accommodation (Best et al. 1992). In the owner-occupied sector, the liberalization of housing finance has increased both borrowing powers and risks of default, raising both the total burden of debt and the real interest rate. Those who have transferred into owner-occupation through right-to-buy, shared ownership, and other low-cost homeownership programs have generally been shielded from the full extent of these cost increases through capital and rental subsidies. It is those who have gone directly into the tougher market environment of the late 1980s, in part because there have been few rental options available, who have found their housing costs most difficult to manage. These households are not eligible for assistance with housing costs unless they become unemployed or qualify for social security. Foreclosures have risen from fewer than 5,000 annually in 1980 to more than 70,000 in 1991 (table 9). The increase in arrears

Table 9. Mortgage Arrears and Foreclosures

Number of Number % of Mortgages % of Mortgages Number in Mortgages Mortgages in of Out- Number % Arrears in in Arrears Arrears standing of Fore- Fore- 6–12 Arrears 6– 12 12 Year Mortgages closures closures Months 12 Months Months Months

1980 6,210,000 3,480 0.06 15,530 0.25 5,540 0.08 1985 7,717,000 19,300 0.25 57,110 0.74 13,120 0.17 1989 9,125,000 15,810 0.17 66,800 0.73 13,840 0.15 1990 9,415,000 43,890 0.47 123,110 1.31 36,100 0.38 1991 9,815,000 75,540 0.77 183,610 1.87 91,740 0.93 Source: Council of Mortgage Lenders, Housing Finance. Privatizing Housing: An Assessment of U.K. Experience 131

and foreclosures reflects both individual aspirations for homeownership and the lack of suitable options in the rented sector. It is also partly a necessary outcome of freeing up the housing finance market. The problem has been particularly severe, because the economic environment changed in the later part of the 1980s to one of high and volatile real interest rates matched with growing unemployment and declining inflation. House prices have declined in money terms for the first time in living memory, so households cannot effectively adjust by trading down. The result has been considerable political pressure to assist those in trouble, not only because the costs of homelessness are so high, but also because foreclosures are themselves increasing supply at a time when the market is in deep recession and because an upturn in the housing market is seen as a prerequisite for growth in the economy as a whole. There has been a rush toward mortgage rescue packages, technically unsubsidized but clearly involving government intervention. There is also considerable pressure to initiate a mortgage benefit scheme for owner-occupiers with a mortgage, similar to the housing benefit available to tenants, to help those who find themselves in unexpected financial difficulty (Ford and Wilcox 1992). There is little evidence, however, that such a benefit would be acceptable to government. In the owner-occupied market, problems of access are simply the other side of problems of affordability. Those who cannot afford owner-occupation, or find themselves in difficulty having purchased a dwelling, add to the demand for social rented housing. Even so, most of those looking for social housing have incomes or income support that leaves them far below the threshold for owner-occupation. In all areas of the country, local authorities and housing associations are reporting growing waiting lists, and in all areas of the country, authorities are resorting to short- term accommodations to meet their responsibilities under the Homeless Persons Act. Homelessness and rooflessness have grown rapidly during the decade (Greve and Currie 1990). Statutory homelessness now ac- counts for nearly 30 percent of all new local authority rentals, squeezing out more traditional tenants (table 5). Moreover, authorities now rely much more heavily on temporary accommodations for these households, thus creating problems for future years (table 10). Government is helping with a range of subsidies aimed particularly at bringing private accommodations into use through housing association management, which might be argued to be the reverse of privatization. 132 Christine M. E. Whitehead

Table 10. Homelessness

Households Accepted Homeless in Temporary as Homeless Accommodations*

1986 122,000 23,000 1988 137,000 32,000 1989 147,000 40,000 1990 167,000 50,000 Source: Department of Enviroment, Housing and Construction Statistics. *Bed and breakfasts, hostels, and short-term accommodations.

Rooflessness, however, is a 1980s phenomenon, arising from the closing of long-stay hospitals and the employment problems of young people, as much as from structural changes in the housing system. But it is very visible—although affecting, by government estimates, fewer than 2,000 people—and government has prom- ised to ensure that some form of housing is available for every roofless person. The government has given additional subsidies mainly to housing associations to provide suitable short-stay accommodations. Housing commentators wonder whether the money could not be better used to provide long-term social housing, but this would be against the ethos of privatization (Todd 1992). If the market is to generate solutions to these difficulties, it must be able to respond both in terms of new building and more effective utilization of the existing stock. The evidence is not particularly encouraging in either case. Private sector home building has been badly affected by recession, and past experience suggests that the industry will find it difficult to respond adequately by expanding output when there is an upturn in demand. Any such increase in demand will therefore have to be offset by rising prices. There has clearly been some response in the private rented sector, but there is little evidence that rates of return are adequate to generate additional investment without subsidies. Nor is the existence of housing benefits to cover market rents enough to ensure a reasonable supply of accommodations for those on the lowest incomes. In the 1990s, we are likely to see an acceptance by government that a large social sector, perhaps with less subsidy per unit, must be maintained, that supply subsidies should be made available to commercial landlords who are prepared to invest in housing and provide accommodations to similar types of households, and that there should be greater tenure flexibility with respect to both dwellings and households. What has yet to be achieved is a subsidy system that generates Privatizing Housing: An Assessment of U.K. Experience 133

suitable incentives to ensure adequate provision, flexibility, and choice.

Conclusion: Lessons for the United States? The most obvious conclusion to be drawn here is that in many ways the United Kingdom seems to be moving toward a system that is far more similar to that of the United States than in the past, in terms of reduced regulation and greater reliance on private provision. Many commentators initially saw these changes as almost wholly bad. Policies were seen as benefiting those who were already relatively well off by expanding owner-occupation, but reducing the capacity of local authorities to help poorer households through local subsidies and pooled historic, costs and increasing the costs borne by private tenants. What has become clear is that the outcome has actually bene- fited many people lower down on the income scale and protected those at the very bottom. Those who have suffered most are those on low incomes who are just above the benefit system and those who would have obtained housing in the social sector during easier times. More generally, some flexibility has been achieved both for those seeking rented accommodation and for those trying to enter owner-occupation, but this has been at the cost of higher prices for almost everyone, as well as greater expo- sure to unexpected changes in the economic environment, particularly interest rate fluctuations and unemployment. In other words, many of the costs of the market have already been experi- enced, whereas many of the longer term benefits have not yet emerged. In this context, the government has found it necessary to protect those at the margin from the worst difficulties; and in so doing it has set up what some regard as an even more complex framework of regulation. What is also clear is that policies such as the right to buy cannot be expected to reach those on insecure and inadequate incomes even with very deep discounts and a strong political commitment. Moreover, by no means do all tenants who could qualify want to buy. After 10 years, only one-fifth of the local authority stock has been sold; the number of rentals by local authorities is stable (as the population housed becomes on average more mobile); and there is growing agreement that additional investment in social housing is required, even if that investment is undertaken by a different set of owners than in the past. 134 Christine M. E. Whitehead

The U.K. experience also clarifies the extent to which privatization policies are not just about transferring ownership from the public sector to the individual. They are about a wide range of in- terlocking policies that aim to improve efficiency and targeting subsidies by introducing private players, whether owners, managers, or financiers. The right to buy, although the best known and the most readily measured, has been only one element in a di- verse and developing strategy. Given these general conclusions, a number of more detailed in- terim findings can be highlighted, although it should be made clear that, at this stage, these can be based only partially on research. First, the shift in emphasis toward privatization does change the ways housing is perceived. It modifies attitudes even within the remaining public sector. Managers now see themselves as providing a service to clients but having a commitment to efficiency and planning as opposed to acting as agents for the tenants. Introducing a business ethos of this type has clear benefits not only in terms of cost but also in terms of the services provided. Second, there is evidence that people are prepared to pay more for their housing when they have some ownership and control. However, there are clear limits to what people can actually afford, and there have been very real problems arising from the lack of mechanisms, such as fixed-rate mortgages, that protect owners from the worst exigencies of their environment. Third, privatization does not have to involve a complete change in ownership with the transfer of all types of property rights. Instead, it may be possible to obtain many of the benefits by simply introducing private finance or private management, or both. Based on evidence from the United Kingdom, acceptable minimum standards for all at affordable prices and rents cannot be achieved without large-scale intervention by the central government. Such intervention may be more efficient if channeled through private or hybrid organizations rather than local authorities, but whatever the conduit it must almost certainly involve significant supply subsidies. Income-related assistance is not enough for at least three reasons: (1) Many households require 100 percent assistance, which is difficult to monitor through income-related subsidies; (2) adequate housing for many people is linked with the provision of a range of other services such as health and community care, which can be supplied more cheaply as a package because of economies of scope; and (3) suppliers are not prepared to provide for the types of household that will Privatizing Housing: An Assessment of U.K. Experience 135

generate large transaction costs at the normal market price. They need additional protection against the risks involved. As a result, it is almost certainly cheaper to assist people through large-scale social ownership together with price subsidies than through market mechanisms, at least in an environment where that social ownership already exists, where it can provide accommodations acceptable to tenants, and where it has some capacity for internal cross-subsidy. This approach does presuppose that there is the political will to meet the objective of a decent home for every family at a price within their means. In other words, it is predicated on a merit good approach to housing as well as a preparedness to redistrib- ute income through housing and housing-related assistance. The fact that supply subsidies are almost certainly a prerequisite for meeting these goals does not necessarily imply that there must be public provision. Within the United Kingdom, the privatization program has only just started to develop the potential for partnership between agencies, both public and private, that undoubtedly exists. At the management level, this partnership can include housing association management of private housing for those with special needs or high transaction costs, as well as private sector management of social housing. It can also involve integrating housing and other social services. In terms of new development, there is clear evidence that the public sector may do better to purchase off-the-shelf from the private sector, but there is also evidence that public partnership may be the cheapest way of introducing supply subsidies, especially with respect to land. With respect to financing, it could easily be argued that the United Kingdom has more to learn from the United States than the reverse, although it is worth noting that a Fannie Mae pro- ject comparing the efficiency of housing finance systems suggests that the United Kingdom was found to be more efficient in deliv- ering mortgage financing on five of six counts (Diamond and Lea 1992). The United Kingdom can undoubtedly learn from the United States about better evaluation of risks in a market environment and about developing insurance markets to cope more effectively with the uncertainties of this environment. A rather different question relates to the development of the market for private finance, both for social rented housing and perhaps for low-cost homeownership. Here the United Kingdom is seeking to operate without a formal government guarantee of any sort. U.S. experience suggests that public sector intervention 136 Christine M. E. Whitehead

has allowed the development of an effective secondary market even in mortgages for lower income households. Without some such mechanism, the costs of financing will be very high. Even so, the market is clearly developing rapidly, and all actors are learning more about what is possible. More important, the difference in attitude toward government intervention in the housing sector between the United Kingdom and the United States remains. The U.K. response to housing problems is still to assume that it is the government’s responsibility to alleviate them and to put pressure on that government to provide the necessary resources. While this ethos remains, the level of government involvement will always be much higher than in the United States, however many private sector mechanisms are introduced.

Author

Christine Whitehead is Senior Lecturer in the Department of Economics, London School of Economics and Political Science, and Director of the Property Research Unit, Department of Land Economy, University of Cambridge.

A version of this paper was presented as part of a lecture series at the University of California, Los Angeles, in January 1992. The author would like to thank the Graduate School of Planning, UCLA, and particularly Professor Leland Burns for all their assistance.

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