The Housing Question No 14: The post-2010 legacy

After 14 years and at least twice as many Budgets, spending reviews and statements, it seems a good time to examine the big picture on what has changed for housing under Conservative-led governments.

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Taxing questions and fiscal fictions

The main beneficiaries of what could be the final Conservative Budget for a while will be owners of more than one home rather than those who have none.

The Treasury claims that the cut in higher-rate capital gains tax (CGT) on residential property sales will ‘encourage landlords and second home-owners to sell their properties, making more available for a variety of buyers including those looking to get on the housing ladder for the first time, while also raising revenue over the forecast period’.

The first bit may be true at the margin for renters who can afford to buy but it could leave thousands of others facing eviction as their landlords rush to sell to take advantage of their tax cut. That will in turn mean more homelessness and increased costs for temporary accommodation for local authorities that are already under severe financial strain.

The likely beneficiaries of the cut were clear enough that chancellor Jeremy Hunt, owner of seven buy-to-let flats in Southampton, felt the need to pledge that he would voluntarily pay the higher rate of CGT if he sells rather than benefit directly from one of his own decisions. However, the measure could also mean a useful saving for many other multi-homed Conservative MPs and the timing will be handy after the election for the sale of homes in constituencies they may no longer hold.  

The second bit will be true in the short term, according to Treasury forecasts of £660 million in extra tax revenue over the next two years as landlords bring forward sales. That temporary windfall could have been spent on homelessness or social housing but instead it will go on pre-election tax cuts even as the total tax burden increases.

The other key Budget changes were also about tax. The abolition of tax relief for furnished holiday lets was long overdue and is intended to boost supply of long-term rentals but may come too late to help renters in tourist areas. The scrapping of relief from stamp duty for buyers of multiple properties follows an external assessment that it had not boosted investment in the private rented sector as intended but there could still be unintended consequences.

Left unspoken, alongside anything for social housing or homelessness this year, were the consequences for the spending review that has been postponed until after the election. Plans pencilled into the Budget envisage a freeze in capital spending and cuts in the budgets of unprotected departments. This ‘fiscal fiction’ is what justifies tax cuts within the chancellor’s fiscal rules but it raises serious questions about the future Affordable Homes Programme (AHP) at a time when the current one has already been badly eroded by inflation in construction costs.

Marketising the social

All of that got me thinking about the long-term legacy of all those Budgets, Spring, Summer and Autumn statements and spending reviews since 2010.

On investment, the Affordable Homes Programme (AHP) might have disappeared completely in the first spending review under the coalition were it not for a rearguard action within the then Department for Communities and Local Government. The creation of ‘affordable rent’ was a pragmatic solution that satisfied the Treasury since it produced more homes for a given amount of government grant. However, rents of up to 80 per cent of local market rents were much less affordable on low incomes and came at the cost of higher housing benefit payments. Affordable housing in market conditions that are unaffordable to a significant proportion of the population has to be paid for from somewhere and a balance struck between capital and revenue budgets, investment and housing benefit.

This has been a recurring theme of the last 14 years, combined with a policy on rents that has lurched from one position to another.  On the one hand, social landlords have been given supposedly long-term rent settlements allowing above-inflation increases to fund improvements and new homes. On the other, a 1 per cent a year rent cut was imposed for four years from 2015 to save money on housing benefit.

These debates were happening against an ideological backdrop in which right-wing think tanks were advocating the abolition of social housing for all but the very poorest. Under David Cameron’s second, Tory majority administration, the second spending review in 2015 saw the balance of the AHP switched to affordable home ownership rather than homes for rent. At the same time, legislation paving the way for the extension of the right to buy to housing association tenants appeared to signal the end for social housing.

After Grenfell and under Theresa May, the balance shifted again. The balance of the AHP shifted back to homes for rent, the overall budget was increased in 2020 and ministers stressed the importance of social housing and social rent. Much of the Cameron agenda had already proved unworkable and now it was ditched. However, social landlords were facing increased costs not just for building safety but also for the decarbonisation of their existing stock and these were only partly covered in subsequent Budgets and statements. There was a sting in the tail of the 2024 Budget for local authorities as it emerged that they would no longer be able to retain all of their capital receipts. On the cusp of the election, completions of affordable homes are falling even as a new spending review and a freeze on capital investment are looming.

Socialising the market

The Conservative fiscal events also include another housing paradox that began in the era of David Cameron and George Osborne. Even as they seemed intent on marketising social housing and slowly withdrawing the state from provision, they were also ramping up state involvement in market housing in an attempt to kickstart housebuilding that had slumped after the financial crisis. This culminated in the announcement of Help to Buy in Osborne’s Budget speech in 2013. Available as a mortgage guarantee for first-time buyers and equity loans for buyers of new homes, the scheme surprised even housebuilder and mortgage lenders with its scale.

From a housing perspective, Help to Buy worked in terms of boosting housebuilding and lending but controversially subsidised the profits, bonuses and dividends of leading developers and has only recently been withdrawn. However, it also represented a significant expansion of the use of off balance sheet financing via guarantees and loans that count as financial transactions capital rather than public spending. As this spread to other schemes supporting housebuilding and Build to Rent, the private sector now accounts for more than half of all government support for housing when loans, guarantees and grants are taken into account. Far from withdrawing from housing, the state is more deeply embedded than ever.

Taking the strain

The same is true, of course, on the welfare side of the housing ledger. Under the previous Conservative government, a housing minister had famously promised that housing benefit would ‘take the strain’ of higher rents triggered by deregulation of the private rented sector and the introduction of private finance for housing associations. Between 1990 when he said that and 2010 when the Conservatives returned to power, the cost trebled in real terms. Alongside the ideology of austerity and the rhetoric about ‘scroungers’ that was applied to the benefits system as a whole, one way of looking at what has happened in housing in the last 14 years is that successive fiscal events have been targeted precisely at reversing all that and ensuring that tenants ‘take the strain’ rather than the housing benefit budget.

Early budgets and statements saw a succession of measures cutting payments to tenants from bedroom caps on the amount of rent paid to private renters to the bedroom tax (or under-occupation penalty) imposed on social tenants judged to be living in homes too big for them. Local Housing Allowance (LHA), the form of housing benefit paid to private renters, had been created under Labour as a mechanism to encourage them to ‘shop around’ for cheaper rents and keep part of the surplus. Under the Conservatives, it became a cost control mechanism for the overall budget, with payments restricted and then frozen regardless of what happens to rents. LHA will be unfrozen and restored to the 30th percentile of local rents from next month but the Treasury has already pencilled in a new freeze. An attempt to cap housing benefit at LHA rates for social tenants failed.

Other restrictions sit alongside that. Most working age benefits were frozen for four years in 2015. An overall benefit cap introduced in the 2010 spending review has restricted the total amount of benefits that any claimant can receive since 2013. The cap was originally justified on the basis that no household should received more on benefits that average income for those in work. This was said to be £26,000 a year (£500 a week) for a family in 2013. However, the cap was reduced to £20,000 (£23,000 in London) in 2016 and has only been increased in line with inflation in one of the eight years since regardless of what has happened to prices and incomes since. While various exemptions apply, the measure operates via a cap on housing benefit payments. In practice this can only operate alongside a local, discretionary welfare state in which discretionary housing payments (DHPs) pay the housing costs of capped households and a Household Support Fund pays for other essentials (but only for the next six months).

The inevitable result of a combination of restrictions on housing benefit and social housing investment and an insecure private rented sector has been increased evictions and homelessness, effectively transferring housing costs from central to local government. The numbers of households in temporary accommodation and bed and breakfast have risen to record levels and the costs of that have been a factor in growing numbers of councils going bankrupt. In his 2024 Spring Budget, Jeremy Hunt turned a deaf ear to pleas to lift the subsidy cap on temporary accommodation (frozen since 2011), abandon plans to renew the freeze on LHA (from 2025) and restore cuts in DHPs.

Tinkering with tax

On tax, the last 14 years have seen policy lurch from one position to another without ever approaching a coherent answer to the question of what the housing system needs. Mortgage tax relief for home owners was scrapped by consensus between the two main parties in the 1990s and 2000s. However, tax reliefs remained in place for buy-to-let landlords until the Summer Budget in 2015, when George Osborne discovered the impact on first-time buyers, and for holiday lets until the 2024 Budget, when Jeremy Hunt found this discriminated against long-term rentals.

Stamp duty remains the main tax on residential property despite a consensus among economists that transactions taxes are bad in principle and discourage house moves. Chancellors have tinkered with rates, increasing them for second home owners and investors and introducing temporary ‘holidays’ for first-time buyers to boost the market, without ever addressing this.

Council tax funds local services and is levied on all homes at differential rates depending on their valuation band. However, rates in England are still based on valuations made when it was introduced in 1993 regardless of what has happened to property prices since. Principal residences remain exempt from capital gains tax, by contrast with many other countries, while inheritance tax on property was cut by Osborne in 2010. These are significant reasons why we over-invest in property.

Tax is perhaps the area where there is most room for innovation in future fiscal events since it is hardly ever seen in the context of the housing system as a whole. The logical options would include reform of council tax to make it more proportional and stamp duty to reduce transaction costs and incentives for older people to downsize to free up family homes for younger families with children. More radical options would include tackling inequalities that are becoming entrenched in the system by the soaring value of housing wealth: young people with propertied parents and grandparents inherit substantial sums while others get nothing. However, Labour will be cautious about anything that can be presented by the right-wing press as a new mansion tax let alone a tax on middle England.

A baleful legacy

Spending reviews were intended to be more transparent about future departmental spending plans but have ended up being more opaque. The last time a Conservative government lost power in 1997 Labour had pledged to follow its spending plans in its first two years in office. The final Tory Autumn Statement in 1996 detailed plans for spending cuts including a reduction of 40 per cent in affordable housing investment in those two years. The programme did not get back to pre-1997 levels until Labour’s second term.

This time around we only know that the overall spending parameters will be dire and capital investment frozen. There is still scope for reprioritising of budgets but even if (a big if) the AHP is maintained at current levels that would still represent a large real-terms cut. The same is true for welfare, where the spending squeeze threatens worse to come on top of the retention of the bedroom tax, benefit cap, LHA freeze and all the other Tory cuts of the last 14 years, and for the financial crisis in local government.

Over to you, Keir Starmer and Rachel Reeves.