Affordable and social housing finance innovation - synthesis, reflection and implications for Scotland: international evidence

A Difficult Context

The context that the Taskforce begins from is uniquely challenging. Short run market, political and public finance challenges adversely impact on affordable and social housing supply, much of which originate with the reset after the GFC structural break and subsequent austere policy responses to the crisis, alongside longer term structural housing system problems, difficulties made worse by Brexit, Covid-19 and the cost of living crisis. Arguably, the response now needs to overcome both sets of difficulties. In other words, we need to find a way to generate more resources for affordable housing quickly that overcome market failures rapidly, but we also need to begin addressing the larger long term and often wicked causes of the housing system dysfunction. The reality is that the electoral cycle throughout the UK is too short for those long-term solutions and the multi-parliamentary terms required to really address the fundamental problems we confront (Marsh, et al, 2024). Below we summarise both the recent catalogue of problems that have beset the housing sector as well as those broader structural problems that we need to address and set about rectifying.

Recent Difficulties

Today, we confront several immediate problems:

• A growth in unmet affordable housing need in a context where there is relatively little turnover in the existing social and affordable stock, nor sufficient new supply to meet this level of need
• Unusually high levels of unaffordability in the form of high private rents and house price to income ratios (let along regulatory constraints on high loan to value loans and stress tests)
• The record increase in homelessness applications, the unsustainable rise of temporary accommodation and the inability of several councils to meet statutory duties particularly over suitable accommodation – the most direct form of the housing emergency
• A decline in market and affordable new supply, a result of a combination of market weakness, supplies inflation, labour shortages, grant rates not keeping up with rising development costs, deep programme budget cuts, and the cost-of-living crisis
• UK-led Housing Benefit restrictions, freezes and limits, which are linked to further homelessness, particularly from the PRS
• Ongoing budgetary pressures which have led to two years of significant affordable housing supply cuts in spending (though followed by the welcome restoration of 2025-26 supply spending to pre-cut levels in the new budget)^[2]
• A consequent reduction in the willingness of providers to take the risk of development in these circumstances.

Structural Challenges

As argued elsewhere (Gibb, et al, 2020; Bowerman et al, 2021; Marsh, et al, 2024), there is, alongside these more immediate drivers, a combination of long-term unaddressed weaknesses, imbalances and failure in the wider housing system which further undermine both short term and longer-term reforms. For instance, short term unaffordability can be viewed as the outcome of the cumulative effects of the following structural problems:

• The underlying supply inelasticity of the development and construction industries (Kiberd and O’Connor, 2024)
• The relatively light asset taxation of housing alongside poorly designed (archaic?) taxes like Council Tax and Land and Building Transaction Tax^[3]
• Multiple land market failures and housing finance imperfections (MacFarlane, 2017; Aubrey, 2018a and b; Bentley 2018 a and b; Crook, 2018; Jones, et al, 2018)
• The anti-investment bias arising from the combination of fiscal rules, public finance accounting rules, subsidy control measures and Treasury short termism (Lloyd and Grayston, 2023)
• The neglect over time that has created the conditions that support a rentier speculation around housing either as owner or investor while insufficient cheaper housing exists for those seeking to simply consume adequate shelter
• At the same time, wider macro trends reinforce the negative housing outcomes: stagnant wage growth, low productivity growth, rising income and wealth inequality

Marsh, et al (2024) and Bowerman et al (2021) emphasise that not addressing these housing and related problems, allowing ‘business as usual’ to continue, will allow these negative outcomes to compound. Bowerman et al stress evidence that this will: worsen affordability problems and housing shortages (and hence homelessness), as well as restricting productivity growth, generating poorer regional economic performance, exacerbating physical and mental health problems, possible weakened social cohesion, and poorer carbon reductions. Housing advocates are familiar with making the preventative arguments about social housing improving health, education and employment benefits, as well as savings on various public budgets (Gibb, et al, 2020; Boyle and Husbands, 2020). Failure to invest unfortunately has (potentially disproportionate) negative consequences across these different dimensions i.e. it will continue to cost society over time not to address the housing sector’s many challenges^[4].

We have a new UK Government and, while initial signs suggest a stance of fiscal conservatism, this is nonetheless a window of opportunity to redress specific issues which have dogged housing resources and interventions for many decades. Lloyd and Grayston (2023) have stressed that social housing investment has long been stymied by the way UK public finances operate^[5]. Clearly, this has implications for devolved Scotland. They identify:

• Fiscal rules that are biased to anti-investment and excessively short term focused
• Incoherent debt rules which are not consistent with good international practice
• Anachronistic practice in the classification of borrowing for council housing as public expenditure
• HM Treasury further worsening the anti-investment bias by pursuing short term policy interventions that undermine the need for long term stability.

Lloyd and Grayston advocate returning to the Gordon Brown ‘golden’ rule. As they say (p.9): “the accompanying Golden Rule was explicitly designed to allow for borrowing to invest. This was achieved by distinguishing between borrowing to fund investment as opposed to current spending. Subsequent fiscal rules have failed to make this distinction, as each has focused on the total debt and/or deficit in cash terms, making the under-investment bias pervasive”.

Second, they argue that the UK needs to follow international practice and factor-in the value of public assets and not just debt in their debt rule such that rather the measure the nation’s net worth not net debt (and seek net worth rising over time). Third, they argue that housing investment e.g., council housing should not be treated as public expenditure but rather follow the international accounting standard that does not count public corporations as adding to state borrowing (and this would include council undertaking council housing investment). The argument is simply that council housing is a form of investment infrastructure wherein rental income literally pays for all the borrowing. Under those circumstances a properly working prudential regime should be sufficient for control purposes. Finally, a number of controls should be placed on HM Treasury so that they are not able to undermine settled financial relationships e.g. regarding rent increases or housing-related benefits. In this respect it is noteworthy that the Chancellor is believed to be proposing a ten-year rent settlement for English social housing in the Autumn Budget (Guardian, August 23 2024). Recent incremental progress on these fronts are encouraging. They are the sorts of proposals that can transform the wider public finance context in the UK but also would change the Scottish dispensation too.