The Landlords Party

In this week's episode of What Have Labour Gone Back On Now?, Lisa Nandy has reaffirmed the party's support for Right-to-Buy and its aversion to rent controls. She linked the latter to "untargeted mortgage relief" (as advocated by various Tory MPs of late), which at first sight might appear a little odd. As Labour List's Tom Belger helpfully explained, "There are understood to be concerns [that] rent controls while mortgageholders’ costs are soaring risk exacerbating a shortage of rental properties if more landlords sell up." In other words, this is about protecting the Buy-to-Let constituency, which is well-represented in the House of Commons, and as such is an example of targeted mortgage relief. You'll also notice the claim, which has become canon among this constituency, that if landlords are obliged to sell their properties this will lead to a shortage of rentals. In fact, those properties will either be bought by other landlords with larger portfolios who aren't so exposed to interest rate changes or they'll be bought by people who want to buy houses for their own use, many of whom are currently renting. They don't get mothballed. As ever in discussions of housing in the UK, actual interests are obscured by myths.

Nandy's thoughts on Right-to-Buy are similarly questionable, insisting first that it was originally a Labour policy and that where it went wrong was "the decision of the Thatcher Government to fail to replace the council housing stock that was sold, pitting the rights of the individual against the rights of the community." This fails to explain why Labour's idea never got off the drawing board and why the Thatcher government precluded adequate replacement. There wasn't a formal moratorium on council house builds after 1979, there was simply a lack of money which became more pronounced over time, and that lack was a result both of Thatcher's war against the larger urban authorities and the generous discounts on sales. As the article linked to above goes on to note, "Inside Housing deputy editor and author Peter Apps argued it was not possible to back Right to Buy but oppose depleting social housing stocks. While Labour promise to replace homes sold, “it’s just not that easy to get new council housing built, but it’s very easy to sell it at a massive discount”." 

In imagining that you can both offer Right-to-Buy and avoid running down council stock, Lisa Nandy forgets that Labour's original plans, from Hugh Gaitskell's manifesto promise in 1959 to Jim Callaghan's more considered review in 1977, foundered because full replacement would require selling at close to market prices, which most tenants couldn't afford. In the 1950s it was still plausible to imagine Aneurin Bevan's ideal of mixed social housing, where "the doctor, the grocer, the butcher and the farm labourer all lived in the same street", but by the 1970s council housing, in particular "sink estates", had become associated in the popular mind with the lumpen elements of society. The reality was much more of a patchwork with tenants in skilled manual work now often much better off than twenty years previously and much of the newest council housing stock being low-rise and often indistinguishable from private estates. But this in turn meant that any programme of sales would initially deplete the stock of better properties, as proved the case in the 1980s. 

The Tories cut the Gordian knot by both offering massive discounts (averaging 44% and rising to as much as 70%) to buyers and gradually strangling the number of new starts by councils. This made it a one-way bet. You could buy cheap and then sell dear once the price went up, allowing you to buy somewhere bigger and perhaps cheaper beyond the city. Alternatively, you could wait to inherit your dear old mum's flat and either sell at a massive profit or realise your ambition to become a landlord. This was a completely rigged market, not to mention an exercise in social engineering - two things the Conservative Party claimed to oppose. It's worth emphasising that these two measures went hand-in-hand. It was only by artifically driving up house prices generally, through limiting council starts and easing mortgage financing, that the Tories could buy off their existing homeowning constituency who would otherwise have looked askance at subsidies for the less well-off. Rising house prices allowed remortgaging for conservatories, extensions and (in time) equity release for new cars and expensive holidays.

Because limited council housing in recent decades has been (rightly) prioritised for vulnerable families, the vast majority of tenants still don't have enough income to buy at anywhere close to market prices, so a revival of Right-to-Buy would require a repeat of the scale of discounts seen in the 1980s. This in turn means that one-for-one replacements could not be funded through receipts, even assuming councils were allowed to keep all the money and earmark it for new builds. You would need massive central government funding to make up the shortfall. This clearly isn't going to happen, not simply because Labour's masochistic embrace of "fiscal responsibility" will rule out borrowing but because the alternative would mean funding new council houses through the taxation of existing homeowners and renters, and neither of those groups would consider that a fair deal. The latter might be assuaged by the promise of access to secure council tenancies at reasonable rents, but that presumes a massive expansion of social housing over the term of a parliament (which would incidentally hammer the private rental sector), and nothing Labour has suggested explains how this could come about. The trick the Tories pulled off in the 1980s, of creating more winners than losers in the short-term, cannot be repeated.

The fundamental problem with Right-to-Buy, which has been there since the 1970s, is that there is a mismatch between the prospective buyers (council tenants) and their means. The people who could potentially buy council houses at market prices are currently paying rent to landlords in the private sector. We know they could afford a mortgage because their rent often covers the actual mortgage repayments for the property (i.e. it's a Buy-to-Let rental). Even where the landlord does not have mortgage debt they are likely to pitch the rent at the market level, which is clearly determined by the landlords who do have mortgages on their properties. In addition, the rent covers the landlord's profit. This means there is another mismatch: between those who can afford mortgages (renters) and those who have access to mortgage capital. The latter is now commonly described in terms of "saving for a deposit" and the "bank of mum and dad" but this obscures that for many landlords the first link in the chain that allowed them to raise deposit capital was the profit made on selling an ex-council property. 

So how do we solve this problem? The solution is to take private landlords out of the equation and replace them with local authorities. This could be done through compulsory purchase, rather than expropriation, the funds being created by selling the mortgages to the Bank of England. In other words, this would be a form of quantitative easing but one in which the assets acquired by the bank would be mortgage-backed securities (MBSs) rather than its own gilts. This is, famously, the model of Fannie Mae and Freddie Mac, the two government-sponsored enterprises (GSEs) that provided secondary mortgage financing in the US (buying mortgages from lenders with cash that is then used to issue more mortgages). It should be emphasised that the sub-prime crisis that peaked in 2008 was not due to this model itself being problematic but due to the deregulation that led commercial banks to expand into "private-label securitization". Insofar as this approach would be problematic, it is that it would be counter-cyclical, i.e. boosting demand at a time when the Bank wants to dampen it. The solution to that would be to pay the landlords with bonds, rather than cash, recognising that most would want to invest/save rather than consume.

This approach would allow rents to be brought into line with the council norm (usually much lower) and tenants given secure agreements with more reliable maintenance and repairs. The rents paid would continue to service the mortgages but the repayments could be reduced, so the lower rent receipts matched them, by extending the mortgage terms. If a tenant then wished to exercise Right-to-Buy, this would simply return the repayments to their previous level and term (but without the need for a deposit). As multiple mortgages will have been bundled-up, the repayment period effectively becomes open-ended, much as the national debt has been for centuries. In fact, this is just national debt. But unlike operational debt that depends on tax receipts to be paid down, and which is therefore subject to bond market sentiment, this has the advantage of the guarantee of future tenancy income and the proven calibre of the stock. Again, to emphasise the point about the 2008 crash: the problem wasn't simply handing out mortgages to people who could never realistically keep up with the payments but an over-supply of speculative property (notably in Florida) that required mortgages being issued promiscuously in order to keep the construction industry growing. That isn't a problem the UK is likely to face any time soon.

This might sound radical, even a bit "out there", but it is simply a scaling up of what the Labour Party proposed in 2019 (see page 9 of its Housing Manifesto): "To get our council housing programme off to a flying start, we will introduce a council buy-back scheme, with additional loan funding for councils to purchase properties from the private rented sector, with a focus on those properties sold through the right to buy, but now in the hands of private landlords. We will provide funding for the purchase of at least 5,000 properties a year throughout the next Parliament." In retrospect, that seems both sensible and pitifully unambitious, but in the current context of the Labour Party it might as well have been a call for the liquidation of the kulaks. In contrast, Nandy's rallying cry appears to be that "private patient capital" can be relied upon to fund council housebuilding, which sounds like PFI but also suggests that building will be at a pace that suits the construction industry. The difference between 2019 and 2024 will be that Labour's policy will be embedded in the market, rather than bypassing it, and high finance will get to wet its beak. Most importantly, landlords will be reassured.