Prime minister David Cameron has called for a housing revolution. So as the gloves are off in the battle to find new ways to fund a massive house building programme here’s a wacky contribution from me.
It amounts to a plan to build half a million homes with no stress on the nation’s debt. It would increase liquidity in the economy in the short to medium term. It would provide up to a million job years and in the process would net the Treasury more than £10bn.
Too good to be true? Well I wonder…
I aired this one, mainly I fear to bafflement within the audience, at a recent breakfast briefing organised by Building magazine for senior construction folk.
I’m an advocate of using financial engineering more cutely to get building done. This was meant as an off-the-wall example of radically rethinking how we view financing of the built environment. And why make an off-the-wall example anything other than exotic?
I realise promoting financial engineering right now is a radical and dangerous position to take given that out-of-control financial engineers have trashed the global economy, wreaked havoc in the lives of a huge swathe of the world’s populations and catalysed civil unrest in what were hitherto relatively stable European nations.
But as someone who studied engineering and intended to pursue a path in that field – before ironically having that ambition deflected by a recession – I have long realised the technical similarities and moral differences between making ploughshares and weapons of mass destruction.
Still here’s the idea. (And I would welcome feedback, positive or pooh-poohing.)
The Bank of England buys bonds through its asset purchase scheme (quantitative easing to you and me) in a time-limited public interest company that has a remit to build homes and, at some date in the future, flogs them into the private and not-for-profit sectors.
Why this charade? Why not just use direct public funding?
Answer: The deficit.
Ok, so here’s some background before we add a little detail to the plan.
I did some rough calculations a year or so ago using the tax and benefit tables and, among the various assumptions, the generally supposed notion that a house takes one and a half worker years to build.
These calculations suggest that for every house built that drags one and a half construction workers back into employment the Treasury gains between £25,000 and £30,000 in increased employment taxes and decreased benefit payments.
It’s fair to assume that a boost to house building would reduce unemployment, but not on a one-for-one basis with those employed. It would also be fair to say that there would be other multiplier effects netting gains for the Treasury.
So let’s take a wild stab, but a stab that I think is on the conservative side, and suggest for each house built in a recession when there is a pool of unemployed construction folk looking for work the Treasury gains about £20,000 for each home built.
Half a million homes equates to £10bn in savings. So it is in the Treasury’s interest to see homes built in a recession big time.
That’s background, here’s the leftfield thinking
I’m no expert. And I’m prepared for some smart lawyer to shoot me down in flames. In fact that is what I expect will happen, so I am ready for the deflation.
The vast majority in the nation wants to see more homes built (even nimbies are happy to see homes built so long as they are not in their back yards). The government knows we need more homes and the Treasury has a financial interest in homes being built. In fact the Treasury could gift almost £20,000 for each home built and still be quids in.
The Bank of England, meanwhile, is gearing up, we are told, for a further round of quantitative easing and there is a mood that it wants to buy assets that are a bit more, for want of a better word, “real” than gilts.
What asset could be more real than housing? What’s more, it is tradable between the household, the private business, the not-for-profit and the social sectors (note the right to buy or the former government’s national clearing house which took unsold private homes into the social sector).
In theory it would make great sense for the government to fund loads of homes now and flog off its investment later. Sadly that doesn’t chime with the debt reduction programme.
Ah, but if the money (let’s say about £50bn) came from the Bank of England’s asset purchase scheme and went into a public interest company, that sits off the nation’s balance sheet, it would not (as far as I can make out) need to be accounted for in the public sector debt.
In a few years’ time when house building is back up to more normal levels (whatever and whenever that might be) the homes can be sold off to housing associations or private buyers. The money raised would then go back to the Bank of England to be zapped out of existence.
The monetary stimulus would be, broadly, timed counter-cyclically with the housing cycle, which I think would be a good thing.
Any losses would naturally be indemnified by HM Treasury, as it does with the existing asset purchases. But it’s quids in on the deal anyway, as it would be paying less in benefits and raking in more in tax.
The public interest company could actually buy the public land putting money into the public sector (no need to build now pay later) and then develop the land.
I’ll not fuss about the finer detail of development mix or tenure issues – but note that is a massively important issue.
For this argument let’s assume the tenure mix is near-market rental and part ownership. In the near-term rental covers the coupon on the bonds (at nice cheap rates of interest as it’s our own friendly Bank), maintenance and maybe provides a surplus.
Any surplus would go into local infrastructure.
What do we end up with:
- More liquidity where we needed it in the economy
- The Treasury more than £10bn better off
- Up to a million new jobs (ok job years, I was just using political speak)
- Half a million more homes (and some)
- More stable future house prices
- Retaining valuable construction skills
- A slightly worse balance of trade on build materials
- A few grumpy developers who feel their toes are being trodden on
- A very irritated Daily Telegraph (which would delight a few I can think of)
Now this idea might be completely bonkers, but weirder things have worked.
I merely offer this up to the government, because if the Tories are to become the Party of house building they will needs a few more plans up their sleeves than they are currently revealing.
As things stand this government could easily end up with the worst record for building homes of any since the Second World War.