Can we afford affordable housing?

Yesterday it was announced that the Greater London Authority (GLA) is to create 50,000 ‘affordable’ homes. But do such schemes actually increase the affordability of housing?

When developers are forced to allocate a share of their dwellings (or land) to social housing or part-ownership it reduces their returns, since these properties will not be sold at full market value. Since the financial incentives to build are reduced, fewer homes are likely to be constructed. This reduction in supply will make housing in general less affordable – and it should be remembered that most people, even those on quite low incomes, have to find accommodation in the normal market.

The effect is exacerbated because full-price buyers will pay less when they know their neighbours are likely to include housing association clients, who may be more likely to engage in anti-social behaviour because of the inability of so-called social landlords to have appropriate clauses in their letting contracts to ensure that tenants meet acceptable standards of behaviour.

And because ‘affordable’ homes are subsidised by government, it means taxpayers have less disposable income available to spend on housing.

There is also significant moral hazard, particularly when social housing is prioritised, as in the GLA plans. If social tenants are allocated brand new, high-specification dwellings – often in expensive, desirable areas – it increases the incentives for people to choose a life of welfare dependency rather than working hard to improve their living conditions.
The policy is also unfair to existing residents who live near Boris Johnson’s social housing projects. They will see their properties devalued and their neighbourhoods degenerate as social tenants are moved into their area. Under the current planning system they will receive no compensation.

Given that land supply is currently relatively fixed, the proposed schemes simply make housing more affordable for one group at the expense of another group and of general welfare. If there is subsidy to the housing sector as a whole then it simply encourages the sorts of bubbles that have got us where we are today.

If the GLA really wants to solve London’s housing shortage it must focus on increasing the supply of land to private developers. This means abolishing the green belt – much of which is not very green – selling off under-used parks and playing fields, and reforming planning rules that wastefully allocate valuable land to industry and warehousing. Tinkering with ‘affordable’ housing will only make the problem worse.

21 November 2008, IEA Blog

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