Monday, 29 August 2011

Co-Operative Housing: 100,000 not for profit rental homes a year available to those currently renting privately.

The stated goal of this policy is to create 1.8 million homes available for private rent only to hardworking families, couples, and individuals who are ineligible for social housing. These people have been paying £8k per year to rent privately. 

1. Costing of 1.8 million homes
It would cost £120,000 to build an affordable home per year. This price includes materials and labour as well as planning costs. The figures are independently supplied by the Housing Federation.  The HF also state that each home built creates 1.5 jobs per home and 4 further jobs in the wider employment field. Thus to build one home, the HF calculate that 5.5 jobs are created. All of these figures are independently supplied and not my own. Based upon these figures I have calculated the cost of setting up a Co-operating housing body that would build 1.8million homes making up the shortfall in social housing lost since 1980. Once the 1.8 million homes are completed this plan does not cater for any more being built. The cost to build 100,000 homes every year over 18 years should in theory, on today's prices cost £216 billion pound. It is planned that the government would commit to paying for half of these costs (£113bn), while the Co-op would be allowed to borrow a further £43bn over an 18 year period. The Co-Ops rental income would make up the shortfall. I calculate that this would in fact result in a net benefit of £40bn to the Treasury as savings in the benefit system due to increased employment and increased tax take would leave the Treasury £8.5bn a year better off. Based upon the rental agreement outlined in my previous post namely that £4,000 is generated per home per year, I calculate the net rental benefit to Co-Op housing to be £66.6bn at the end of the 18 year period. This excludes running costs of the Co-op housing which  I estimate to be £100m per year. The generated rental income by 2055 would actually exceed the entire costs of building the homes. Thus the homes would then be net assets to the Co-op company. The Co-Op company would then benefit from a rental income of £7.1bn per year, and valuing each home at £120,000, the company would also enjoy property assets of £216bn. 
          It is proposed that the government pay the initial start up costs of £12bn to complete the first 100,000 homes. Once completed, they would generate £400m of rents per year, but £100 of those would be retained for running costs. To complete the next year's 100,000 homes it is proposed that the Co-op be granted borrowing powers. It would, in this said year, borrow £5.7bn declining at a rate of £400m annually thereafter. The government would provide 18 annual £6bn pound payments until the 1.8million homes were completed. The Co-Op would borrow from years 2 to 18 after which it will be no longer necessary for the government to spend or for the co-op to borrow. From this date the £7.1bn surplus rental income could be used to pay back borrowing. This would not be a PFI initiative. The Co-op would be with the aid of the government allowed to raise capital on the back of its own assets. Given that the assets grow £12bn per year, and that the borrowing required would decline every year, there is little doubt that this credit facility for the Co-op is achievable. Co-Op housing would remain a not for profit organisation.

[See below for projections as to when borrowing will be exceeded by rental income (accumulated)]

[to enlarge simply click the graph or chart]

2. Benefits to GDP, Tax take, and reduced benefit payments

If 750,000 people are employed as a result of this, it means that they do not have to a) claim benefits and b) they can now pay taxes. One unemployed person on average claims  £82 a week in Housing Benefit. They also claim job seekers allowance of £67.50. Both these are modest estimates. Evidence shows that many claim other benefits in addition. But i have omitted these from my calculations. In terms of Child Tax Credit I assume that those eligible as unemployed will still be eligible when they get a job, so I have omitted CTC savings. WTC tends to climb in a gradient as the CTC element decreases. This mostly has the effect of cancelling the other out. Once over a threshold the total CTC & WTC decreases but I have not factored in these savings. Thus, I repeat, these are conservative calculations. 

Having explained the caveats, I calculate based upon 2011-2 tax and benefit system that this would save the Treasury £8.5bn a year in reduced benefit payments and increased tax take. Note that the Treasury would be investing initially £12bn (year 1) and £6bn thereafter. Thus, these saving above are not net. In fact from year two the total savings to the Treasury would be £.25bn on the year. As I said, housebuilding would cease after year 18. From that point, the net benefit to the Treasury would be £8.5bn a year as no expenditure would be required.

Thus, deducted investment costs from Treasury benefits, and the Treasury would gain £40bn over an 18 year period rising by £8.5bn thereafter. In addition, net rental income from the Co-Op housing scheme would total £66,6bn after an 18 year period. All of this would be ploughed back into rebuilding more homes, which would year on year reduce the borrowing costs. In the end it would be necessary for the government to spend £113bn on building the 1.8 million homes.  But during this period, £153bn would be added to the treasury's coffers though reduced benefit payments and increased tax take. Once the debts have been paid to private lenders, the Co-Op could conceivably run at a profit of £7.1bn with assets of £216bn. Since the Co-op would be by law forbidden from making a profit, the government or indeed the Co-Op could discuss how to proceed with arrangements thereafter.  The stated goal of this policy is to halve the annual rental costs hard working couples, families and individuals on low income are paying in the private rented sector. A secondary goal which I will discuss at an alternative date is to reduce volatility in the construction sector that forces labourers to live a life of seasonal employment.