This is the post Tim Montgomerie wouldn’t have
In London alone, the annual flow of Local Housing Allowance into landlords’ pockets is over two billion pounds. The taxpayer is forking out with no expectation of getting anything for it.
But the policy of radically reducing the LHA valuations, from the 80th to the 30th percentile of local rents, is an accident waiting to happen. The profile of British landlords has radically changed during the Labour years; the typical landlord is now a buy-to-let investor who holds their property on a mortgage. This sets a definite limit on how low rents can go before bankruptcy supervenes.
Further, the BTL investors are in it for capital gains, not income. As a result, it is economically rational for them to buy property up to the point where the rent just covers the mortgage. It’s a leveraged bet on housing, not an investment. Therefore, they can’t give back profit margin and they can’t cut their costs. You may argue that any fool could find tenants in London, but anyone who has ever been a renter, a landlord, or a mortgage banker can tell you that it’s voids that sink landlords, and shuffling hundreds of thousands of tenants around the country must needs generate voids.
We simply don’t know how much the banks are on the hook for here; most of the funkiest BTL investment was funded by specialist trade lenders, but then this is another way of saying that it was funded by fringe banking, and fringe banking has a nasty way of snaking back to the real banks, as it did in 1974 and 2008.
Fortunately, there is a cure. The answer to this experiment in bipartisan social engineering, the lazy credit-bubble consensus, is localism. Under the Localism Bill, councils get to keep their rents and get a general power of competence to do what they want. London councils could, for example, launch a joint company to buy the BTL property up, obviously at a healthful haircut to the values of the Brownite bubble years. They could raise the funds to do this by issuing bonds backed by the stream of LHA. Councils can borrow from central Government at 2.8% at the moment, but this is above the market – investors are crying out for any securities that pay a coupon at the moment. We could beat that.
Based on the net-present value of the LHA stream and reasonable estimates for prices and interest rates, it is feasible that we might be able to absorb the whole lot. This would head off the crisis, save the BTL landlords, and avoid destabilising the banks. It would demonstrate the power of practical localism and Tory democracy.
The Mayor of London has a £2bn affordable housing fund. This would be ideal as initial capitalisation. Boris should step up and take the lead.