There’s No Such Thing as a Free House

Weighing Up the Cost of Social Housing

Mark Wadsworth today has an interesting piece on social housing. It continues a debate that Tim Worstall began.

Tim was arguing that paying housing benefit to people living in private housing is no more expensive than providing a council house.

Mark was arguing that providing a council house is cheaper – in actual fact, he reckons it’s free to the taxpayer if I’ve understood him correctly.

In principle, I think Tim is right – but there are complexities in it that I’ll come to in a minute.

The basics first. Imagine you are the government, and you have a poor person who needs housing.

1. You can allow him to rent a house privately, and pay him housing benefit to cover the rent.

or

2. You can build a council house, let the house to that tenant (at below market rent), and pay him housing benefit to cover the rent. In short, you provide the council house to him for free.

So which is cheaper?

In option 1, the cost to the taxpayer is the housing benefit (which equals the rent the private landlord charges), plus administration.

In option 2, the cost to the taxpayer is the cost of maintaining the house, plus administration, plus the interest you have to pay on the money it cost to build the house (and buy the land).

The rent that the private landlord charges consists of: the cost of maintaining the house, plus administration, plus the interest he has to pay on the money it cost him to buy the house (or to buy the land and build the house) … plus, of course, his profit.

You can see a few things here. In both cases, the cost of maintaining the house is included in the cost; in both cases, there is administration to pay for; in both cases there is interest on the capital tied up in the house.

So in principle the cost of both options is exactly the same – except for the profit claimed by the private landlord.

Which is cheaper in reality depends on all those complexities that I mentioned before.

In the red corner we have the reasons why the council house might be cheaper. First, the government can borrow money cheaper than a private landlord can, so the interest included in the cost of a council house will be lower. Second, the private landlord has that profit. And third, the profit is almost certainly inflated by that private landlord pushing his rent higher than market rates because the government is paying.

But in the blue corner we have the reasons why the private landlord might be cheaper. And the main reason for that is efficiency in the private sector.

You see, the private landlord may be able to maintain the house at a lower cost than the State can. At the very least, he has a strong incentive to find the cheapest way – unlike the social housing administrators at the council.

Potentially even more important could be the efficiency of building houses in the private sector. If a private builder can build a house for £40,000 when the same house costs the State £50,000 to build, that means the private landlord will have to borrow £10,000 less than the State to provide that house. In turn, that will reduce the private landlord’s interest costs and offset the extra interest rate that he has to pay as a private individual.

There’s also a further complexity, of course – that house prices are not static. Rising prices benefit the State if it provides council housing. Rising prices benefit the private landlord if the State pays for private housing – but of course that tends to push down market rents, because landlords may be willing not to cover their whole costs of providing a house if they expect a big capital gain when they sell the house.

With the system as it now is, with private landlords creaming the housing benefit system, Mark is probably right that it would be cheaper to build council houses. But if the system were changed to remove that abuse, that difference could well be overcome. In fact, I strongly suspect the private option might be cheaper.

Despite what Mark says, social housing is not free, however it is provided. Which is, of course, what most people would have predicted without doing any analysis.

There are social reasons for preferring private housing as well, principally because it breaks down class barriers whereas the old council estates used to reinforce them. But that’s another story.

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5 thoughts on “There’s No Such Thing as a Free House

  1. I suspect you’re overlooking something. The cost of a house can be broken down into three elements:
    (i) The cost of the land
    (ii) The cost of having the house built (Bricks and mortar, plus labour, etc)
    (iii) The cost of planning permission.

    The private landlord may get a better deal on items (i) and (ii), although I doubt that he’d do much better if the council were at all competent (Oh well, never mind then), but item (iii) is effectively free to the council and is a big cost to the private landlord. I’d be very surprised if that didn’t tilt the balance in favour of the council. Add in the fact that the landlord wants to make profit and that the council pays less for debt and I think council building should be a considerable amount cheaper.

    “With the system as it now is, with private landlords creaming the housing benefit system, Mark is probably right that it would be cheaper to build council houses. But if the system were changed to remove that abuse, that difference could well be overcome. In fact, I strongly suspect the private option might be cheaper.”

    I’m not sure it can really be counted as abuse. The government says “We think it’s worth paying up to £xxx for a 2 bedroom house, per month” and the landlord takes them at their word. It is monumentally stupid to set £xxx at a rate that’s higher than market rates, but it’s currently working as intended so far as I can see. I think they should pay far less, and they’re making a start, but the rates now are still way way too high. With a household income of over £40k before tax, my wife and I are currently paying £550 a month rent. It’s true that we’d like to get a slightly bigger place, but we’d still be looking at a rent of under £1,000 a month – and that would get us a nice big 2 bedroom house with a fast link to both of our places of work. My wife works in central london and I work in Croydon, so it’s not like we’re out in the sticks.

    • “Item (iii) is effectively free to the council and is a big cost to the private landlord” – only because the council (i.e. the State) imposes those costs.

      I wasn’t trying to prove which is cheaper one way or the other. I was just trying to point out that providing council housing is NOT free to the taxpayer.

      • I concur, which is why I’d really like to see an analysis of who gets housing benefit at present, and the reasoning behind it. I reckon we could save a fair bit if we made it so that it was a safety net, rather than a hammock…

  2. It just goes to show that however lovingly I explain things, there will always be people who put Home-Owner-Ist Tory dogma over the interests of the taxpayer*, or indeed above the interests of low income people and/or people who don’t want to join the housing pyramid scheme.

    In any event, you haven’t answered the simple question at mine – what should Mr A do?

    Z makes excellent further points, especially cost item iii).

    * It may surprise you to learn that I am a taxpayer.

    • Fine. I’ll answer it (again) in a mo.

      It doesn’t surprise me at all to learn that you’re a taxpayer!

      This is not home-owner-ist dogma anyway. Whether social housing should be provided by the State or contracted out to private providers has nothing to do with “home-owner-ism”, LVT, or deliberate government creation of house price inflation.

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