Weighing Up the Cost of Social Housing
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.
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.