How Green Are Your Shoots?
There are certainly some signs that the economic situation is easing. More commentators are saying we have reached the bottom of the trough and things will begin to pick up although some are still talking about a “W” curve with a further dip to come. There are positive signs on both sides of the Atlantic. In the USA, better than anticipated figures on jobs have given a boost to Wall Street. In the UK, the FTSE100 is up a third from its March low, the purchasing managers’ influential survey for the services sector is showing expansion for the third month running, indeed the services sector actually grew in June and July, and we have just seen the biggest increase in manufacturing output since October 2007.
Turning to the housing sector, the HBOS house price report for July showed a 1.1% increase on the previous month and Nationwide’s equivalent survey reported a 1.3% increase. The HBOS average house price of £159,623 is 12.1% below the July 2008 figure but only 0.8% below the January 2009 level. People are beginning to talk about a net increase over 2009 as a whole. Levels of mortgage arrears and repossessions are also beginning to ease. The market is responding to high demand and low supply and is helped by improved affordability and low interest rates. Activity levels in the market are still running at lower than half the mid-2007 peak but mortgage approvals went up 22% between Quarters 1 and 2 with the June 2009 level 35% above June 2008. The decline in the construction sector also appears to be easing. Apparently, Taylor Wimpey are gearing up for recovery having halved their losses and report that they are seeing fewer cancellations by buyers. Bellway have also announced a share placing to buy land.
The Bank of England on the other hand thinks the credit crunch is far from over. At the beginning of August the Monetary Policy Committee shocked many pundits by announcing a further £50bn tranche of quantitative easing – bringing the total to £175bn which exceeds the initial £150bn limit. The Bank thinks the recession is deeper than previously thought with GDP still falling in Quarter 2 by 0.8% against a forecast fall of 0.3%. The Bank continues to have concerns about the economy this year and next, especially as lending to business is still restricted with banks concentrating on rebuilding their balance sheets and increasing the deposits they hold. This raises the question of how effective quantitative easing really is if the money fails to get through to the real economy. One effect of the MPC decision and the Bank’s relative pessimism was to reduce the value of the pound against the US dollar. This was probably deliberate as Mervyn King seems convinced that a low pound is needed to boost exports. The Treasury approved the Bank’s action but still holds to the view that the economy is on track to return to growth by the end of the year.
Gordon Brown launched the UK Government’s “Building Britain’s Future” programme on 29 June. This is wide ranging and responds to political issues as well as economic ones. Part of this is a “Housing Pledge” jointly announced by Gordon Brown and John Healey with funding for affordable housing (initially described as “new” funding) and reforms to local authority Housing Revenue Accounts to allow councils to build more homes and reforms to waiting lists to give more room for local priorities. The funding element was described as a £1.5bn package that would provide 20,000 extra affordable homes and 10,000 market homes over two years while generating 45,000 jobs in construction and related sectors. It transpired that this whole package was to be financed by reallocating funds from existing budgets, with some coming from CLG’s own budgets including that for final phases of delivering the Decent Homes Standard. Not surprisingly, this caused some furore with Boris Johnson and other Opposition politicians joining in. Much of the money is actually being transferred to the HCA’s “Kickstart” programme to get mothballed private housing sites moving again. Sir Bob Kerslake commented that the Government had difficult decisions to make and added “but there is a premium on new build activity”. That is certainly true. New house production has plummeted and the big house builders are a major economic driver when operating at optimal levels. It is inevitable that Government (whatever Party is in power) will try to get the big house builders performing again. However, it is ironic that the Decent Homes work is probably much more labour intensive than new build and so would generate more jobs per pound invested. It is also worth pointing out that a lot of the tenants still waiting for Decent Homes work will be living in areas whose councils were slow to sort out their housing options and where investment will have been slow. These tenants will have had a lot to put up with already without a further delay in reaching the basic decency standard. In a similar vein, it has been reported that CLG is reviewing levels of gap funding approved for negative value stock transfers. This may just be prudent monitoring in line with existing agreements. But if it goes further than this it could undermine jittery funders’ confidence in the sector.
So …what can we learn from this? Probably, we are somewhere near the trough of the recession and things will not get much worse. There are some signs of recovery. However, full recovery is likely to be slow and to vary across sectors. Life will continue to be tough for people at the bottom of the pile – that includes large numbers of social housing tenants. Job opportunities will not be plentiful for people without skills or qualifications. The housing market will gradually recover – partly driven by the exacerbated shortages caused by reduced new build activity over the last couple of years. The demand for social housing will continue to exceed supply. Both CIH and NHF have been making the case for increased investment to deal with this. The big problem is that the public spending situation coming out of the recession will be as tight as in any period since the end of World War II. This is because of the unprecedented public borrowing needed to support high levels of public spending during the recession. The recent problem over the “Housing Pledge” funding is just a symptom of this and an example of difficulties to come.
So …what can be done by not-for-profit housing providers to make a difference in these difficult circumstances? Part of the answer is not to forget what has been achieved in the past and not to let others forget it either. Through mixed funded development, stock transfer and PFI, registered social landlords established an unequalled track record of working in partnership with both the public and private sectors. Access to private finance may be difficult at the moment but funders should not be allowed to forget that the sector’s “covenant” (as they call the ability to repay loans) is as strong as any they are likely to find in other sectors – if not stronger. Then we must learn from our successes and use the lessons learnt to find imaginative solutions to new problems. It is a truism but much of the answer lies in effective partnership working with other key players. The list is familiar – CLG, HCA, TSA, local authorities, private developers, banks and building societies, other specialist agencies, and the people who actually live in the places that need action. One example where new approaches can be taken is PFI. The old model is all about contractual performance and borders on the adversarial and confrontational. Contracts can have hundreds of performance indicators with penalties attached to many of them. The emphasis tends to be on the more easily measured inputs and outputs rather than the outcomes that really matter. A basic requirement is to shift risk from the public sector client to the private sector contractor. A new model for PFI would be a wider joint venture that involved the client local authority as an investor partner rather than as a simple purchaser of services. Risk would be shared rather than off-loaded and rewards would also be shared. This is not a new idea but now may be the time to really make it happen.
And finally …hindsight is wonderfully easy and open to criticism for that reason but sometimes things just have to be said. If we don’t know how effective quantitative easing has been, the same can certainly be said of the Government’s across the board VAT relaxation. A couple of percent off VAT was intended to boost consumption and aid the retail sector in particular. But a couple of percent was miniscule compared with the level of price discounting going on at the time. I doubt whether any of the companies that benefitted would have refused Mr Darling’s largesse but think a targeted VAT reduction would have had greater impact. Not surprisingly, given my background, I think the target should have been investment in the existing housing stock. Complete removal of VAT from all home improvement work would have been a significant incentive for much needed investment and would have generated jobs in the construction sector and building supplies industries at a time when house building and commercial construction were both scaling down. As I said, hindsight is wonderfully easy … but I did think this at the time! Is it too late to make this change?