Understanding Housing Finance

Meeting Needs and Making Choices

Peter King

• Publisher: Routledge
• Year: 2009
• Print ISBN: 9780415432955
• eBook ISBN: 9781134081721
• Edition: 2
• Topic: Economics
• Subtopic: Business General
• Index: Economics

One of the biggest challenges for students of housing is understanding the financial principles which underpin the place of housing in the wider economy. By taking a political economy approach, Peter King's Understanding Housing Finance makes the basic principles of the subject accessible, without requiring detailed prior knowledge of economics or financial systems.

The book explains housing finance by exploring the way in which markets and governments react together. It takes a conceptual approach to consider the advantages and limits of housing markets and why governments intervene. The consequences of intervention are explored in detail using examples of housing subsidy systems and policy mechanisms such as rent control, housing allowances and subsidies to owner occupation.

This is a key reference for students on housing and planning courses at both undergraduate and postgraduate level. The book's approach means that its relevance is not confined to one particular housing system, but is useful for those studying housing finance in most developed and developing countries.

CHAPTER 1
Understanding housing finance

Learning outcomes

• Why we need to know about housing finance.
• What housing finance is.
• The centrality of the issues of quality and access.
• The political economy approach to housing finance.

A nightmare

Imagine you wake up and find yourself not in your bed or even in your own home, but in the middle of a jungle. You are in an unfamiliar and hostile environment. There are no roads, no buildings, no signs whatsoever of human civilisation. And it gets worse. You have no means to communicate: no mobile phone or laptop; you have no food or drink and just the clothes on your back. You really are in trouble! You are back in the Stone Age.

How would you live?

Of course, you might not survive long: if the cold or hunger doesn’t get you, a wild animal might. But let’s assume you’ve watched the right TV programmes and you know what to do, and so you survive.

What would you do?

You would look for shelter, perhaps in a cave, or make a rudimentary shack with branches. You might learn to make a fire to keep you warm, to light up your shelter, and to cook the food you might have caught or gathered. And over time as your skills develop, you learn more and more and get better at surviving. You make your shelter watertight, stronger and safer.

But how much further could you take your life? How much could you improve your situation?

You might be lucky and meet others in a similar situation who aren’t hostile, or you might be spotted and rescued. But what if you remain there, on your own and having to depend on your wits?

What sort of life would it be?

But now you wake up properly and feel with relief that the nightmare is over. You find you are still in bed, with the clock ticking nearby, perhaps the sound of gentle breathing next to you and the normal sounds of a house resting at night. You feel a sense of relief that you have plenty of food and drink in the fridge, light and heat at the flick of a switch, money in the bank and credit cards in your pocket, and the ready ability to communicate with people, either face-to-face or via the various bits of technology you have lying around and take for granted.

And this is entirely the point of this little thought experiment. That we take what is around us for granted; we just assume the technology and amenities are there and will always be there. But these things are not just there. Someone or something has to provide them and we, at some time in our lives, have also had to make the effort to get them. So now that we are back in our safe little world, perhaps we ought to think of what it is we need to maintain our own lifestyles.

Obviously we need the money to buy and maintain our dwelling and all the other things we need for our lives. But it is not just the money. There have to be the physical resources and materials available to build our houses, to use as food and so on. We also need lots of energy to heat our dwellings, to get us from place to place and run the industries and services we rely upon. But we – or rather the society we live in – need the knowledge that allows us to make things properly and to try to control our environment. Finally, we need some leisure to be able to sit back and enjoy our time and use the things around us. We have to be in a situation whereby we are not continually struggling for survival but can take our standard of living for granted and just enjoy it.

This suggests that the life we lead is complex and involves many different facets that need to come together just to allow us to get out of the shower and walk down the stairs to put the kettle on. The life we are used to is possible because of co-operation on a large scale. We rely on others to provide the goods and services we need. We want hot water on tap, light at the flick of a switch, petrol in the pump and food on the supermarket shelves, but we may not be aware of how any of this comes about, and what’s more, we really don’t need to know.

But this means that we have to rely on the co-operation of strangers. The lifestyles that we have necessitate a reliance on people we have not met, and will never meet, who live in different parts of the world and are going about their lives in sweet ignorance of our existence. This is what economists call a disembedded economy (Levine, 1995); in which our consumption of goods and services is separate from their production and in which we do not provide everything for ourselves.

But if people don’t know we exist, how can they possibly know what we need and want? How can we co-operate with those of whom we are ignorant? The answer is that we need some form of co-ordination that allows the needs of strangers to be met. This co-ordination might take the form of a market, where people come together to buy and sell, or it might be undertaken by government that plans for the needs of its citizens.

This discussion, starting with a very simple thought experiment, has introduced some of the key concepts and issues that will be discussed in this book. In particular, we have started to consider what it is that we need in order to lead the sorts of lives we are used to and how this might come about. We have to co-operate with others in order for the full complexity of our lives to be fulfilled, and this needs a high degree of co-ordination. But how is this achieved, and how can we understand it? It is the aim of this book to try to answer this question.

The aim of this book is to concentrate on the normative basis of housing systems: about what we can and should do for ourselves and what we need others for; about how we can and should live and what this entails in terms of the provision and co-ordination of resources. This will involve some detailed consideration of particular housing finance mechanisms, but the emphasis will be more on the reasons for particular forms of provision and how these link with the needs and choices of individual households.

I have chosen to call such an approach the political economy of housing finance. In the rest of this chapter I shall explore what this means and why it offers an important way into appreciating the complexities of housing systems and the interdependencies that households have. The first task, however, is to define just what housing finance is. Having done this, we can then start to appreciate how it ought to be studied.

What do we mean by ‘housing finance’?

Put simply, housing finance is what allows for the production and consumption of housing. It refers to the money we use to build and maintain the nation’s housing stock. But it also refers to the money we need to pay for it, in the form of rents, mortgage loans and repayments.

There is a tendency to think that housing finance is all about government subsidies, such as capital grants, housing allowances and tax relief. These are all important, or have been, and we shall indeed spend parts of this book considering the various forms of government subsidy. However, we need to be aware that there is more to housing finance than subsidies.

The majority of households in the UK, USA and parts of Europe are owner occupiers who pay for their housing from their own income. Therefore much housing finance is found privately, mainly from earned income. Of course, a household’s income is normally used to repay a loan provided by a commercial bank or building society. This is another important source of housing finance. In addition, households use their own money and borrow in order to fund repairs and improvements to their dwellings. They also spend money on decoration, furnishings and fittings.

But private finance has also become increasingly important in the social rented sector. In the UK, for instance, housing associations have used private finance alongside government subsidy to develop new social rented housing. Social landlords therefore have to borrow from banks and building societies, just like private households.

So we need to be aware that housing finance consists of more than subsidies from government. It involves the far larger sums spent by households and housing organisations that are derived from income and from borrowing. But there are two further facets of housing finance we need to consider.

First, housing is a store of wealth, and thus we need to be aware of the fact that the housing stock is an asset that can be used by its owners. Individuals can, and do, tap into this wealth in order, say, to set up a small business, pay school and university fees for their children or enjoy their retirement. Landlords can use their assets as security for future development. Thus housing wealth can allow households and landlords to develop housing and non-housing activities.

The second issue returns us to the role of government. Because housing is so expensive and so valuable an asset – as well as being so important to our well-being – government feels the need to regulate housing finance. It can do this through interest rates that affect mortgage repayments, and by controlling rents through rent controls and regulating standards, which impose costs on landlords. Therefore we need to consider not just the money that government spends on housing, but the costs that its actions impose on the various players involved in the production and consumption of housing.

A consideration of what housing finance is also tells us where the money comes from. It shows us that, whilst some finance comes from government, we need also to consider other sources, such as earned income and private finance. Table 1.1 summarises what I take housing finance to include.

Table 1.1 What housing finance is and where it comes from

Why do we need housing finance?

Table 1.1 also begins to tell us why we might need housing finance. I would suggest that we need it for at least four reasons, highlighted in Table 1.2. Without finance we could not achieve any of these objectives.

But this offers only a partial answer to the question of why we need finance, in that it does not explain why government has a role. We need to appreciate this because government does not intervene in the same manner with all households. The list of facets that housing finance covers shown in Table 1.1 does not apply equally to all households. In particular, government’s role differs according to households’ income and therefore their ability to provide housing for themselves. In some cases government offers financial support and regulation, whilst in others (and this is the majority) it merely regulates standards. Moreover, this regulation might directly or indirectly impose costs on households, rather than providing them with financial support.

All this suggests that housing finance fulfils a more specific purpose over and above the general objectives described below. I would suggest that this purpose is to ensure a housing system that offers quality and access to all households.

Table 1.2 What housing finance is used for

Quality and access

Housing is one of the most important items that we human beings need. There are many things that we would find difficult, if not impossible, to do without good quality housing. We might find it hard to find and keep a job, to learn, to maintain our health, to vote, to claim benefits we are entitled to and to initiate and maintain stable relationships.

But just because something is important, this does not mean it is always available. Like most commodities, housing comes with a price tag attached. If we want decent housing, we have to pay for it. It also follows, broadly speaking, that the better the standard of housing we want, the more it will cost us. Therefore, as standards rise, so does the cost.

One of the most important issues, then, is how we can afford the sort of housing that we want. We could say that this is simply a case of matching up our income with our aspirations and expectations and buying the best dwelling we can afford. This may be fine for those on reasonable incomes, but not for those on low incomes. Many households will lack a sufficient income to provide them with a dwelling that meets their expectations. It may well be that they could find housing of some sort, but this might not be of a standard that they, or the society of which they are a part, find acceptable.

This implies that two issues are of supreme importance. The first is quality. We are not content with just any type of housing; we want good quality housing that allows us to live a civilised and healthy existence. We therefore require housing to a modern standard of amenity. This standard, of course, is a relative one, in that it depends on general expectations that exist here and now. It is no good saying that households elsewhere in the world manage with less or that our grandparents were brought up without central heating and modern appliances.

The second issue follows on from this, and is about access. We might readily agree on what constitutes a good quality dwelling for us here and now. We can describe the particular amenities and standards that the modern dwelling should have. But that doesn’t mean that everybody has such a dwelling. Many households might not be able to afford one.

There is a clear trade-off between quality and access, in that, generally speaking, the higher the quality, the fewer will be able to gain access to it. Quality comes at a cost, and this limits access. There is, then, a gap that needs to be filled between the aspirations people have for good quality housing and their ability to access it because of a lack of income. This is where housing finance comes in, by acting as the bridge over this gap.

Therefore the true purpose of housing finance – and the historical reason why the state has intervened to provide subsidies – is to ensure that all citizens gain access to good quality housing.

A political approach to housing finance

But a definition like this can only take us so far. When discussing the issue of quality, it became clear that we could not define it absolutely but only relatively. What we consider to be good quality housing depends upon on our expectations and the norms of the society we are part of. These change over time as we become more (or less) affluent, and as our society becomes more (or less) open to external influences. However, it is not helpful to talk of the housing conditions of 50 years ago, or in other countries, as if they can be the models for how we do, or wish to, live now. What matters is the housing we can reasonably expect and aspire to here and now and whether we are able to attain it.

This means that we should pay attention to the objective physical conditions of housing in our society and the particular mechanisms that provide and sustain that housing. But it also means we should be aware of what it is that households feel that they want and need. Our concern should not merely be to describe what is currently happening with regard to housing finance, but also to understand why things are as they are, and what pressures exist that both create particular mechanisms and force them to change.

I would argue that these pressures come from two sources, which sometimes interact and at other times might be conflictual. On the one hand, we have the actions of government, which initiates, controls and regulates mechanisms; on the other hand, there are the actions of individual households in markets who use particular mechanisms, are incentivised or limited by them and whose combined behaviour can influence the operation of mechanisms, as well, of course, as the continued existence of any particular government.

Housing policy is thus part of a wider set of relationships between government and individuals. This is the domain of political economy. According to Adam Smith, who is commonly seen as the founder of the discipline, political economy has two distinct objectives:

First, to provide a plentiful revenue or subsistence for the people, or more properly to enable them to provide such a revenue or subsistence for themselves; and secondly, to supply the state or commonwealth with a revenue sufficient for the public services.

(Smith, 1981, p. 428)

Smith assumes two important things. The first is that individuals should be able to provide for themselves. Households should be able to find the wherewithal to meet their wants and needs. But, second, Smith assumes that there is a need for government action to provide public services. This immediately shows the relationship between the individual and the state. Smith sees the state as facilitating individual action, whilst, of course, the revenue of the state can only be derived from the actions of individuals themselves. It is only through individual households thriving that the state can raise any finance through taxation in order to fund necessary public services.

Political economy makes a particular assumption about the nature of a society, and this is one we have already mentioned: that societies are complex and depend on co-operation between strangers. Accordingly, Levine (1995) has stated that political economy is the study of disembedded economies. It is precisely the analysis of those economies that are separated from the household and are thus subject to conjecture, thought and action. The key relationships are therefore not within households but through mar...

Table of contents

• Cover Page
• Title Page
• Copyright Page
• List of tables
• Preface
• 1 Understanding housing finance
• 2 Need, choice and responsibility
• 3 The importance of markets
• 4 Government action
• 5 Influencing markets
• 6 Controlling housing
• 7 Complexity and choice
• Notes
• Bibliography