Welfare, housing and unexpected surprises

The UK government currently has a problem. It's called 'housing benefit'. It's a form of welfare where the government gives those who cannot afford housing an allowance to help with the cost of rents, which can be very high indeed. For example typical rents in London at the time of writing for a one-bedroomed apartment are typically between ?300 and ?500 per week, and you can easily pay well over twice that for three bedrooms in the nicer areas. That's a minimum of around ?16,000 per year before you even begin to pay for all the other living costs. And with a minimum wage of around ?6 per hour, a full-time job pays something around ?12,000 per year. It is not surprising that people need handouts. It is estimated that around one in four people in the UK are receiving housing benefit, adding up to the ?23.8 billion in 2013-14, which is almost 30% of the entire welfare bill. This is a big headache for the government and also a target for their cost-cutting agenda.

It all started back in the 1980s, when Margaret Thatcher's Conservative government sold off the national stock of social housing and instituted housing benefit instead. It gave the government a windfall as well as those who bought the houses, often at bargain prices. The stated goal was to increase house ownership and it did for a while. But then, after an early-90s drop, house prices started to rise. And rise. The cost of houses has tripled and more in the past 20 years, even after taking into account the dip after the 2008 financial fiasco. Rents have increased appropriately and in London, which is particularly expensive, it is easy to pay ?1500 per week for rental on a modest apartment.

So what has this to do with changing minds? Margaret Thatcher's goal was to change minds, to get ordinary people to think they could own their own homes. For a while, she succeeded, but only by fudging the system, selling them their rented houses at below market value, then topping up the incomes of those who couldn't afford even the lower mortgage. Another force was the increasingly ease of borrowing money. At one time lenders were very cautious, but over the next 20 years the push to lend and bonus payments to motivate this led to very unwise loans that ended up crippling banks and requiring massive government bail-outs. The commercialization of lending and deregulation of the finance sector also allowed traditionally cautious building societies to convert to banks (with free payouts to members), which led in turn to many more banks in the marketplace, fierce competition and the consolidation of acquisitions that had to be paid for with unrealistic lending goals.

In other words, the extrinsic money motive (greed, to you and me) motivated people in the lending sector to flood the market with money, which had the predictable result (coupled with inadequate house building) of pushing prices up and up. Oh, and the non-stop upward motion of London property prices has continued to make it a safe haven for foreign investors, further pushing up prices. And yet another factor, add net population increase as EU openness and global conflict has led to lots of immigration, further increasing demand for houses. And of course rents have followed, and of course necessarily along with housing benefit.

The game has yet to play out. When inflation takes hold again, many who can barely pay their mortgages will need housing benefit to keep their families off the streets. People will not be able to afford living in London and will move, perhaps to other cities further north and perhaps abroad. Banks may crash again as borrowers default on their debts. And this time the government may not bail them out, resulting in financial chaos and ordinary people ending up taking the brunt again.

The bottom line is that decisions that seem simple and well-minded are not that straightforward. In a supply and demand situation where demand outstrips supply, prices will go up, especially if the buyer can borrow or otherwise acquire money (including from lend-mad banks and government benefit). And when there is money to be made, people will do whatever it takes to make the money. The UK housing situation has been characterized by greed and desperation. Not nice motivators but powerful nevertheless.

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