Does social housing pay for itself?
No, it doesn't
Probably the most influential article published by Pimlico Journal is ‘The Social Housing Phenomenon’ (Volume I). In this article, data journalist JUICE discussed, inter alia, who occupies Britain’s current stock of ‘social housing’; this generated the oft-shared map showing that 47.6% of London’s social housing stock is currently occupied by a household headed by someone born abroad.
In this short article, I will add to the debate by explaining to readers how exactly the economics of social housing works. What is ‘social’ and ‘affordable’ housing, and how is it built? What is ‘Housing England’, and what is a ‘Housing Revenue Account’? And does ‘social housing’ actually pay for itself?
Firstly, we must differentiate between ‘social housing’ and ‘affordable housing’, as both are somewhat vague terms, more intended to conjure up positive images for the public than to illuminate.
‘Social housing’ is what many readers (especially older ones) will previously have called ‘council housing’. ‘Social housing’ refers to housing which is rented out by a local council or a registered social landlord (RSL). Rather than letting the market mechanism allocate their stock of housing to whoever is willing to pay the most, the allocation of a council or RSL’s ‘social housing’ stock and the rent are both instead determined by bureaucratic fiat.
‘Affordable housing’ covers a wider spectrum of rental discounts and state assistance towards ownership — basically anything that applies a discount to the market rate, whether rental or capital. In essence, the difference is that while ‘social housing’, is a local government-led term, ‘affordable housing’ is a planning policy-led term; the most up-to-date definition of ‘affordable’ can be found in the National Planning Policy Framework (NPPF). Section 106 agreements often require developers to make a certain percentage of the houses they are building ‘affordable’ in exchange for being granted planning permission. These ‘affordable’ houses are typically constructed by the developer and then sold on completion to a registered social landlord at a sum equating to only the cost of construction and, in theory, not including any margin for profit or a land value. The ‘affordable’ element of a development can include a mix of types of tenures, including the aforementioned ‘social housing’. The specifics of this mix will be agreed with the planning authority in advance of an application.
The ‘affordable housing’ grant system
At a very basic level, the grant system for ‘affordable housing’ works as follows:
A construction cost is provided by the developer or contractor;
There is some form of debt-funded capital raised, normally secured against the future rental income over the assumed ownership of the property;
Deductions for management, maintenance, and lifecycle costs (i.e., costly forecastable repairs, such as new windows or a replacement roof) are made;
The council or registered social landlord is provided with a one-off grant from the quango Homes England, to whom the government have delegated the dispensing of public funds for ‘affordable housing’ projects. To give you an idea of the amount of money involved, Homes England has been granted £7.4 billion to deliver up to 130,000 ‘affordable’ homes outside of London by the end of March 2026. This equates to a £57,000 grant per home as a benchmark. In Scotland and Wales, the bodies involved are different, but the model of public monies as the source of grant funding is the same.
The idea is that these sums balance. When costs exceed the balancing figure, there are two possible methods of dealing with this. The first is increasing the rent on the new ‘affordable housing’, which is not viewed at all favourably by local authorities; in the case of newly built ‘social housing’, it is virtually unheard of. As such, the alternative course — increasing the grant — is chosen almost without exception.
Therefore, what happens in practice is that the affordable housing provider will request an ‘above benchmark’ grant. The greater the number of ‘above benchmark’ grants approved, the fewer overall homes will be delivered by the government funding that has been allocated. This is a topical matter, as construction costs have increased due to inflation and regulatory expansion. In my own local authority area, it is common to see grants approved at up to double benchmark.
Does social housing pay for itself?
The ‘tl;dr’ answer is that it (perhaps) has done so in the past, but that it doesn’t any more.
For a more detailed answer, it is important to understand the role of a Housing Revenue Account (HRA). A Housing Revenue Account is a dedicated, ringfenced financial account which is used to record income and expenditure on running a local authority’s social housing stock and closely related services or facilities provided primarily for the benefit of a local authority’s own tenants. Each local authority will have one.
The rent from the existing social housing stock is paid into the Housing Revenue Account, and the costs of regular maintenance and other lifecycle costs are paid out. Many Housing Revenue Accounts have now grown to become sizeable pots of money. Rents from social housing built in the ’60s were first used to pay down the borrowing costs associated with building them over a thirty-year loan period; after this, money started to accrue, with minimal offset.
This growth of this pot of money has led many left-leaning politicians, academics, activists, and journalists to believe that social housing is ‘self-funding’. They are wrong for three main reasons:
1. The regulatory state and its impact on the Housing Revenue Account
The standard of social housing across the country is a real mixed bag. I wouldn’t go so far as to say it is universally poor; however, it is almost universally old. Old properties need more active repair and maintenance. They are less energy efficient. They increasingly don’t meet new standards. In isolation, this wouldn’t be a problem, since a roof over your head is better than no roof.
Social housing, however, has not escaped the expansion of the regulatory state. Research undertaken by Savills in 2023 into expenditure trends highlighted the following regulatory costs associated with maintaining the existing Council housing stock across England:
Post-Grenfell fire and building safety: £8 billion.
Net Zero compliance: £23 billion.
Energy efficiency requirement for all houses to meet EPC Rating C: £3.5 billion.
These are all capital costs needing to be paid for upfront, separate from any normal maintenance and repair. The previously referenced paper suggested the average Housing Revenue Account will need to find £37,500 for every home they own. This is likely to substantially increase borrowing liabilities to meet the regulatory compliance changes currently proposed by the Government.
2. The role of Housing Benefit
Imagine a honking goose, chasing a man shouting out, ‘but who pays the rent?’.
Everything I have said so far assumes that the rent is actually personally being paid by the tenant to the local authority or registered social landlord, rather than the cost of rent being partially or fully borne by the state. This is not the case: most tenants in ‘social’ and other ‘affordable’ housing will get some or all of their housing costs paid for by the taxpayer. In 2022/23, the British state spent £15.4 billion on Housing Benefit — making it a significant outlier in the OECD in terms of spending on ‘housing allowances’ as a percentage of GDP, well above second-placed Finland, and almost doubling third-placed Germany and fifth-placed France.
Overall, the amount of Housing Benefit paid out by the British Government has somewhat fallen in recent years, as Universal Credit recipients now receive a Housing Entitlement instead — i.e., the Government is still paying, but via a different benefit. In England, about two-thirds of social housing tenants receive housing benefit. (Around a third of private renters also receive Housing Benefit, but this is a topic to be discussed in another article.)
In reality, money is first being transferred from your pocket to the government; and then, via Housing Benefit, from the government to your local authority’s Housing Revenue Account.
3. The opportunity cost
The decision to rent properties out at anything less than market rates is a subsidy. Constructing social housing means foregoing the potential rents from tenants who can pay their way. It is a case of severe economic distortion, preventing the market from channeling resources to wherever they are most needed, which is inefficient, and thus reduces economic growth. The enormous proportion of Inner London’s housing stock which is occupied by the fundamentally unproductive restricts the labour mobility of the productive, harming the British economy by a very substantial — though perhaps ultimately unquantifiable — amount. This means that even if social housing might be self-financing on a financial (i.e., money in/money out) basis (ignoring the role of Housing Benefit), it certainly isn’t on an economic basis.
Summary
Social housing is heavily subsidised. Both the existing stock and newly built homes are reliant on the continuation of Housing Benefit (or a Universal Credit equivalent) to underpin the income side. New build social housing is also reliant upon sizeable upfront grant funding to make the economic model financially viable. Much of the existing Housing Revenue Account financial surplus, which is responsible for driving the belief that social housing is ‘self funding’, is illusory: one of accrual after the end of borrowing payments, but before the costs of new regulatory requirements, which will wipe out most of these surpluses, kick in. When you factor in the capital costs associated with current and future regulations, then Housing Revenue Accounts will actually need to take on additional borrowing to just maintain its existing stock. This, of course, is before even considering the question of opportunity costs — which are more difficult to quantify, but are likely very substantial — and housing benefit. The effectiveness of these huge public subsidies — and specifically, what they facilitate and what the opportunity cost is — should hopefully continue to draw substantial public scrutiny.
This article was written by an anonymous contributor. Have a pitch? Send it to pimlicojournal@substack.com.
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Thanks for the explanation of how the current system works.
The definition of “subsidy” is rather important here, isn’t it? I think what many people mean when they say that social housing is subsidised is that they are paying taxes that are going directly into the pockets of tenants. For example, the “zoomer” who wrote an article on Matt Goodwin‘s Substack complains that he is paying council tax to enable other people to live in social housing. The council that did this would, of course, be breaking the law. You acknowledge that in the past, social housing tenants have paid the costs of maintaining their properties through their rents. So there is no direct financial subsidy in this case.
You say that the cost of maintaining the social housing stock has risen because of new energy efficiency rules etc. and that in the future, maintaining the properties might only be possible with increased government funding. This would indeed be a financial subsidy.
If the state decides it doesn’t want to pay this subsidy, the obvious thing to do would be to increase rents. However, this then raises the question of what to do with those tenants who cannot afford the higher rents. There will be little point in kicking them out if they end up renting privately and claiming housing benefit.
I find the section on housing benefit puzzling. Yes, housing benefit is a direct financial subsidy. But housing benefit is paid both to social tenants and to private tenants. I’m not sure how it is relevant to the question of whether social housing per se is subsidised.
So what is a “subsidy”? You say:
“The decision to rent properties out at anything less than market rates is a subsidy.”
Is it?
An alternative definition would be that a subsidy is a payment made in order to allow something to be sold at less than the cost of production. For consumer goods such as cars and televisions produced in a competitive market, the market rate and the cost of production should be approximately equal. The market rate in the private rental market, however, is not determined by the cost of production i.e. by the cost of building and maintaining the property. That’s because the market rate includes a payment made for the land underneath the property i.e. for the property’s location. The land costs nothing to produce and yet it commands a price because the landlord controls access to it.
So even a social tenant who pays the full costs of building and maintaining her property will pay less than the market rate in the private rental market because she does not have to pay for the land. Such a tenant does not require any financial subsidy from the taxpayer despite being better off than a tenant renting an equivalent property in the private sector.
You say, however, that “even if social housing might be self-financing on a financial (i.e., money in/money out) basis (ignoring the role of Housing Benefit), it certainly isn’t on an economic basis.” You say that the state is incurring an opportunity cost by not renting out the property it owns at the market rate.
This is obviously true, but what is puzzling is why you seem to think that this applies only to people occupying social housing. The state could, if it wished, arrogate all the land rents in London to itself by imposing a 100% Land Value Tax. It chooses not to do so. So yes, the state incurs an opportunity cost by not collecting land rents from social housing tenants, but it also incurs an opportunity cost by not collecting land rents from landlords and owner occupiers. What’s the difference? (To say that the difference is that landlords and owner occupiers “own” their land would be begging the question.)
You say that constructing social housing produces “severe economic distortion, preventing the market from channeling resources to wherever they are most needed”. The implication is that the most efficient allocation of housing will occur if all housing is privately owned and is bought, sold and rented in the marketplace. But this is false because when a commodity - in this case, land - is fixed in supply, people will hoard it. Elderly people, for example, will continue to live in large houses in sought-after locations because they know that those houses will increase in value. If you really want land to be used in the most efficient way, you need to nationalise land rents and force everybody – not just social tenants - to pay for the land they use. Then you have a genuine free market.