Treasury Policy (Housing)

– in the House of Commons at 9:43 pm on 10th May 2004.

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Motion made, and Question proposed, That this House do now adjourn.—[Mr. Bob Ainsworth.]

Photo of Andrew George Andrew George Shadow Minister (Environment, Food and Rural Affairs), Shadow Minister (Environment, Food and Rural Affairs) 10:00 pm, 10th May 2004

I am pleased to secure the opportunity to discuss Treasury policy in respect of housing, partly because the issue has a significant impact on my constituency, which covers west Cornwall and the Isles of Scilly, and partly because I am certain that it also has a significant impact on many constituencies throughout the country.

I am pleased to see the Economic Secretary to the Treasury in his place. I have tried before, in Budget and other debates in which I have had the opportunity to speak about Treasury matters, to catch your eye, Mr. Deputy Speaker, or that of one of your colleagues, to discuss this matter, but without success. I am pleased to have the opportunity now to debate serious material issues, which I hope the Minister will accept I am raising in a spirit of constructive engagement.

Following the theme of constructive engagement, a few years ago, after I was first elected, I raised the subject of the impact that council tax discounts were having on second home ownership in my constituency and in many others. I argued at the time that I was disappointed that a Labour Government had been responsible for giving me such complacent ministerial replies on the subject, both written and otherwise.

I am pleased to say that on 9 February 2000, in a debate that I had called on second homes and council tax, the then Under-Secretary of State for the Environment, Transport and the Regions, Mr. Mullin, who is now a Foreign Office Minister, acknowledged that I had received a rather complacent response from his ministerial colleagues in previous years and months, and then went on to say:

"indeed, I have here a rather complacent response, which I will not read out."—[Hansard, 9 February 2000; Vol. 344, c. 112WH.]

Indeed, he suggested that we discuss the matter later, and we did.

Later that year, in November, the Government proposed to withdraw the council tax discount for second home owners. I was pleased with that outcome, and I was also pleased when, this year, the Government honoured their promise to reduce that discount from 50 per cent. to 10 per cent. That was the result of constructive engagement. I would like the Government to go even further, but what has happened already demonstrates that constructive dialogue can result in what I consider to be a beneficial outcome.

I want to raise with the Minister an issue that was rather hidden away in Treasury papers following the pre-Budget statement in early December last year—the subject of self-invested personal pensions. I shall make a few remarks about the Kate Barker review, and then, as I cannot hand it to him across the Floor of the House, I would like to draw the hon. Gentleman's attention to a briefing from the National Housing Federation outlining its concern about various tax impacts on social landlords.

What I, and other people far more expert than I who work in the industry, are concerned about is the likely impact of the Government's proposed changes to self-invested personal pensions from April 2005. What concerns me is that, having largely closed one tax loophole by removing the council tax discount for second homes, the Government are about to open a new one that could provide even greater encouragement to those wanting to invest in second homes. From April 2005, self-invested personal pensions will enable a pension plan to invest in residential property for the first time. That will have clear implications: 40 per cent. tax relief on money used to purchase property, and exemption from capital gains tax on the sale of property where the proceeds are reinvested in the pension plan.

Although personal use of the asset held by a pension fund will be subject to a tax charge, we all understand—just as local authorities understand—the distinction between council tax and business rates on second homes. Frankly, local authorities are prepared to turn a blind eye to businesses that let out second homes for more than 120 nights a year and that would otherwise be subject to business rates. Similarly, it will be very difficult to police the extent to which second homes are used by those with a beneficial interest in the property and the pension plan.

Photo of Mr Paul Tyler Mr Paul Tyler Shadow Leader of the House of Commons

I am very grateful to my hon. Friend and near neighbour for giving way. In case the Minister does not understand this point—I hope that he does—perhaps my hon. Friend might emphasise that this potential taxpayer subsidy to second home owners will be far greater than the concession on council tax. It will therefore be devastating to Cornwall communities such as those in my constituency and my hon. Friend's. The affordability gap in such communities is already big, and many local people are squeezed out of the market altogether.

Photo of Andrew George Andrew George Shadow Minister (Environment, Food and Rural Affairs), Shadow Minister (Environment, Food and Rural Affairs)

I am grateful to my hon. Friend for that intervention. West Cornwall and the Isles of Scilly have among the highest levels of second home ownership in the country, and parts of North Cornwall have similarly high levels. That is a burden on our local communities, although it is nice that people from outside take an interest in them. None the less, the impact on the opportunities for local people, socially and economically, is very significant.

I entirely agree with my hon. Friend that this proposal is likely to have a far more dramatic effect. The reduction in the council tax discount was very unlikely to result in the sale or loss of a single second home from any constituency in the country. On the margin, it did not affect people who invested in such properties, who were unlikely to change their minds as a result. It provided more funds for the local community, but it did not necessarily reduce levels of second home ownership.

Although the proposal makes using self-invested personal pensions for a main home rather complex and probably unattractive, it provides a very encouraging scenario for investing in a second home. In my constituency, 10 per cent. of all the mainland properties are second homes, and 25 per cent. or more on the Isles of Scilly are second or holiday homes. I am not criticising what is a perfectly rational decision, given the way in which the current tax and benefit system works, for someone who has some spare cash. On an individual basis, many second home owners provide a great deal of support to local communities, but they affect the viability of services and housing opportunities for local people. Spare properties in the local market simply are not available for local people.

Hundreds of millions of pounds have been spent subsidising the wealthy so that they can have second homes in areas such as mine, in which thousands of local people cannot afford their first home. Now, probably billions of pounds in tax concessions will be made available to the wealthy so that they can have their second homes, and even greater numbers of local people will have no chance whatever of owning a first home of their own. That is the problem that we face.

In areas like mine, the rented sector is diminishing significantly. As the housing market remains buoyant, landlords see their main chance—no one can criticise them for it—as selling their properties into the market. The problem is that local people simply cannot afford to buy into that market themselves. The private sector, where it is not slipping away into the holiday trade, is diminishing and the social rented sector is in any case being lost over time. In an area such as mine, little more than 10 per cent. of rented properties are in the social sector—either housing association or council housing—so the opportunities for local people are few and far between.

Even in the most run-down communities—there are many of them in west Cornwall—low-priced properties are well out of the reach of those on local wages. The problem is now "ginormous" in my constituency, where there are unprecedented levels of need within the community and long waiting lists in each of the three local authorities that cover it. What impact does the Minister believe the tax change is likely to have in that context?

On 4 February this year, I asked the Financial Secretary what criteria would be used, and I received a parliamentary answer:

"There will be no specific criteria relating to residential properties. There will be a single set of simple, flexible investment rules underpinning the simplified regime. The use of private pension scheme assets by a scheme member will be subject to a tax charge."

We know that. Secondly, when I asked about the likely impact, the Financial Secretary answered:

"The impact of this change, if introduced, will depend on the extent to which trustees and administrators decide that residential property is a suitable pension investment."—[Hansard, 4 February 2004; Vol. 417, c. 935W.]

Again, that is more or less self-evident, but the likely impact on the opportunities for local people in areas such as west Cornwall is simply unknown and not addressed at all.

Charles Hendry received a written answer from the Financial Secretary on 26 February 2002:

"Information on the total number of self-invested personal pension plans and value of their funds is not available."—[Hansard, 26 February 2002; Vol. 380, c. 1215W.]

How, then, can the Treasury possibly assess the value of the likely impact when it does not even know the number or total value of the plans? Experts in the industry estimate that it could not only have a significant impact on areas such as mine, but bring about a further loss of housing opportunities. I suspect that any such losses for local people on local incomes will be extremely significant. It is also likely to have a general impact on house price inflation in the country, which is already running at a severe rate.

In the spirit of constructive engagement, I propose an alternative to the Government's approach, as it entails severe unintended consequences. Many pension plans are clearly failing and the Government need to respond. Self-invested personal pension plans are one way of responding, and I applaud the Government for their efforts in that direction. However, unless the Government take a second look at the problem, the policy is likely to have severe and even greater consequences socially throughout the country.

Why do not the Government try to produce a wider definition of residential properties, which could create a virtuous investment—a benefit for those seeking an alternative to pension plan provision, but restricted to rented or leasehold accommodation for people in local need, or portfolios of shared equity properties, which would provide further opportunities for the most needy or those trying to get a toehold on the housing ladder? If the Government want to proceed, they should define the circumstances in which the investment could take place. That would have two benefits: first, it would benefit pensioners and pension plans; and secondly, it would add to investment in social properties.

I said that I would mention the Kate Barker review. Recommendation 2 says that local authorities should charge more for second homes, which is going in the opposite direction in respect of statements of investment principles, and recommendation 26 argues effectively for the reintroduction of development land tax. That seems fundamentally to fail to recognise the key feature of the housing market in the past 20 years, which is the persistence and growth of an affordability gap. Areas such as mine need an intermediate market, because there will always be a massive gulf between social rented accommodation and the first step on the housing ladder. Simply building more houses will not fill that gap. The Government need to seek more sophisticated ways of dealing with that.

The National Federation of Housing Associations sent me a briefing pointing out that the Government are allowing millions of pounds of investment in affordable housing to be lost through onerous burdens on social landlords. Housing associations set up with the purpose of improving former local authority housing face increased tax bills of more than £200 million as a result of recently announced Government reluctance to counter an Inland Revenue decision. The NFHA is asking for relief from capital gains tax, harmonisation of VAT at 5 per cent. on all works to existing social housing, and an extension of zero rating of VAT on aids and adaptation works to non-charitable housing associations, and it is making a case for exemption from stamp duty and corporation tax. To cap it all, it argues for the need for a more effective channel of communication between the Treasury and social housing providers.

I hope that the Minister will accept that I wish the debate to be held in a spirit of constructive engagement. I look forward to his response.

Photo of John Healey John Healey The Economic Secretary to the Treasury 10:16 pm, 10th May 2004

I congratulate Andrew George on securing the debate and on his constructive tone. He wanted constructive engagement, and he certainly delivered his comments in that way. I am glad that he concedes that he is less disappointed with Government policy than he was in the early days after 1997, but I find the title that he has chosen for the debate somewhat curious. He and the House will understand that there is no Treasury policy on housing, only the policy of the Government as a whole. He will also appreciate that, although the Treasury may sometimes help to shape it, we are always fully supportive, to the hilt, of policy. It is therefore about Government rather than Treasury policy that I speak tonight.

It is nevertheless true that housing is an important factor in the functioning of the economy, and it is therefore a matter in which the Treasury takes a close interest. Housing plays a key part in the flexibility of an economy. The availability of housing, its location and the access that individuals have to it all have a direct impact on a person's ability to gain employment and to match their skills with appropriate job vacancies. People need not only to be able to live within a reasonable distance of their jobs, but to be able to move in order to access better employment opportunities when they arise. Current evidence is that, although increased labour mobility can make a significant contribution to increasing employment, it can make an even greater contribution to increasing productivity.

Housing also has an impact on a person's social opportunities—through the effects that inadequate or inappropriate housing can have on health, education and social integration. For too long, too many of the poorest in our society have had to endure damp, cold, poorly insulated and poorly repaired properties, which they often cannot afford to heat.

Despite the obvious importance of housing to our welfare and prosperity, the UK has over many decades persistently under-invested in housing, as the hon. Gentleman hinted. Since 1960, in fact, the UK has invested a lower proportion of national income in housing than any other European Union country. It is partly because of the long-term under-supply of housing that the UK has one of the strongest trends in real house prices in Europe. That upward trend in prices has itself made the desire to get on the housing ladder grow even stronger. Owner-occupation is now the tenure of choice and a source of financial saving for many.

The hon. Gentleman set out his concerns about affordability within the context of the Cornish economy. It is fair to say that the south-west is a region in which pressures are acute. This afternoon, I looked at some figures produced by the Joseph Rowntree Foundation last year, which show that the south-west suffers the double impact of lower than average incomes and higher than average house prices. In 2002, north Cornwall had a house price to income ratio of more than 5:1 and Penwith, in the hon. Gentleman's constituency, had a ratio of only just under 5:1.

In the UK, our high level of mortgage debt is often more reliant on variable interest rates than other countries, which tend to have a higher proportion of debt at fixed interest rates. That greater exposure to variable rates contributes to making the UK housing market more volatile, which itself adds a greater potential volatility to the general economy.

Since 1997, the Government have faced a unique combination of low investment coupled with high levels of owner-occupation and house-price volatility and sharp regional divergences—not forgetting demographic trends that suggest that the demand for housing will grow ever stronger. In answer to the hon. Gentleman's queries, I shall explain how Labour in government is rising to that challenge.

Successive spending reviews since 1997 have approved substantive real increases in public sector investment in housing. By next year, it will have more than doubled compared with 1997. After nearly two decades of the Tory neglect of investment, in 1997 the Government inherited a £19 billion backlog of repairs to the social housing stock. Some 2.25 million social homes failed to meet the standard for decent homes. Already, under a Labour Government, 1 million of those homes have been brought up to that standard, and we have an ambitious target to make all social housing decent by 2010.

Since 1997, the Government have supported the creation of 230,000 new affordable homes. The hon. Gentleman will be aware that the Government have again increased the Housing Corporation's rural target to provide 3,500 affordable homes during 2004–05 and 2005–06 in smaller settlements. We have put policies in place to ensure that existing social housing can be kept for those who cannot rent privately or buy, so that the right to acquire does not apply in rural villages where fewer than 3,000 people live. Restrictions may also be imposed on resale of right-to-buy properties in national parks, areas of outstanding natural beauty and areas designated as rural for that purpose. Those restrictions on resale effectively cover the whole of Cornwall.

Photo of Mr Paul Tyler Mr Paul Tyler Shadow Leader of the House of Commons

The Minister is making a very reasonable speech, but I hope that he will come to the issue of second homes. I remind him that on the previous occasion to which my hon. Friend Andrew George referred, when the then Minister, Mr. Mullin, made a similarly reasonable response, he left the Government a short while later. I warn the Economic Secretary not to be too reasonable, or we will assume that the same fate may befall him. Does he accept that anything that fuels the pressure for second homes makes all the remedial action to which he has referred more expensive for the taxpayer?

Photo of John Healey John Healey The Economic Secretary to the Treasury

I hope that the hon. Gentleman will bear with me long enough for me to reach the point in my remarks when I shall deal directly with the points that he and the hon. Member for St. Ives raised.

Increased investment alone will not be sufficient. Greater investment must be accompanied by significant reforms if we are both to increase the supply of housing and to promote stability in the wider economy. Fundamental reforms to unlock land and private development are under way. The Planning and Compulsory Purchase Bill contains a wide range of measures designed to improve the speed, predictability and certainty of the planning system. The Government have consulted on an update of guidance on planning for affordable housing. New regional housing boards, introduced by the communities plan, are now taking responsibility for the preparation of regional housing strategies, including the requirement that they are "rural-proofed" with the assistance of the Countryside Agency. The Government are also considering an extension to the contaminated land tax credit to cover long-term derelict land—a measure championed strongly by my hon. Friend Ms Atherton and which may be of particular benefit to areas of Cornwall.

We know that we still have further to go, however, and the hon. Gentleman raised three specific points. I shall take his reference to the briefing from the National Federation of Housing Associations as an early representation for the 2005 Budget. I shall deal with self-invested personal pensions and the Barker review.

Although self-invested personal pensions do not fall directly within my policy field, I submitted a memorandum to the Environmental Audit Committee in February as it had raised the issue with me. The memorandum was published with the Committee's third report on 10 March and both the hon. Members for St. Ives and for North Cornwall (Mr. Tyler) might find it worth examination. It dealt with the pre-Budget proposal to simplify the eight taxation regimes relating to pensions into a single regime, which would among other things allow all pension schemes to invest in residential property. Currently, only large schemes can do so; the prohibition on small and self-invested pension funds was designed to prevent pension scheme assets being put to the private use of the member or his or her family—where the rent forgone would reduce the growth of the pension fund.

The reforms we propose for SIPPs should help the supply of residential property for rent, but will not exacerbate the problem of second homes about which the hon. Gentlemen are concerned. There will be no new incentive to purchase property for private use, because any non-commercial or personal use of a property would lead to a benefit-in-kind tax charge. There would thus be no incentive to shelter second homes in a pension. The Inland Revenue will police the legislation and will be alert to possible abuses of the kind feared by the hon. Gentlemen. The Inland Revenue will not turn a blind eye to such abuses, even though—as the hon. Member for St. Ives suggested—some local councils may do so at present.

Photo of Andrew George Andrew George Shadow Minister (Environment, Food and Rural Affairs), Shadow Minister (Environment, Food and Rural Affairs)

Does the Minister accept that second homes—whether run as a business or simply used as a holiday home—are notoriously difficult to police? When they are let, it is difficult to determine whether their use is commercial or personal. I cannot accept his rather optimistic expectation that the scheme would not be used for second homes.

Photo of John Healey John Healey The Economic Secretary to the Treasury

I understand the hon. Gentleman's concern. I can only repeat that the Inland Revenue is alert to the possibilities. We are obviously looking into the possibilities for misuse, and as the Inland Revenue polices the new legislation and the new regime, it will be alert to potential abuses. It will have access to a range of data that may not be available to the local councils that the hon. Gentleman felt were not undertaking the work required.

I shall turn briefly to the Barker report. In many ways, the Barker review has prompted a change in the nature of the debate on housing in the UK, putting the affordability of housing to the fore in a way that I think the hon. Gentleman welcomes. Indeed, he expressed some concerns about that in his remarks. Obviously, many factors can influence prices and supply locally, and affordability problems can be further exacerbated in some areas, such as Cornwall, where second homes account for a sizable proportion of the stock—I think that he said that the figure in his constituency was 10 per cent. That is why the Government have given local authorities the power to reduce the council tax discount on second homes, from 50 per cent. to 10 per cent. Councils thus have the chance to raise extra money locally, and can spend it on local priorities. I understand that all district councils in Cornwall have chosen to take advantage of that new power and have agreed with the county council that most of the proceeds will be spent on affordable housing.

The Government recognise that housing is central to the UK's economic performance. We recognise the essential contribution that housing can make—directly and indirectly—to meeting many of our other policy priorities. That is why we are putting so much investment into housing and taking such a close interest in housing policy reform.

Question put and agreed to.

Adjourned accordingly at twenty-nine minutes past Ten o'clock.