By Sarah Easton, Senior Associate in Commercial Property & Development. First published in MODUS Magazine in September 2012.
Vince Cable speaking at CentreForum on 18 June suggested that lessons could be learned from the 1930s as to ways to assist our escape from economic crisis.
One way, Mr Cable suggested, was to build our way out.
Mr Cable reported that houses built by the private sector rocketed from around 130,000 in 1931 to almost 300,000 in 1934 and that house building contributed to almost a third of all employment increases in this period. The 1930s was a time, like now, when Britain was facing a major economic downturn. Mr Cable claimed that “the experience of the 1930s tells us that it is possible to build, and grow, out of deep economic crisis”. However, as Mr Cable points out, there is one major difference, in that there was no banking crisis in the 1930’s to contend with. Increased construction in the 1930s was funded by bank and building society lending. Despite current low interest rates, those institutions are not, in the 21st century, so willing to lend. Mr Cable suggests that Government could, in certain areas, underpin the necessary finance to stimulate the economy.
Leaving aside for the moment whether Mr Cable’s views are financially viable, how would they work and what would the consequences of failure be?
One way Mr Cable suggests is for Government to guarantee the bonds Housing Associations give to pay for new developments. With less access to bank finance, and housing grants reduced or non-existent, Housing Associations, which are independent not for profit organisations, look at using bonds to raise finance instead. A bond is essentially a promise to repay money to an investor usually with interest.
Mr Cable says there is a large unmet demand for social housing, which could be self financing if built in conjunction with private housing. If guarantees are made available, he suggests will this lead to more private investors willing to invest.
Assuming the Government offers a pure guarantee, i.e that the Housing Association would perform its bond obligations in full, if the Housing Association failed to fulfil its obligations under the bond then the Government would automatically be in breach of its guarantee obligations. Consequently, the bond holder would have an action in damages against the Government equal to the loss suffered as a result of the Housing Association’s breach, albeit that the bond holder in those circumstances would have a duty to mitigate its loss.
The alternative is a conditional payment guarantee. Here, the Government would undertake with the bond holder that, whenever the Housing Association did not pay an amount when it was due, the Government would pay that amount. This would mean that if the Housing Association was in breach, that breach did not automatically put the Government in breach of its obligations under the guarantee. Instead, it would give the bond holder an action in debt (or a contractual right to a payment) against the Government which is not subject to the defence of mitigation. This makes a conditional payment guarantee more like an indemnity than a pure guarantee, but as it is a secondary obligation that is dependent on the primary agreement between the borrower and lender, it is therefore still a guarantee.
Irrespective of the form of guarantee, would support merely for Housing Associations as opposed to the whole housing industry, be sufficient to boost the economy? Mr Cable suggests a buoyant affordable sector would generate revival in the private sector. If Mr Cable is referring to the private sector of “for sale” housing, then without corresponding support for private sector building finance, in the form of less restrictive lending policies from the major banks, this would appear to be wishful thinking.
However, with a young generation facing the increasing prospect of never owning their home, there is an increasing need for private rental housing. Support for this private sector would no doubt generate an increase in activity in the construction industry. If Government were prepared to extend any guarantee scheme to this sector, perhaps underwriting bank loans, then maybe Britain could build its way out of the economic crisis.