The Public Accounts Committee is bang on when it comes to the New Homes Bonus

Today the New Homes Bonus scheme took a pasting. It was the flagship scheme and the pet project of the incoming housing minister Grant Shapps when the coalition took office in 2010. And it was heralded as a major incentive to get more homes built.

But the powerful House of Commons Public Accounts Committee, following up on a very critical report from the National Audit Office, this morning called for swift action by the DCLG to provide evidence of its effectiveness.

As the report points out: “This is no small matter when up to £7.5bn will have been given to, or redistributed between, local authorities by 2018-19.”

There is a growing view that the scheme is far from the success Mr Shapps supposed it would be. He seemed to see no flaws in the scheme. This is clear from his reaction by email  (see half way down this later blog) to an initial tongue-in-cheek blog I wrote when the scheme was floated as an idea.

So I shed no tears over the PAC or NAO criticism. I’ve from the outset been concerned that it would be at best a sideshow and at worst it was a potential freak show. (see here, here, here)

I have long joked that the New Homes Bonus is not really about new homes and it really isn’t a true bonus

The idea seems simple and well founded. Reward those who increase their housing stock. Who could argue with that? I wouldn’t. And I think no one would argue against it, if the need to increase housing stock in an area is accepted and the rewards lead to the end result, with no nasty side effects.

The trouble is, as anyone with a half-decent knowledge of payment and incentive systems knows, bonuses more often than not have unintended consequences – a bit like drugs. And there are times when well-intentioned bonus payments actually prove counterproductive to the intended aim.

I have long joked that the New Homes Bonus is not really about new homes and it really isn’t a true bonus. There was a bit of extra money in the initial phase, but the intention is that it is a carrot and stick measure, redistributing money from the overall pot of local authority funding.

I was unimpressed by the original idea. And, when sufficient details started to emerge, I became even less impressed when I crunched numbers to see how the thing would work in practice.

Basically it works by taking money from councils where demand is low and giving it to councils where demand is high. Why?

Because houses tend to get built in places where there is high demand. They get knocked down and replaced where populations are stagnant or dwindling.

So in order to accept the New Homes Bonus as a good thing, you have to accept that local councils in troubled areas with no real control over housing demand will get the stick and lose funding no matter how pro-development they are. This has been known since details emerged of the scheme.

It must be noted that, even if only in a small way, this loss of funding will make the area less attractive and reduce demand for homes still further, whatever the need may be.

Presumably those that can accept this aspect of the New Homes Bonus feel that the greater good is being served because the bonus will incentivise those in richer areas. Well it may. But does it?

Let’s look at what happens in those areas where demand is high, homes are not being knocked down, and where new homes are built. These areas get a financial lift. The bonus in the mix of these councils’ overall funding can presumably help to improve amenities or reduce the council tax.

What’s even weirder is that many of the more attractive local authorities have to do very little to get a bonus and some could receive a bonus for doing less than in the past

Both of these marginally make the area even more attractive. This raises demand in areas already under pressure from high demand and it raises prices. Theoretically over time this would boosts the value of the bonus for each new home added to the housing stock which would provide positive feedback boosting yet further demand and prices.

Interestingly this would most probably have the counterproductive effect of raising political pressure to restrict planning. One might suggest then that this would then increase the amount of bonus needed to achieve the equivalent level of change in attitudes within the local community.

What’s even weirder is that many of the more attractive local authorities have to do very little to get a bonus and some could receive a bonus for doing less than in the past.

So ultimately mechanisms within the New Homes Bonus can be seen to exacerbate the problem the bonus is designed to ease.

Clearly gauging the scale of the positive effects of potentially building more homes against the inbuilt negative tendencies within the scheme are hard to calculate.

But one thing is for sure there are serious questions that need to be addressed. The call by the PAC is well made.

Brian Green is an independent analyst, commentator and consultant working in construction, housing and property