The house that Thatcher dismantled

The Conservatives' housing policy worked fine at first, but the housing associations are now in crisis. Paul Vallely on an issue that goes to the heart of the welfare debate

Erik Pearse was the kind of man, they said, that the movement could not afford to lose. For the past 20 years he has dedicated his life to providing homes for the poor, giving special attention to those no one else will house - the mentally handicapped, the disabled, the elderly and ex-offenders.

"We all respect Erik," says one of his most senior colleagues. "He is one of the thinkers of the movement."

The movement is that of the nation's housing associations. Between them they provide homes for around a million of Britain's poorest citizens. This is an important element in housing for the poor, now that local authorities are forbidden from adding to their stock of four million council houses as tenants exercise their right to buy and join the nation's 13 million owner-occupiers.

Recently, however, the housing associations have split into two camps under the cumulative impact of seven years of Tory housing policy. The accusation is that by using cut-throat tactics and undermining standards, a new breed of entrepreneurial association managers is driving out the idealists.

Mr Pearse is one such idealist. At the end of last month, he resigned from his post as chief executive of one of Birmingham's leading housing associations, defeated and disillusioned.

The political significance of all this goes beyond housing. For the changes forced upon Pearse and his fellows over the past seven years offer a paradigm of government plans to switch more services away from statutory bodies and on to the shoulders of the voluntary sector. More importantly, it exposes the policy dilemmas at the heart of some of Britain's most fundamental problems: unemployment, family breakdown, benefits overload and a growing poverty trap.

The principle of providing subsidised accommodation to the needy goes back via the estates created by Victorian philanthropists such as George Peabody to the almshouses of the 13th century. But the great burgeoning came in the 1960s, in the period of social revulsion against the Rachmanite excesses of private landlords. Dozens of charitable housing associations sprang up.

Their original aim was to refurbish run-down inner-city houses at a time when local councils were obsessed with building tower blocks. As tenants, they took on the elderly, young singles and others who were not covered by the local authority duty to house families. Conservative and Labour governments alike injected substantial public funding.

Everything changed in 1988, with the Housing Act. Secure status for tenants was abolished. Council-house dwellers were given the right to buy their homes, and local authorities lost the right to build replacements. Housing associations were told to look to the private sector for much of their finance. They were told that the Housing Corporation, the government funding agency, would give out cash only to those who could match it with private funds.

"Before 1988, we were really no more than agents for the Government, which absorbed all of the risk involved in building," says Des Oxley, chief executive of the non-charitable Bradford & Northern housing association, which has embraced the changes with enthusiasm. "Now it's possible for a housing association to go bust. It has put an end to the more extravagant commissioning procedures. It has introduced competition, and brought better value for money."

In the early years, the evidence seemed conclusive: more houses were built - around 50,000 a year - and private finance injected some £6bn.

But then the politicians started to cut the cash subsidy. It has continued to fall - from £2.4bn in 1993-94 to £1.2bn in the coming year. At the outset, 95p grant was paid for every £1 needed. By 1990, the figure was reduced to 75p; it was down to 62p last year, 58p this year, and looks set to fall to 52p. And those are averages. Many current projects receive only 45p or even 35p in grant; the balance has to be raised from the private sector. And as the subsidy element is reduced, private lenders are increasingly saying there isn't enough security for their loans.

The overall effect is that, instead of the 50,000 new homes which were being built by housing associations every year (against a demand for 100,000), there are now only 30,000. And the 20,000 target for next year is the lowest for any year since the Second World War.

The process has had other devastating consequences, says Richard Best of the Joseph Rowntree Trust. Rents are up. The size and standard of housing is down. Reserves are being irresponsibly eaten away. Bills are being stored up for the future. "But so long as associations are making competitive bids," says Mr Best, "they win the funds, because the Government is always tempted to get the most homes for the smallest amount of money."

Confirmation of that came only last week from John Gummer, Secretary of State for the Environment, who warned the annual jamboree of the Housing Corporation against the idea that low rents should be their chief objective. "Low rents mean more subsidy, and therefore fewer homes," he said. To those like Mr Pearse, the very agenda of that conference was revealing of the new priorities of the movement. The sessions on the private owner and private finance were near the top. Only towards the end came the question: "How can we raise the profile of housing issues morally and politically?"

Ministers would probably dismiss Erik Pearse's opposition as ideological. But doubts are spreading to those who approved of the initial reforms. "They had quite a good idea to start with," says Mr Best. "It drew a lot of new money into housing. But then they pushed it too far."

"We were too taken in by the growth and the opportunities," says Helen Cope, chief executive of one of the larger associations, the East London. "We made it work so well that we soon found ourselves saddled with a regime where we find it difficult to make ends meet. And yet the Government won't listen to our reservations about the grant ratio and the fall in standards."

That fall is significant. A survey by Valerie Karn, professor of housing studies at Manchester University, has charted how houses have been getting smaller - in two-thirds of new houses, the family does not even have room to sit down and eat together.

The irony is that, despite the fact that subsidy is now fixed at an unrealistic percentage of the total cost, there are still more bids for Housing Corporation cash than there are funds available. "The Government then claims that grant levels must be realistic because people continue to bid for them," says Ms Cope. And because the Government lays down no minimum specifications on size, materials, energy insulation, maintenance costs, or general standards, the way to compete is to lower standards still further.

It is always a mistake to subordinate the quality of housing to quantity, Nick Raynsford, the Labour housing spokesman, told the Housing Corporation conference last week. "There is almost always a serious long-term cost. The failure to put baths in council houses in the 1930s, and central heating in the 1960s and early 1970s ... simply led to a requirement to modernise those homes far sooner than would otherwise have been necessary."

The Government's approach has had other side-effects. The rehabilitation of inner-city properties - which is costly because sites often need expensive preparatory work - is being gradually abandoned in favour of the construction of homes on greenfield sites, which is cheaper, and where are costs are more predictable.

It would be easy to dismiss all this as a backwater of policy in one of the lesser departments of state. There is far more to it than that. The issues it raises go to the heart of a problem that will continue to confront European politicians into the next century: can we still afford a welfare state if we are to compete in a global marketplace?

There is a fundamental mismatch in our economy between what people earn and the true cost of the housing they need. In the West, there are many who do not earn enough to cover the real cost of their homes. And the phenomenon will only increase as our market-driven society continues to widen the gap between rich and poor. The difficult question for policymakers is how to minimise subsidy to the growing poor.

The answer of the present Government - still in thrall to Thatcherite ideology on individual choice - has been to entrust its subsidy to people, rather than bricks and mortar; as was done by building council houses and housing association homes under the old system. As a result, rents have been forced up nearer market levels, and to offset the impact, the poor have been given increasing amounts in housing benefit. It rose from £8bn last year to £11bn this.

This highlights another of the great current policy dilemmas: the poverty trap. "People are caught in an abominable situation, because housing and other benefits are reduced in line with their increased earnings," says Mr Pearse. Anyone earning between £100 and £200 a week is affected, removing the incentive for the employed to work overtime or for the unemployed to seek a job. "For every £1 they earn, they lose 97p from their benefits. It is like the equivalent of 97 per cent income tax."

Combine that with the government policy to promote low-cost ownership schemes, and a new phenomenon can be observed: the building of ghettoes of what ministers are fond of calling the underclass. The government policy of giving tenants inducements of between £9,000 and £15,000 to move out and buy their own homes means, says Mr Pearse, "that the people with jobs move out. The estate gradually becomes 100 per cent unemployed people on housing benefit. The place deteriorates. Vandalism, violence and neighbour disputes increase and the scheme needs more intensive management."

The obvious solution involves a U-turn on subsidy strategy. A bricks- and-mortar subsidy, according to the National Federation of Housing Associations, is cheaper than a revenue subsidy, if it is costed over a period longer than 14 years - not that governments think over periods that long. To revert to subsidising buildings would increase the national housing stock, lessen the poverty trap, create jobs in the building industry, revitalise the inner cities and cut the amount that goes via housing benefit to private landlords, who do not generally plough it back into housing. Only the ideology of paramount individual choice argues otherwise.

Were that shift to happen, it would be too late for Mr Pearse, who has now joined the ranks of the unemployed whose cause he has so ardently championed. His old association has now advertised for a replacement. The successful candidate, the job description demands, will possess "the ability to manage change in a challenging and uncertain world". He or she will need all the skills they can muster.