It is argued that housing is a fundamental element in successful community care programmes for people who have a long-term mental illness, but that the significance of the immediate living environment on the individual's psych- social well-being has been underestimated in the formulation and implementation of policy. Using a grounded theory approach. Part One reports an exploratory study of the catchment area of one psychiatric hospital, which included parts of three health districts and three local authority areas. The study examined in detail, with a focus on housing, the operation of services for mentally disabled people , the plans for creating locally-based facilities, and the implementation of those plans in the mid-1980's, by means of a combination of documentary evidence and key informant interviews. All three parts of the study area were found to have encountered major but differing problems. Wide variations between and within local areas in policy and resources were found, but most stiking was the emergence of two distinct key informant perspectives: those of policy makers/managers, and workers in face-to-face contact with mentally disabled people, indicative of separate discourses of rights and needs. Part Two sets up a model of three functions of housing based on psychological needs, and argues for a compensatory role for housing in community care, which is contrasted with the reality of increasing difficulty in meeting even basic survival needs. It is suggested that the emphasis on negative rights of much mental health reform was inadequate to ensure that needs were met when the welfare net began to contract, and renewed emphasis on citizenship and social rights is proposed as a means to represent more adequately the housing needs of mentally disabled people at the levels of policy and service planning.