The first sign of the late 20th century property boom came at the beginning of the 1970s, at the same time that public-sector building went into decline. An official Whitehall study from 1974 recorded with a mixture of consternation and perplexity that house price inflation in England and Wales averaged 19 per cent a year between 1969 and 1973, and 29 per cent a year for the period 1971-73. Residential land prices were rising at up to 48 per cent.[i] The study noted, perhaps optimistically, that there was 'no historical precedent for such a price movement being maintained'.[ii] In fact, however, Britain was moving into a new era of house price inflation, as Figure 2 shows.
This depiction of nominal house price growth does not tell the full story, however: once general price inflation is factored in, the picture is slightly less dramatic but also much choppier. There are marked peaks and troughs, each more pronounced than the last. This is illustrated in Figure 3 which takes a close-up view of how prices have evolved, adjusted for inflation, since the 1970s.
But the most telling representation of house price growth, and what is most pertinent to any consideration of the affordability of housing, is to view it in relation to wages.
Figure 4 plots the ratio between average annual nominal earnings and average house prices since 1930 (there is a gap for the years of the Second World War, for which there is no data). What this demonstrates quite vividly is that the affordability of housing had, in response to the heightened output of the inter-war period, begun to improve by the 1930s (prices in London had peaked in 1926).[iii] This progress was disrupted by the Second World War, by the end of which a major shortage had re-emerged, but by the 1950s, as construction levels reached new heights, house prices once again stabilised, and for a while rose more slowly than earnings.
All of this changed at the start of the 1970s, when public sector housebuilding began to be drawn down. Since then, we have witnessed a return to the peaks and troughs in house prices that were experienced during the 18th and 19th centuries (discussed in Chapter 1) and which had been, for a few decades of the 20th century, levelled out somewhat.
Since the mid-1990s, the affordability of housing has steadily worsened and has shown no sign of returning to the level it was at throughout the post-war period, even allowing for a small improvement in the ratio between prices and earnings following the 2008 financial crisis.[iv]
It is important to note that this rise in property prices consists mainly of a rise in land prices. It is not the bricks and mortar which is worth very much more than it was, it is the land on which the home stands. Among the advanced economies it is estimated that 80 per cent of the inflation in property prices since 1950 has consisted of increases in land values.[v] In the UK, residential land with outline planning permission doubled in value between 1994 and 2000, and by the eve of the financial crisis in 2008 it had reached five and a half times its 2004 value.[vi] In the UK, the difference in value now between agricultural land and residential land is staggering. In 2015, a hectare of agricultural land was worth an average of £21,000; with planning permission for residential development, a hectare was worth £1,958,000 – roughly 93 times as much. That figure excludes London, however, where residential land prices are many, many times higher still: in Bromley, an outer borough, a hectare would have cost just over £10 million; in Westminster, where demand is highest in the centre of the capital, it would have been £93 million.[vii]
We have discussed at some length already the progress of housebuilding and its decline since the 1970s, which has clearly been a significant factor in house price growth. But there have been other factors at play as well – principally restrictions on the supply of land on the one hand and, on the other, vastly inflated demand.
Planning controls
Planning controls as we know them today were introduced (by and large) under the Town and Country Planning Act in 1947, which allowed local authorities to veto development and determine how urban areas were able to expand. Until this point there was little check on the use of land for residential development; after it, the developable land was effectively rationed by local authorities. This planning sytem was introduced in response to the rapid and haphazard expansion of Britain’s towns and cities during the inter-war period; this sprawl – while it helped improve housing costs – was not the most efficient use of land and unlikely to prove sustainable through another period of rapid housebuilding.[viii]
It is unclear that the imposition of planning controls, while undoubtedly a factor, is the principle driver behind land values of the levels we see today
A less well-remembered provision of the 1947 Act, however, was the introduction of a charge equal to the development value of the land; this development charge meant that the landowner was not able to profit from the uplift in value that planning permission conferred.[ix] This was an important but contentious component of the new planning system, effectively cancelling out (for the landowner) the planning gain created by the new artificial scarcity of developable land. The development charge was a controversial measure, however, causing resentment among landowners, who were subjected to compulsory purchase orders with little by way of recompense. It was abolished for private-sector land purchases in 1953 and for public-sector purchases too in 1959.
Land prices have been rising ever since.[x] There is a large body of literature which has described the effect of planning controls on land prices in various localities around the world.[xi] We will return to the availability of planning permissions and the extent to which they are responsible for restricting development in the following section. But in terms of blaming high land prices on the planning system, it should be considered that land values did start rising in the 1950s but they did so only modestly at first; it was only around 1970 that real land prices became especially prone to dramatic price spikes.[xii] It is the volatility of land prices which dates from this point – reminiscent of the house price cycles and building cycles of the 18th and 19th centuries discussed previously – which has done most to limit private-sector housebuilding, as will be explored below. It is unclear then that the imposition of planning controls, while undoubtedly a factor, is the principle driver behind land values of the levels we see today. More significant, I would argue, is the decline of housebuilding that occurred at the beginning of the 1970s, which rendered housing – and so the land on which it could be built – more expensive. Broadly in tandem with this, however, came a further development that would contribute to high house prices: the expansion of credit.
The expansion of credit
The other side of the price equation to the restricted availability of housing and land is the vast increase in demand – or purchasing power – over the same period. Since the early 1970s, financial liberalisation has led to an enormous increase in the amount of money, or credit, chasing a finite number of homes. UK financial services, which grew more slowly than GDP between 1914 and 1970, have since that period grown twice as fast as national income.[xiii] A significant staging post in that process was the 1971 Competition and Credit Control Act which relaxed curbs on lending and led to the major commercial banks weighing in to the mortgage market, previously the preserve of building societies. The ‘Big Bang’ of 1986 further liberalised the financial services industry and the deregulated free market in credit.[xiv]
'Lending against real estate – and in particular against existing real estate whose supply cannot be easily increased – generates self-reinforcing cycles of credit supply, credit demand, and asset prices' - Adair Turner
These reforms led to a vast increase in private credit, particularly in the form of mortgages on property, which to banks often appeared the easiest and safest way of lending money and increasing their market share. Household debt grew from 15 per cent of GDP in 1964 to 95 per cent in 2007.[xv] Most of this was spent on housing. Among advanced economies, lending on property increased as a share of all bank lending from 35 per cent in 1970 to almost 60 per cent in 2007; in the UK, residential mortgages comprised 65 per cent of all bank lending in 2012.[xvi] The availability – and cheapness – of this credit has increased enormously the amount of money people have been able to spend on housing, with inevitable consequences for prices.
As Adair Turner, the former head of the Financial Services Authority, has described, the growth of finance has had a vicious circle effect on asset prices, including housing:
'Before the mid-twentieth century, banks in several advanced economies were restricted or at least discouraged from entering real estate lending markets… Once the constraints were removed, these institutions increasingly became real estate lenders. But lending against real estate – and in particular against existing real estate whose supply cannot be easily increased – generates self-reinforcing cycles of credit supply, credit demand, and asset prices.'[xvii]
New class of investors
The resulting frenzy was not confined to owner-occupiers. As housing has come to be seen (rightly or wrongly) as a one-way bet, it has attracted large numbers of new investors. The gap between prices and earnings that opened up in the mid-1990s coincided with the sudden and rapid expansion of the private rented sector. This had been made possible by the deregulation of private rentals under the Housing Act 1988, but the boom in landlordism did not take place until buy-to-let mortgages were introduced in 1996. By 2011 there were 1.39 million buy-to-let mortgages outstanding, worth a combined £159 billion; 20 years earlier these mortgages did not even exist.
It is estimated by Savills, the estate agency, that homes in the private rented sector were by 2015 worth almost £1.3 trillion
Between 2001 and 2014/15 the number of homes owned by private landlords in England more than doubled from 1.9 million to 4.3 million.[xviii] It is estimated by Savills, the estate agency, that homes in the private rented sector (across the UK) were by 2015 worth almost £1.3 trillion – just over a fifth of the value of the total housing stock at £6.17 trillion.[xix] Not all of this stock was debt-financed, however: while buy-to-let mortgages opened the floodgates to this kind of investor in the 1990s, latest research by Shelter suggests almost half (45 per cent) of private landlords today have no mortgage on any of their properties; only nine per cent have a loan-to-value ratio across their properties of more than 75 per cent, so they are on the whole remarkably asset-rich and unleveraged – quite unlike the average first-time buyer.[xx]
The expansion of the private rented sector has been underpinned by housing benefit, which was adopted in the 1980s as the preferred way of supporting lower-income households when the government began to wind down the provision of council housing. This, in a more modest way, further contributed to demand. Instead of subsidising supply, via the building of new homes, the government effectively began to subsidise demand, by topping up what people could afford to pay in rent to private landlords. This marked a major reversal in housing policy which would have significant consequences for the public purse after the government abolished rent controls in 1989 as part of the deregulation of the private rented sector. In the years ahead, the cost of housing benefit would balloon, from £3.2 billion in 1979/80 (in 2015/16 prices) to £24.7 billion in 2015/16.[xxi] This was the result not just of spiralling housing costs but also the much larger number of people coming to live in rented accommodation. The number of households in need of housing benefit more than doubled in a decade from 777,000 in 2004/5 to 1.6 million in 2014/15.[xxii] Today, 25 per cent of private renters are in receipt of housing benefit, at a cost of £9.2 billion a year - state funding that is effectively underwriting rent demands, thus contributing to rent inflation and so the attractiveness of the sector to existing and potential private investors (as discussed in greater detail in a previous Civitas report).[xxiii]
Declining home ownership
As prices have risen, to the delight of many existing homeowners, it has become increasingly difficult for first-time buyers to get on to the property ladder themselves and owner-occupation has fallen from a high-water mark of about 71 per cent in 2003 to 64 per cent in 2014/15 (in England).[xxiv] But these figures disguise more dramatic falls among certain groups, particularly the young and the least affluent. Among low to middle earners under the age of 35, home ownership has fallen from 57 per cent in 2000 to 25 per cent in 2014.[xxv] Increasingly families have little choice but to rent in the private sector, where there is rarely any security of tenure of more than six or 12 months. The number of households with children renting from private landlords has increased by one million in a decade.[xxvi] Concerns about the high costs of renting, the lack of security and poor conditions have begun to proliferate.
'The government became the guarantor of a new generation of slum landlords'
These developments have been most pronounced in the South East and especially London, which since the 1970s has established itself as a global hub of finance and culture that is providing immensely attractive to people not just from the rest of the UK but the rest of the world. Now absorbing almost half of net migration to the UK, London’s population has increased from its post-war low of 6.7 million in 1988 to 8.6 million today.[xxvii] As a result, London has experienced a disproportionate rise in house prices relative to the rest of the country. Savills calculates that 51 per cent of the increase in value of UK housing stock since 2009 has occurred in London and 42 per cent in the south of England.[xxviii] Owner-occupation in the capital was in 2015 down to 50 per cent of households, with 27 per cent renting privately (as opposed to 18 per cent elsewhere),[xxix] while rates of overcrowding have almost doubled from seven per cent to 13 per cent between 2003/4 and 2012/13.[xxx] Here more than anywhere else buy-to-let landlords – and to a lesser extent rich overseas investors – have ridden the wave and as a result become increasingly central to the viability of new developers’ calculations: in 2013 only 32 per cent of new-build London homes were sold to owner-occupiers; 61 per cent went to investors of one description or another.[xxxi]
This has led many estate agents and developers to claim that the investments of domestic landlords and overseas non-residents are a vital prerequisite for new developments to get off the ground. But this is only true to the extent that landowners have come to take inflated residential land prices for granted: if this demand were not there then they would have to trim those expectations. The trouble with relying on investment money to build future homes is that it only maintains supply to the extent that it also increases demand. It is a strategy built around maximising house prices and not one that could ever reduce the cost of housing.
Conclusion
By the turn of the 21st century, almost entirely dependent once again on the output of private-sector builders, the housing market was in certain ways beginning to resemble that of the turn of the 20th century. A steadily worsening shortage of homes was helping to drive up housing costs proportionate to incomes and property ownership was becoming concentrated once more in the hands of a small number of landlords. As the Oxford historian Harold Carter has noted:
'The two tenurial groups – small capitalist landlords buying houses on borrowed money, and tenants with limited security of tenure – would have been familiar one hundred years earlier. What was different this time around was that the government was paying the rent, for one in four of the new tenants. This was essential if they were to be able to have anywhere to live… In effect, the government became the guarantor of a new generation of slum landlords.'[xxxii]
That the housing market has become very much more exposed to the ups and downs of economic cycles is the result of entrusting housebuilding almost entirely in the hands of profit-maximising private interests. But the extent to which it has been buffeted must be connected to changes in the wider economy – particularly the explosion in private credit. It is impossible to know precisely how much the relaxed credit regime of recent years has contributed to house price growth as opposed to inadequate supply. But one estimate suggests that low mortgage rates and the rise in loan-to-income multiples has accounted for about 60 per cent of house price growth between 1994 and 2014.[xxxiii] So while increasing housebuilding to keep track of demand is essential, and the focus here, it may only provide part of the solution to reducing the cost of housing.
This is Chapter 2 from my Civitas report 'The Housing Question: Overcoming the shortage of homes'. You can read the report in its entirety as a PDF here. But I will also be publishing it chapter by chapter here in the slightly more digital-friendly format of Shorthand Social. If you've any thoughts or just want to get in touch on the subject, you can email me at daniel dot bentley at civitas dot org dot uk
Introduction: The Housing Question: Overcoming the shortage of homes
Chapter 1: A Practical Plan: Housebuilding in historical perspective
Chapter 2: From Slums to Slums? The property boom and its consequences
Chapter 3: Why Don't We Build More Homes? Barriers to housebuilding today
Conclusion: A National Housebuilding Strategy: What should be done?
[i] HLI Neuberger and BM Nichol, ‘The Recent Course of Land and Property Prices and the Factors underlying it’, Department of the Environment, 1976, p.6: http://dclg.ptfs-europe.com/AWData/Library1/Departmental%20Publications/Department%20of%20the%20Environment/1976/The%20Recent%20Course%20of%20Land%20and%20Property%20Prices%20and%20the%20Factors%20underlying%20it.pdf
[ii] Neuberger and Nichol, p.2.
[iii] Samy, p.21-22.
[iv] For a more finely grained analysis of the affordability of housing since the 1950s, see Joe Sarling’s blog ‘Housing unaffordability – are we creating "Generation U"?’: http://nlpplanning.com/blog/housing-unaffordability-are-we-creating-generation-u/
[v] Katharina Knoll, Moritz Schularick and Thomas Steger, ‘No Price Like Home: Global House Prices, 1870-2012’: http://www.piketty.pse.ens.fr/files/Schularicketal2014.pdf
[vi] Table 563, now discontinued. As of March 2016, a cached page can be accessed here: http://webcache.googleusercontent.com/search?q=cache:u3Tan_k8UO8J:https://www.gov.uk/government/uploads/system/uploads/attachment_data/file/305680/Table_563_-_Discontinued.xls+&cd=2&hl=en&ct=clnk&gl=uk
[vii] ‘Land value estimates for policy appraisal’, DCLG, February 2015: https://www.gov.uk/government/uploads/system/uploads/attachment_data/file/407155/February_2015_Land_value_publication_FINAL.pdf
[viii] Merrett (1982), p.21.
[ix] Merrett (1979), p.68-69.
[x] Paul Cheshire, ‘Turning houses into gold: the failure of British planning’, LSE Blogs, May 7th 2014: http://blogs.lse.ac.uk/politicsandpolicy/turning-houses-into-gold-the-failure-of-british-planning/
[xi] See for example Kristien Niemietz, ’Abundance of land, shortage of housing’, IEA, April 2012, p.17-19: http://www.iea.org.uk/sites/default/files/publications/files/Abundance%20of%20Land%20Shortage%20of%20Housing.pdf
[xii] See Neuberger and Nichol for evidence of the surprise with which policymakers met this. Figure 1 in Paul Cheshire’s blog (n.67) demonstrates the shift in land prices at the beginning of the 1970s.
[xiii] Adair Turner, Between Debt and the Devil: Money, Credit and Fixing Global Finance, Princeton University Press, 2016, p.20.
[xiv] Turner, p.93.
[xv] Turner, p.22.
[xvi] Turner, p.67.
[xvii] Turner, p.71.
[xviii] ‘English Housing Survey: Headline Report 2014/15’, DCLG, p.7.
[xix] Neal Hudson, ‘Shifting Patterns of Housing Wealth’, Savills, February 24th 2016: http://www.savills.co.uk/research_articles/141285/199550-0
[xx] ‘Survey of Private Landlords’, Shelter, February 2016: https://england.shelter.org.uk/__data/assets/pdf_file/0004/1236820/Landlord_survey_18_Feb_publish.pdf
[xxi] ‘Outturn and Forecast, Autumn Statement 2015’, DWP: https://www.gov.uk/government/statistics/benefit-expenditure-and-caseload-tables-2015
[xxii] ‘Outtturn and Forecast, Autumn Statement 2015’
[xxiii] ‘English Housing Survey: Households 2013-14’, DCLG, p.13. For a fuller discussion around the introduction of housing benefit and its effects, see Daniel Bentley, ‘The Future of Private Renting: Shaping a fairer market for tenants and taxpayers’, Civitas, 2015: http://www.civitas.org.uk/publications/the-future-of-private-renting-2/
[xxiv] ‘English Housing Survey: Headline Report 2014/15’, p.6.
[xxv] ‘Owning a home set to become a pipe dream for young workers on modest incomes’, Resolution Foundation, February 13th 2016: http://www.resolutionfoundation.org/media/press-releases/owning-a-home-set-to-become-a-pipe-dream-for-young-workers-on-modest-incomes/
[xxvi] Bentley (2015).
[xxvii] Gerard Lyons, ‘London: The Global Powerhouse’, GLA, February 2016: pp.17-21
[xxviii] Neal Hudson, ‘Residential Property Focus’, Savills, 2016, Issue 1: http://pdf.euro.savills.co.uk/uk/residential-property-focus-uk/residential-property-focus-feb-2016.pdf
[xxix] ‘English Housing Survey, 2014/15., p.8.
[xxx] ‘Overcrowded households by tenure over time’, London’s Poverty Profile: http://www.londonspovertyprofile.org.uk/indicators/topics/housing-and-homelessness/overcrowded-households-by-tenure-over-time/
[xxxi] ‘Who buys new homes in London and why?’, British Property Federation, p.2: http://www.bpf.org.uk/sites/default/files/resources/BPF-Who-buys-new-homes-in-London-and-why.pdf
[xxxii] Harold Carter, ‘From Slums to Slums in Three Generations’, pp.44-46.
[xxxiii] Neal Hudson, ‘Home Buyers’ Income: When The Average Buyer Is No Longer Average’, Savills, November 16th 2015: http://www.savills.co.uk/research_articles/186866/196894-0
