The present Conservative government, aware that high house prices and the consequent decline in owner-occupation is becoming a particularly damaging issue politically, has identified housebuilding as a priority for the current parliament. The housing minister, Brandon Lewis, has defined 'success' as 1 million new homes built over the course of the government’s five-year term.[1] At 200,000 homes a year, this is not an especially impressive target, and output is already running behind that ambition. But new initiatives are yet to work their way through.
'We are the builders' - George Osborne
In his November 2015 spending review, George Osborne announced plans to deliver 400,000 ‘affordable’ new homes in England by 2020/21 in what he called ‘the biggest housebuilding programme by any government since the 1970s’. These homes would be delivered via a series of initiatives funded by a doubling of the housing budget to £2 billion a year from 2018/19. ‘We are the builders,’ the chancellor told the Commons.
The rhetoric, especially as trailed to the media on the morning of the review, sounded promising. But the initiatives involved are unlikely to create much additional housing that would not have been built anyway, and certainly nothing like 400,000 extra units (over five years); instead the government’s Starter Homes initiative will enable more of those that are built to be sold at a discount to first-time buyers. In this respect, it was in much the same vein as initiatives during the Coalition government: helping a relatively small number of first-time buyers get on to the housing ladder via various subsidies without doing anything to actually reduce the cost of housing. The effect of this has been and continues to be to make things worse rather than better, as it further supports demand without improving supply. There have been other initiatives announced in or since the spending review and reaffirmed in the March 2016 Budget which should be welcomed, including the release of public-sector land for 160,000 homes, streamlining the planning system and providing £1.2 billion for the remediation of brownfield land. Improving the availability of land on which to build is an important component of the housebuilding strategy the country needs.
None of these initiatives amounts to the actual building of homes, however, and there is no sign that anybody seriously expects a glut of new properties to flood the market. Certainly the Office for Budget Responsibility does not anticipate that any of the government’s plans will change much. In its outlook for the next five years, the OBR forecasts house price inflation to ‘persist at rates somewhat above earnings growth’, amounting to 26.4 per cent by the beginning of 2021. It made no mention of the chancellor’s ‘400,000’ homes in the context of house prices.[2]
It was described by David Cameron as 'a huge shift in government policy', which would be a fair assessment but for the extremely limited extent of its ambition
One recent initiative that showed promise was the government’s decision to directly commission the building of 13,000 homes on publicly-owned land. It was described by David Cameron as ‘a huge shift in government policy’, which would be a fair assessment but for the extremely limited extent of its ambition. Another promising but currently small-scale initiative involves the use of ‘housing zones’, in which councils receive funding to work with private developers in order to deliver homes more quickly; in other words, subsidising development and involving local authorities in getting homes built. However, the scale of this too is tiny. Just £6 million has been committed so far, assisting the construction of up to 45,000 homes.[3] Involving public-sector money and agency like this is the right sort of approach but it needs to be scaled up, and on a very large scale.
Some principles for a new approach
In the absence of a committed public-sector building programme, the supply of new homes has been, and continues to be, inadequate: the market has failed to deliver. Upwards of 240,000 homes are needed in England each year: not only has private enterprise failed to hit this figure in the past few decades but it has never come near since the 1930s.[4] It may be time now to relearn the lessons of the early 20th century and accept that it is unrealistic to expect the market alone (supplemented by a relatively small number of housing association properties) to provide all of the homes that the country needs. We need to ensure once again that those homes the private sector does not build are provided by the public sector: this will require significant public funds and the direct commissioning of housebuilding by the state, whether by central government, regional bodies or councils.
Allied to this is the need to increase the amount of land that is made available for development and ensuring developers build it out at the rate that homes are needed, rather than the rate at which the highest returns can be obtained. This is of profound importance to the housing question which goes to the heart of why mounting unmet demand is resulting in higher prices rather than higher output. Tackling it will involve addressing the lack of incentives for landowners to release land more quickly or for developers to build out sites more quickly. We need to break the dynamic which means that residential land and the homes that are built on it are drip-fed into the market at a rate that holds and pushes up house prices. The answer must involve imposing a new set of incentives, on both landowners and developers, which ensures that housebuilding keeps up in future with evolving need.
Proposals
There are various ways in which the above principles might be put into practice. Here are some proposals for a national housebuilding strategy which would meet these objectives:
1. Give local authorities a statutory duty not only to survey housing need (existing and future) and identify sufficient land suitable for development, but also to ensure the delivery of those homes within appropriate timeframes. Crucially they should be empowered and required where necessary to step in and directly commission construction work where the private sector fails to meet the needs identified in the given local area.
2. Establish a National Housebuilding Fund on which local authorities can draw for the financing of construction work. The assumption should be that these homes are sold into owner-occupation on the open market, with the proceeds of sales reinvested into the fund and used for future housebuilding, in perpetuity. But there should also be access to this fund for housing associations to build homes for social rent and repay the amount out of future rental income over the years ahead. The capital for this fund could be raised via the issue of central government bonds, taking advantage of the currently very low cost of borrowing.
3. Grant planning permissions in future on the basis that they are completed within a given timeframe, corresponding with the existing and future needs that the local authority has identified. Build-out rates would effectively be determined by local planners according to the area’s needs. Where sites are not built out as planned, the local authority should be able to impose charges, and/or (as appropriate) acquire the land at less than its residential use value (probably 50 per cent) and directly commission building firms to complete the work. These sanctions are meant as a last resort – the goal being not to punish developers but to introduce new incentives powerful enough to change current behaviour. A less severe approach – if it elicited the necessary response – might be to charge annual business rates on the capital value of undeveloped sites.
4. Give local authorities the power to acquire non-planning permissioned land at less than residential use value in certain limited circumstances, these being where the pipeline of developable local land has run low, and where the land in question is deemed strategically important to meeting local housing need. This too is meant as an action of last resort, designed to encourage the owners of developable land to strike deals early with private developers.
This revised framework would not only, by involving the public sector, provide a backstop to ensure the homes that are needed are built irrespective of private-sector output. It would also exert a new downward pressure on prices. Developers would no longer be able to restrict supply in order to maximise prices; instead, they would have to design business models, including pricing strategies, based on releasing homes into the market at the rate they are needed, as stipulated by the local authority. This would inevitably require them to be sold at lower prices than at present, which would mean, in turn, purchasing land at much lower prices than are customary at present. The losers, ultimately, would be landowners – they would still stand to profit from the sale of land for residential development, but they would not be able to command the prices they do at the moment. Developers, who have built landbanks at current land prices, would also be placed in an extremely vulnerable position.
This framework would maintain market mechanisms and fair pricing, but it would remove the ability of landowners and developers to manipulate those prices by controlling the supply of new homes
There might be a danger, with the introduction of ‘use-it-or-lose-it’ planning permits, that landowners or developers are reluctant to obtain planning consent (if the clock is then ticking as soon as it is granted). The purpose of the local authority’s power to compulsorily purchase land at less than its residential use value would be to overcome this likelihood (councils already have the power to acquire land compulsorily but the owner is legally entitled to any development gain that arises within 10 years).[5] Empowering councils to purchase land at 50 per cent of the residential use value in certain circumstances would mark a partial return to the development tax that was a feature of the 1947 Town and Country Planning Act. Rather than being applied to all land purchases, however, it would only be used as a last resort as a disincentive to landowners holding land to profit from inflation. Landowners in areas of high housing need, with plans at some point to cash in on residential use values, would run the risk of losing much of that windfall if they did not strike a deal with a developer and get their sites in the pipeline sooner rather than later. The power should only be available to the local authority, subject to review by the secretary of state, if the existing pipeline for homes is running so low that the necessary rate of development is at risk. All other land purchases by councils should be made on the open market.
This framework would maintain market mechanisms and fair pricing, but it would remove the ability of landowners and developers to manipulate those prices by controlling the supply of new homes. Crucially, it would drive residential land values down because, if homes have to be sold more quickly and therefore cheaply into the market, then the land will be worth less to the developer – and landowners can only command prices that developers are prepared to pay. By using the public sector to top up private-sector output, it would also remove one of the principal drivers of high house prices at present, which is the year-after-year shortfall in the building of new homes.
In terms of who should deliver public-sector housebuilding, I would argue that councils remain best placed to fulfil this function given that they are locally accountable. The difficulty in some places at the moment is that this local accountability gives voice to nimbyism, which holds back planning approval for certain developments. This nimbyism must not be allowed to override national imperatives, which would be the point of placing a new statutory duty on local authorities to ensure sufficient homes are built. The alternative might be to have a central government quango in charge of such commissioning, or regional bodies (the Northern Powerhouse initiative would seem to offer scope in that part of the country, for example); but the more remote from town halls the decision-making, the more resentment there is likely to be about new developments.
The crucial difference with the 1980s manifestation of right-to-buy, however, would be that the proceeds of sales would be reinvested in more homes
The new council-built homes would not need to be maintained in the social sector; on the scale envisaged this would raise the prospect of a new generation of council estates. This is likely to be politically unpalatable but would also entrench poverty and welfare dependency; there is much evidence that spatially segregated social housing has served not only to concentrate poverty in particular areas but to perpetuate unemployment among those who live in it too.[6] Selling new properties directly into owner-occupation would in some ways represent the logical extension of right-to-buy. The crucial difference with the 1980s manifestation of right-to-buy, however, would be that the proceeds of sales would be reinvested in more homes. A similar strategy was pursued in the late 20th century by Singapore, where the large majority of homes are both public-sector built and privately owned.[7]
Increasing access to home ownership would be one attractive outcome of the plan, but that is not the fundamental objective, which is simply to increase the supply of homes and so reduce housing costs across all tenures. This may alleviate some of the demand for social housing; however, the proposed new fund for building should also be made available to housing associations to the extent that local authorities identify social housing need in their areas.
Finally, councils should, wherever possible, be encouraged to parcel up land for their own developments into chunks manageable by SME builders. This would encourage greater competition in the building industry and break the stranglehold of the biggest high-volume builders.
Costs
How much money for public-sector housebuilding should be made available via the National Housebuilding Fund? This would depend on how the private sector reacts to the reforms outlined here, and so how many public-sector homes were needed. It would also depend on what kind of homes were needed where. But if we assumed, for the sake of argument, that there was no improvement in private sector housebuilding above current levels, we would be looking to councils to oversee the building of about 100,000 homes a year, including about 25,000 in London. If, say, half were two-bedroom flats and half were three-bedroom houses, and all were built in London and the south of England, this could be achieved for £15-20 billion, based on estimates of 2015/16 building costs calculated by the consultancy Capital Economics.
This would represent the highest end of the cost spectrum, because these figures are calculated using today’s building costs, including today’s land prices (as well as assuming that all of the homes would be in the more expensive south). If homes were sold into the market in much greater numbers and more quickly than they are at present, then prices would be depressed and land values would fall, reducing the cost of building future homes – for the public and the private sectors. In addition, if the private sector stepped up housebuilding in response to the proposed planning reforms, then the demands on the public sector would be correspondingly less. If private (and housing association) output reached 200,000, for example, that would leave roughly 50,000 homes a year to be built out of the National Housebuilding Fund – costing at most £10 billion.
The costs should be viewed in the context of the £25bn-a-year housing benefit bill - which is a direct consequence of the failure to build enough homes
This would be a one-off upfront capital investment – as homes were sold into the market, the money would be reinvested year after year. These sums should be viewed in the context of the current cost of housing benefit, which is roughly £25 billion every year - none of which finds its way back to the taxpayer, and is a direct consequence of the failure to build enough homes. The investment in new homes, on the other hand, would yield significant returns for the taxpayer: reducing housing costs would reduce housing benefit liabilities, now and in the future. In addition to that, money spent on construction would contribute to GDP growth. The value of this has been estimated at a £2.84 increase in GDP for every £1 spent.[8] The Lyons Review calculated that increasing annual housebuilding to just 200,000 a year by 2020 could create 230,000 new jobs and add 1.2 per cent to GDP.[9]
Still, the initial outlay would be large and would be likely to meet significant political opposition. The climate at Westminster is currently hostile to big spending initiatives, however efficient a use of resources this might be in the long term. It might reasonably be argued though that the recent period of belt-tightening since 2010 and the prospect of a budget surplus within the next few years might allow a little breathing space for the contemplation of long-term infrastructure investment such as this. Government borrowing costs have recently reached all-time low levels, 10-year gilts now costing the government well under 2 per cent.[10] Borrowing to invest should not be ruled out in areas of national importance. Without it, as I have tried to show in this paper, the under-supply of new housing is unlikely to be resolved.
Postscript
There is an elephant in the room in the housing debate which is that, actually, very many people do not want housing costs – or, more precisely, the price of their own home – to fall at all. Most homeowners (which still, for now, means most households) have gained and continue to gain from rapid house price growth. Many may be concerned about their children or grandchildren’s limited prospects of becoming homeowners; they may be horrified by the kind of prices that many younger people must pay today just to rent. Even so, there is little obvious desire for a fall in house prices, which would leave millions of homeowners out of pocket. Few, if any, politicians will stand up and say that house prices need to be reduced. In fact, most seem content to go along with initiatives from this and the previous government to buoy the market by effectively subsidising purchases. And yet the only way of reducing housing costs for everybody is to get on top of demand, increase supply and depress house prices. The present generation of owner-occupiers is not the only vested interest presenting an obstacle to the government doing the right thing. There are large landowning interests who stand to lose out from any change to the status quo, and there are vocal campaigns against housing developments on environmental and heritage grounds, for instance.
How house prices can be negotiated downwards sensibly, without creating mass panic and an economic crash, is a challenge worthy of an entire study of its own
For the past decade or more, we have lacked the will as a country to do what is necessary. House-price appreciation has been too enticing, for too many people, to do much about. But even if the public mood changed and we were determined to tackle the issue along the lines suggested above, there would be potentially enormous economic consequences arising from any strategy to reduce house prices. Recent homebuyers would be placed in negative equity, consumer confidence would probably fall, a recession may well ensue. If land prices were to fall – as intended – the current generation of developers who are sitting on expensive landbanks will be highly exposed. More frightening still perhaps, the financial sector that has facilitated the current levels of house prices would be plunged into crisis as those prices fall; as noted above, about two-thirds of UK bank lending is in the form of residential mortgages. Martin Wolf of the Financial Times, a critic of measures that keep housing expensive, nevertheless warns: ‘A deregulated and dynamic housing supply could spell financial and political Armageddon.’[11]
I have tried to offer some answers here as to why we do not build sufficient homes and what must be done to rectify the situation. How house prices can be negotiated downwards sensibly, without creating mass panic and an economic crash, is a challenge worthy of an entire study of its own. These are big questions beyond the scope of this paper, but they require serious and honest discussion of the kind that has not been had so far. The question may reasonably be asked, can we afford to bring down housing costs? It may also be asked, can we afford not to?
This is the Conclusion to my Civitas report 'The Housing Question: Overcoming the shortage of homes'. You can read the report in its entirety (complete with references) as a PDF here. But I have also published 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?
[1] Press Association, ‘We want to build 1m more English homes by 2020, says government’, The Guardian, September 21st 2015: http://www.theguardian.com/society/2015/sep/21/1m-more-homes-in-england-by-2020-government
[2] Office for Budget Responsibility, ‘Economic and fiscal outlook’, March 2016, p.68: http://cdn.budgetresponsibility.org.uk/March2016EFO.pdf
[3] ‘Tens of thousands of homes supported by Housing Zone funding’, DCLG, January 5th 2016: https://www.gov.uk/government/news/tens-of-thousands-of-homes-supported-by-housing-zone-funding
[4] The highest level of private enterprise output in England in a single year was 203,320 in 1968, according to Table 244, DCLG.
[5] ‘Compulsory purchase and compensation’, DCLG: https://www.gov.uk/government/publications/compulsory-purchase-and-compensation-booklet-1-procedure
[6] Tim Horton and James Gregory, The Solidarity Society, Fabian Society, 2009, pp.36-39: https://www.fabians.org.uk/wp-content/uploads/2012/04/SolidaritySociety.pdf
[7] Sock-Yong Phang, ‘The Singapore Model of Housing and the Welfare State’, Singapore Management University, 2007: http://ink.library.smu.edu.sg/cgi/viewcontent.cgi?article=1595&context=soe_research
[8] ‘CBI calls for infrastructure investment to power recovery’, CBI, November 8th 2011: http://www.cbi.org.uk/media-centre/cbi-calls-for-infrastructure-investment-to-power-recovery/
[9] The Lyons Housing Review, p.18.
[10] Elaine Moore and Robin Wigglesworth, ‘UK’s 10-year borrowing costs touch all-time low’, Financial Times, January 29th, 2016: http://www.ft.com/cms/s/0/ef568030-a7a8-11e4-be63-00144feab7de.html#axzz43Wuf0uj5
[11] Martin Wolf, ‘Buyers beware of Britain’s absurd property trap’, Financial Times, October 10th 2013: http://www.ft.com/cms/s/0/aa1c9dfa-30ea-11e3-b478-00144feab7de.html?siteedition=uk#axzz2wg1sGouQ
