Published: 19 Oct 2016 by Pete Jefferys

On Newsnight last night there was an interesting debate about housing and homelessness. It was prompted by tonight’s BBC2 documentary which follows a London council’s helplessness in finding places for its homeless families to live. There were great points made by all the participants; including Jon Sparkes from Crisis and campaigner Poppy Noor – who has experienced the homelessness system herself.

However the point that struck me most was actually made by the presenter Evan Davies. He said:

“People who, if they’re in the housing market – the market sector – are clearly not going to get a home. They’re not going to afford one whether it’s private rent or to purchase … and… I just wonder whether the most basically obvious fact – and whether it’s accepted now – is that we just don’t have enough of if you like the ‘non-market sector’ homes, the social homes… where they are allocated by other factors than how much money you can afford to pay for a room.”

What struck me about this statement was how it really isn’t accepted within much of the debate on the housing shortage. Instead, there is a strongly held view across many of those who care about the housing crisis and want to solve it that simply building a lot more market homes could solve the crisis we face. This is wrong.

I’d argue that the proposition being made by those who believe this is something like:

• Prices in the housing market – rents and house prices – are too high and rising partly because the housing market produces far too few homes.
• If developers were freed up to match their supply to housing demand, for example by scrapping planning restrictions, this would cause prices and rents to fall.
• Over the long term, this is the only way to make housing more affordable.

This misses out lots of the detail, but I think it’s the core assumption of a lot of people. So why do I think it is wrong? I think you’ve got to start with the fundamentals of the housing market.

The key point is that prices and rents in the housing market are not set by newly built homes (unlike in lots of other markets, where the supply and demand for new products sets the price). Prices are set by trading within the secondary market. What this means in plain English is that the price of a new house is determined by how much people are paying for old (secondary) houses in that local area. New build homes do not set prices!

There are around one million property transactions in England per year, of which perhaps 120,000 are for new build market sale homes (roughly based on new build figures minus rented homes). At just over 10% of the market, the new builds will not set the price but will be marketed at values which reflect their local second hand market.**

For new build homes to start impacting, let along setting, prices in the wider housing market there would need to an enormous rise in the scale of market building. Kate Barker’s influential review of housing supply in the mid-2000s recognised this. It argued that even if private housebuilding roughly doubled from 120,000 to 240,000, house prices would still continue to rise on a trend of 1.1% above inflation. She said that to stop house prices rising at all would imply a level of market housebuilding that would be “undesirable and unachievable”.

I agree that it would be unachievable to get the market building enough homes to start flatling or reducing house prices overall. The reason is simple: the private housebuilding market can only build when prices are rising. Private house building operates on a speculative business model. Firms buy land years in advance and they pay a price based on how much they think homes will sell for in the future. If house prices fall, they stop building – as they would not make a return.

You cannot solve the problem of high house prices and rents by over-building market homes.

This is where Evan is spot on. What we need is to build (and retain) a lot more “non-market” homes which are outside of the land price, house price trap. Over time this will moderate price rises in the market sector too, by giving people who can afford the market a viable alternative choice.

There’s an obvious second benefit to building non-market homes too. It is that outside of the market you have scope to set rents and/or prices that people can genuinely afford. In the short term, this is what is needed most – homes that people on normal and low incomes can actually afford!

Many of these non-market homes will be part-funded by through schemes delivered by the private market which also provide full market homes – I’m not saying we should stop building market schemes! But the critical point is that without building thousands more homes outside of the speculative, high-price market we simply won’t make a dent in the housing crisis.

Evan Davies got this point intuitively. But we need to do quite a bit more work to make sure it is widely appreciated so that we build the right sort, as well as the right number, of homes.

**One caveat is that this is being distorted at the moment by the fact that buyers can pay more for new build homes, because of the government’s Help to Buy scheme. This adds an extra loan on top of a mortgage to the buyers of new build homes, meaning that they can pay more. According to the latest stats from the ONS, the average new build home now cost between 13% and 64% more than the average second hand home in English regions (40% on average for England). Part of the reason for this difference may be the extra demand created by the Help to Buy scheme.