Stalling supply – and why more tinkering is not an option

The news that the long awaiting revival of house building may be stalling is deeply worrying,  but sadly not surprising.

The BBC report that a leaked document from DCLG shows the department expects “a decrease in the number of houses started this year: down from 133,650 in 2013/2014 to c.128,000 in 2014/15 (-4%).” This is despite house prices reaching an all-time high and a majority of areas in England now seeing only 1 in 10 private homes for sale affordable for working families on average income. The big picture is of course that whether housing starts go up a bit or down a bit this year, there will still be a yawning gap between the homes we need and the number being built.

Ever since the financial crisis triggered a collapse in the number of new homes being built everyone – from the government to the IMF to the European Commission – has been desperate to get construction moving again. Not only do we need at least 250,000 new homes in England each year, just to  keep up with rising numbers of households, but the prolonged slump in construction activity is seriously holding back the economic recovery. For example, last year the London Assembly found that there were 150,000 skilled construction workers in the capital who were unemployed and on jobseeker’s allowance, costing £2.1bn in benefits.

When you have a massive housing shortage, sky-high and rising prices, and unemployed construction workers all at the same time, something is clearly desperately wrong.

In recent years there have been lots of attempts to kick start a revival in building – and lots of heralding of new dawns whenever an indicator moves in the right direction. However smart market watchers like Brian Green at Building Magazine have been sceptical as to whether we really are on the road to a full house building recovery.

Sadly, the historical record backs the skeptics. After each housing market bust of the last sixty years, supply crashed and then stagnated, only rising again after years in the doldrums. Most worryingly, with every turn of this cycle the production peak has got lower and the upswing shorter.

Despite the short run ups and downs, the graph shows clearly that over time we are steadily grinding to a standstill. Meanwhile, prices continue to soar – and don’t forget that mild falls in house prices were blamed for the last collapse in supply. How can falling prices trigger building strikes, and record prices inspire stuttering increases at best?

We’ve set out our analysis of this seemingly contradictory situation in a major joint report with KPMG warning that there is no one, simple answer to the problem. Yes, the planning system is partly responsible. Yes, the near abolition of government investment in affordable homes has not helped. And yes, the link between mortgage lending, the housing market and construction is a complex one. But none of these factors alone can explain the perverse, downward ratchet in supply we are witnessing.

The hard, but unavoidable, lesson is that our entire housing development system is profoundly dysfunctional, and needs smart, radical interventions on multiple fronts. A few of these include:

  • Green belt swaps, and a wider look at the role of the green belt
  • Increasing public and private investment in affordable housing, through for instance a Housing Investment Bank. It’s worth noting the key reason for the drop in CLG’s figures is a falling off of starts in affordable homes.
  • Addressing the decline in local SME builders by getting land and finance to those who want to build
  • Using the “muscle of the state” (as the DPM said recently) to spur private competition on strategic land. We recommend that this can happen through New Homes Zones

Our full package of reform proposals is here. Some of these could help increase supply before the election, but above all what’s needed is political commitment over a Parliament at least; something we haven’t seen in a generation. Iff the next government has the courage and conviction to put it into place, we could finally turn this one around and start building the homes we need.