Building more is essential – but not enough to solve the affordability crisis

What with the EU referendum hotting up, hooliganism stalking Euro 2016, and Donald Trump enraging half the world, there’s not a lot of unanimity at the moment. But almost everyone now agrees that we need to build far more homes in England. Happily the government does too, having recently increased it’s ‘ambition’ to build a million new homes this parliament to a full blown ‘commitment’ – which Westminster-watchers assure me is a significant shift. The word on Whitehall is that Secretary of State Greg Clark sees this target as analogous to the challenge that Churchill famously gave to the young Harold MacMillan of building 300,000 homes a year, saying that it would either make or break his career. MacMillan fretted – but believed that that ‘every humble home will bless my name, if I succeed’ (which he famously did).

Targets are one thing, but as last year’s Comprehensive Spending Review made clear, the Chancellor is also prioritising house building, and has found a pretty impressive amount of money to deliver it. Keen observers will have noted that we at Shelter have had a few less-than-positive things to say about some of the government’s other housing initiatives, particularly the attacks on genuinely affordable homes in the Housing & Planning Act 2016, as we must now learn to call it.  But despite these concerns, the commitment to addressing England’s historic undersupply of new homes remains a hugely important step towards tackling the housing crisis.

So it was a little galling on several fronts to read yesterday’s new report from Civitas: Restoring a Nation of Homeownership, by Peter Saunders, which robustly rejects the idea that building more homes will improve affordability. My first problem with this report is just how well written and argued it is: if people are going to challenge our hard-won consensus, I’d prefer it if they would be less eloquent and well informed about it. But it must be said – Saunders is quite simply right that building more homes on its own will not bring the price of homes down to a level ordinary families can afford.

This is a terrible truth that many – myself included – are reluctant to admit in public, for fear that it will undermine the argument for more homes. We fear that NIMBYs and naysayers will seize on this admission as proof that we don’t need to build any more, and certainly not round their way. They’d be completely wrong, of course, because it’s perfectly possible to have BOTH an affordability crisis and shortage of homes, without assuming that fixing one problem will automatically solve the other. In fact, I’d say that’s exactly where we are: the lack of housing supply has undoubtedly contributed to booming house prices, but it’s certainly not the only factor. Improving supply therefore can’t be the only solution required.

To be clear, we do urgently need more homes. Back in 2004 Kate Barker’s seminal review of housing supply showed that current building rates implied that all new homes would last 1,200 years. Even the Queen doesn’t have a house that old – so we’d need to increase supply just to replace the existing, aging stock, let alone meet the needs of frustrated first time buyers, overcrowded renters or those suffering the nightmare of homelessness. For all these reasons, we need more homes.

But as Saunders says, even the most ambitious house building programme can’t add much more than 1% to the stock each year, so the bulk of homes for sale at any one moment will always be older properties, not new builds. This means that general house prices are actually set in the second hand market, which new build can only influence at the margin. So it’s not the raw supply of new homes that determine prices, but how much people are prepared to pay for the homes that are already there.

As we’ve long argued, there is simply no silver bullet to the twin problems of the housing shortage and the affordability crisis: we need a whole range of solutions addressing the land market, the construction industry, the planning system, public taxes and subsidies, the housing market, tenure options and financial regulations – and that’s just on the supply side of the equation. But Civitas are entirely right to draw attention to the other side of that equation: we also have to address the problems of housing demand, because it’s this that really determines house prices.

I’ll review some of Civitas’s interesting suggestions for tackling housing demand in another blog later today.

  1. Reducing the amount of money available and willing to be spent on housing will bring down the price of housing, so making housing more affordable for those for whom such money is available. As such, you could say that it solves the affordability crisis, making building more houses inessential. The catch is how those to whom such money is available is decided. It will either be those with access to the bank of Mum and Dad, or those who are allowed mortgages under a Bank of England regime of regulatory and interest rate levers designed to prevent prices rising. To the extent that financial prudence, the main mandate of the Bank, was involved in such regulation, this would also favour those already with access to capital. These proposals would therefore work to stabilise privilege.

    The argument that general house prices are actually set in the second hand market can be applied to any market, food for example. It does not mean that controlling how much people can spend on food would be helpful in resolving a famine. In such a case, and the current housing crisis, an increase in supply is essential, and alternative ideas, to the extent they will have any impact, amount to proposals about who gets allocated what while the supply shortage lasts.

    You accept that even the most ambitious house building programme can’t add much more than 1% to the stock each year, having previous mentioned how MacMillan, at the behest of Churchill, did manage this in the 1950s. What has changed between now and then?

    1. Sorry, my earlier response seems not have posted.

      1. I agree this proposal – which i’m only saying is interesting, not a policy call! – would not solve all problems. No policy idea will do that on its own. I agree that this wouldn’t change the fact that those with more money have more and better choices.

      2. I don’t get this point I’m afraid: there is no second hand food market I know of! But yes, more supply definitely essential too.

      3. Lots has changed since 1950s. My top 3: mortgage deregulation in 1970s and 80s; end of the New towns programme; end of council house building.

      1. 1. No single ‘silver bullet’ policy idea will solve all problems, but neither will any set of policy ideas which excludes either (a) increasing supply, or (b) making people want to live here less (anyone for Brexit? Not me!). OTOH, an idea which solved it for the children of the rich will be politically attractive for some.

        2. ‘Second hand’ here means previously owned, so already produced. So almost all food at the point of consumption is second hand. But as with all markets, the prospect of new supply will prevent prices rising excessively. The prices set in the second hand market for housing are excessive because the prospect of new supply is so constricted.

        3. To rank the causes of the changes to the housing market since the 1950s, it would be useful to identify what caused the causes – a piece of economic history which I think deserves more research! So why did Council house building end? I have a strong suspicion that it was because it became a drain on Council budgets, with costs rising with the inflation of the 1970s, but rents not easily adjusted upwards – so the same economics which stopped PRS building under the Rent Acts of the time.

        Why did New Town building end? I suspect because the planning environment became more and more difficult for them too, and local objectors developed their arsenals. Other ways in which supply might have expanded also became more difficult.

        Finally, why was it rational for banks, building societies and their customers to pile into the deregulated mortgage market, or equivalently, why the pressure to deregulate? I suggest this was the result of house prices being seen to rise abnormally fast, thanks to the restrictions in supply, so diverting the nations savings into the housing market, with the results we see today.

  2. In the 1980’s rent controls were shown with constant publicity to be responsible for Mr Rachman and other rogue landlord’s activities. The Rent Acts were repealed after which a long term secure home could only be had with ownership which for most people meant a substantial mortgage debt repaid over many years. What a happy coincidence.

    Right to Buy and VAT on repairs and maintenance had already meant the demise of large numbers of local builders so now we have eight large construction companies and the mortgage providers in control.

    Could this be the reason for the failure to build enough affordable houses, ever rising prices, vast profits, £1.26 trillion in unpaid mortgage debt and millions living in temporary accommodation including the pavement.

  3. Cathy come Home brought the housing crisis to our attention in the sixties, could you not follow through with a film exposing the mortgage providers and the eight large building contractors.

    These companies have recently been forced to pay out £70 million (Private Eye 1419) because they maintained a black list containing the names of hundreds of thousands of skilled men who were forced onto the dole for the crime of being union members thought liable to blow the whistle on unsafe building practices.

    The size of the out of court payout can only mean that the companies have a strangle hold on building contracts, which enables them to limit the numbers of affordable homes as well as maintaining prices ensuring vast profits. This commercial practice is usually called a Cartel and is illegal.

    But the mortgage providers collateral consisting of nearly £1.3 trillion of unpaid mortgages is protected and sometimes it seems that this is more important to our government than providing homes.

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