More homes, but how?Original
31 Aug 2011
Housing in England is in crisis. It’s become a cliché, but that’s because it’s true. The latest reminder came yesterday with a new report from the National Housing Federation (NHF) and Oxford Economics which restated the problem in no uncertain terms: despite being one of the richest nations in the world, we are failing to provide enough homes for our people.
2010 saw the lowest number of new houses built in a year since the second world war (around 105,000). The average number of annual additions to the housing stock over the past 20 years has been around 160,000, although house-building has nose-dived since the recession took hold. As a result of factors such as immigration, an ageing population and an increasing divorce rate, there are likely to be 4 million more households in England by 2025 than there are today. That means, assuming the economy makes a reasonable recovery, we need to be building about 250,000 new homes each year until then. If, instead, we keep building for the next 15 years at the same rate we have for the last 20 years, then by 2025 we will be 750,000 homes short of what we need as a country: that’s equivalent to the current housing requirement of Birmingham, Liverpool and Newcastle combined. Meanwhile, 4.5 million people are on our council waiting lists, and homelessness is on the rise for the first time since 2003.
The NHF report also highlights a decline in levels of home ownership. It’s important to note though that this decline is, for the most part, confined to the young. Levels of home ownership among pensioners, for instance, are rising. The main reason for a decline in home ownership among today’s young generation is high house prices, themselves an inevitable consequence of the shortage in supply. The average house price nationally is currently 11 times average earnings. In London, it’s even worse: there, the average age at which someone now has the savings to afford a deposit on their first property and commands a salary sufficient to pay the mortgage on it is 52. There is plenty of demand for housing, what is lacking is ‘effective demand’, that is demand mediated by finance: people can’t get mortgages, largely because they can’t get a sufficient deposit together unless they have access to ‘the bank of mum and dad’.
But a decline in levels of home ownership wouldn’t necessarily be a problem if the alternatives were better. The primary purpose of housing policy should be to provide a secure, decent, affordable home for the whole population – regardless of tenure. What should matter most is that a home is secure, decent and affordable – not that it is owned rather than rented. The problem is that, unlike in many European countries, our fragmented and unprofessional private rented sector does not offer that security, decency or affordability. Part of the reason that home ownership has come to represent the primary manifestation of aspiration in this country is that the alternative is so poor.
Compared to elsewhere in Europe, our privately rented property is less secure and charges higher rents. And yet this is where the squeezed middle are now being funnelled towards, unable to afford to buy their own place and unable to qualify for our increasingly residualised social housing. And, if house prices are set to stabilise – which we do need if we are to avoid another bubble and burst – then private rents could get higher still, as landlords move from a capital gain to a rental income model. So, a big part of the solution here has to be to sort out our private rented sector, to make it a more secure place for families to call home: this is where much of the policy action is going to have to be in the years ahead.
But, returning to the fundamental problem of housing supply, we need to start offering solutions.
Current government policy isn’t up to the task. For a start, cutting central investment in affordable housing by 63 per cent can’t help. In fact, history tells us that the only really significant surges in housing supply have come when government has paid for them. The New Homes Bonus looks likely to offer too-limited an incentive for reticent local authorities to really build. And ‘Affordable Rent’ seems a short-term fix, likely to run out of steam after this spending round. Reform to the Housing Revenue Account, building on previous government policy, will allow local authorities to build a bit, and the presumption in favour of development at the heart of proposed planning reform is a welcome development. But, overall, it isn’t enough.
Some of the other solutions being mooted won’t help either. The last thing we need is a return to the loose lending by banks that characterised the last decade. It saw house prices triple and exacerbated volatility in the housing market, contributing to instability in the economy as a whole. We mustn’t go back there – we don’t want to court another recession. And it was no good for first-time buyers anyway – following the onset of really lax lending (110 per cent mortgages and so on) around the turn of the millennium, their number actually dropped. We need to maintain sensible credit control – in terms of loan-to-value and loan-to-income ratios, proper deposit requirements for buy-to-let and limits on interest-only and self-certification mortgages – if we are to avoid repeating the mistakes of the past.
We need to tackle the problem head-on, by building more homes. So, at IPPR we are developing some ideas for how to finance the new homes this country desperately needs. Five ideas – by no means all new – are emerging from our research that seem to us to have real potential:
- domestic institutional investment in new residential property, especially by local authority pension funds
- local authorities releasing public land for development (perhaps in return for an equity stake) and adopting a more assertive ‘use it or lose it’ approach to private land (for instance through greater use of time-limited planning permissions
- shifting central government expenditure on housing, over time, away from personal subsidy through housing benefit and towards investment in bricks and mortar: this means reversing 40 years of drift in the opposite direction, without pulling the rug from under existing tenants
- the expansion of the nascent Green Investment Bank into a fully fledged National Investment Bank to fund infrastructure development, including new homes
- reform of the development industry to get construction going: at the moment, the normal laws of supply and demand don’t work in housing because developers do not respond to more demand with more supply, preferring instead to bank their land and make large profits on small volumes of building.
Next month we will publish a paper fleshing out these ideas as part of our fundamental review of housing policy. We hope that, in its revised housing strategy due out this autumn, the government will take some of them on board. That strategy mustn’t simply recapitulate existing policy. It mustn’t overplay peripheral low-cost home ownership schemes. And it mustn’t pin too much hope on the single proposition of release of government land.
The housing challenge we face as a country is a daunting one. The present predicament is one of low supply, low finance and low confidence, despite low interest rates. Some big ideas are needed to tackle these interlinked problems.