UK needs to expand house building

Tackling the crisis requires rebalancing supply and demand with more new homes

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The UK housing market is “broken”. Even the government agrees on that. But who broke it? And how to fix it?

“Teach a parrot the terms supply and demand and you have an economist,” said Thomas Carlyle, who also coined the phrase “the dismal science”. And the parrot’s insight is the key to housing policy. Housing demand is driven by population. Over the past century, population growth in the UK has averaged a little less than one-half per cent a year. But after a marked dip between 1970 and 1990, that figure has recently risen towards the upper end of its historic level, with immigration a major cause; net migration contributed more than half of the rise in population between the 2001 and 2011 censuses.

The average size of household has also declined over the long term — from over four at the beginning of the 20th century to around two and a half at the start of the 21st. This trend has both social and demographic causes. Young people leave home earlier, while older people live longer and occupy empty nests. Such a decline in household size raises underlying demand for housing by around a further half per cent per year.

Taking these two factors together, equilibrium in the UK housing market would require that supply should rise by about 1 per cent a year. There are 28m houses and flats in the UK. One per cent of that is 280,000. Some allowance needs to be made for replacing older houses that are no longer fit for modern living, and to accommodate population shifts away from industrial towns like Merthyr Tydfil and Stoke-on-Trent, built for their proximity to coal and clay, towards the modern conurbations where today’s workers want to live. Proximity to reserves of coal and iron is today a repellent, not an attractor. So we would need to build at least 300,000 houses per year to meet the underlying growth of demand.

Former prime minister Harold Macmillan established his political reputation by fulfilling a pledge to do just that in the 1950s. And in 1967, 400,000 new houses were built. But 300,000 completions a year have never been achieved during the last 40 years, and in the last decade new construction has been around half that figure.

The parrot will tell you that where supply does not increase in line with underlying demand, price will increase, and it has. The British housing market suffered a setback in the early 1990s, when rapid inflation and raised interest rates were followed by “Black Wednesday” as Britain crashed out of the European exchange rate mechanism. Since then, and despite the 2008 financial crisis, house prices have more than doubled in real terms.

The parrot will also insist that demand and supply always balance. The mechanism through which higher prices have equated demand and supply is a lower rate of household formation. The 2011 census was the first in a century in which the average size of household had not fallen. In particular, there has been an increase in the proportion of households with more than two adults. Young people are remaining home with their parents for longer, and there are more groups of young adults or recent migrants sharing — mostly rented — accommodation.

The Thatcher government implemented major changes in housing policy. An objective was to end local government involvement in housing, funding for new municipal construction more or less ceased. While local authorities had played a huge role in postwar reconstruction and slum clearance, much of what they built represented socialism at its most dreary: rents were generally low and waiting lists long. Many council estates, such as the Edinburgh estates of Pilton and Muirhouse featured in Trainspotting, would have looked familiar to people from eastern European cities.

Tenants were given the “right to buy”, a hugely popular innovation. Subsidies were to be aimed at poor households, rather than poor houses, and housing benefit (being integrated into the chaotic universal credit) became — at an annual cost now of £25bn — one of the largest items in the government budget. The hope was that the private sector would fill the gap left by the retreat of local government, through construction for owner-occupation, social housing by housing associations and the re-emergence of a private rental market.

The private and social housing sectors did not take up the challenge. The reform of the private rented sector was more successful. By the 1980s that market had been in protracted and terminal decline since the first world war. The combination of rent control and security of tenure meant that almost no new tenancies were created. Owners waited for the occupants to die and then sold the properties. With the establishment of new assured shorthold tenancies, prospective landlords slowly regained confidence: by the turn of the century “buy to let” was widely promoted as an investment for private individuals. More recently, institutional funding of residential property has begun to revive as investors hungry for yield seek new outlets. The result is that since 2000, virtually all expansion of the UK housing stock has been in the private rented sector.

The rise of “generation rent” is often ascribed to the unaffordability of house purchases, but this is facile: at current interest rates, renting is not necessarily cheaper than buying a similar property, and for many mobile young people, renting makes good sense. Policies before the 1980s had simply made the rental option unavailable for those who did not qualify for municipal tenancies.

So what should be done? There is only one good answer, as the parrot could tell you: build more new houses. There are several bad answers, widely canvased; schemes which benefit some individual households, and are therefore politically popular, but which do so at the expense of aggravating problems for everyone else. Egregious examples of such policies are the “Help to buy” schemes implemented by the Cameron government or the reimposition of rent controls favoured by Jeremy Corbyn. Build more houses — and just do it. It does not matter much what the new houses are, who buys them or who finances them although it does matter where they are; if we expand construction, the occupancy and utilisation of the existing stock will adjust to meet the parrot’s cry of supply and demand.

So who should take the lead in expanding house building? The least bad solution is probably to give the job to local authorities, with funding by central government borrowing. Municipalities are probably best placed and incentivised to seek out both greenfield and brownfield sites, many of which are to be found in the public sector itself. And to face down residents who want houses built anywhere so long as it is not anywhere near them.

Local authorities did the job in the past, not always well, but they did it. We could raise £20bn a year from global capital markets for this purpose — and perhaps economists could stop parroting references to “the savings glut” and “secular stagnation” when there are opportunities such as this for plainly remunerative investment. But perhaps it is necessary to mention that the most likely — and probably only — source of much of the labour which would be needed for a new housebuilding boom is migration to Britain from EU member states. The parrot reciting supply and demand knows that there are two sides to most economic questions.

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5 COMMENTS

  1. Many thanks For your interesting insights into ‘the housing crisis’. Not sure about ‘ much of the labour needed’ for the new project has to be from Eastern Europe.

    We did build houses before they became part of the EU, and i am sure we would find ways of doing it again, with or without them. However, if your analysis implies that we need cheap labour to build affordable houses, I take my words back. But I very much doubt that somone of your ethical stature would think on those lines. Best, Simon Qadri

  2. Enjoyed the article however I feel the concerns of generation rent are either misunderstood or misrepresented. “at current interest rates, renting is not necessarily cheaper than buying a similar property”.

    It’s the lump sum deposit that makes houses unaffordable for generation rent not the monthlies. If house prices have doubled in the last 20 odd years then the deposit has too and unless people can double their saving rate (a challenge given pay lagging inflation, low interest rates and renting tending to come with higher monthly payments as Jon acknowledges) then houses are more unaffordable.

    Generation rent’s gripe can effectively be summarised as “you used to need £10k savings to get a house now you need £20k” or that the ability to save lags the thing they are saving for due to government policy and a refusal to build rather than a lack of effort on the saver’s part.

    Stamp duty eligibility not going up with prices doesn’t help either!

  3. Good article John. The answer has been known since year dot….Perhaps as the baby boomer generation dies out we will see politics swing further towards the have nots and action will be taken..

  4. If only houses were widgets and could be produced with no concern for the human or natural environment.

    Of course, increasing supply is the ideal solution. However, there is the slight matter of getting it done so fast. I live in North Herts, a district that is close to London and was the cradle of urban/suburban development in the UK over the 20th Century: in the early 1900s the first Garden City (Letchworth) was built there, followed by the country’s first New Town (Stevenage) in the middle of the century. All the towns in the district have continued to grow since then. The current plan is to almost double the size of Baldock (currently 4000 dwellings, with more than 3800 new ones planned by 2030). The trouble is that this is not a particularly fast process, and I would say that this is because things have changed since the ‘golden years’ the 1960s house-building boom. Back then environmental and other protections were fairly rudimentary. Now the increase in traffic in the town and associated pollution has to be accounted for, whereas back in the 60s people just had to suck it up, as it were. (Baldock had more than double the average UK rate of asthma before a bypass was completed almost 9 years ago, a return to the good old days is unpopular).

    The train company that serves the town has decided to cut back services, apparently completely unaware of the impending development. Then there is the matter of main roads, the congestion on the A1(M) is bad during rush hour at the moment and will certainly get worse after the houses are built. The last time the town was expanded, there was extensive archaeological work to excavate the Roman settlement. Presumably this will happen again. Also, local residents are given some say in the development in the form of a Neighbourhood Planning Group – this takes time too.

    Plus, there is the matter of people’s attitude to increasing development: it’s not popular. Are we really saying that preferring rolling wheat fields to a housing estate is completely irrational and immoral? Maybe it is, but to me the example of Stevenage is instructive, here. Expansion to the north of the town has stalled due to the fact that E. M. Forster used to live in a house there, which he used as a model for Howards End (the house, not the novel). Some people in the area have taken advantage of this fact to re-brand it as ‘Forster Country’ as part of an effort to preserve the landscape (half of it is already underneath Stevenage – “London creeps”, as Forster put it). The house itself was a synonym for a powerful attitude toward the urban, suburban and the rural that persists today – roughly, a preference for wheat fields over traffic jams. This, no doubt, leads some to look at the other side of the housing equation, demand.

    Maybe, to quote that great American property developer, Forster was a ‘loser’ and we should all be calling for the end of Howards End and start pouring the concrete. But maybe it’s a bit more complex than that.

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