Last week, ConservativeHome published the housing section of its manifesto, Homes for All. Housing – more specifically, the lack of it – is now one of the most important issues we face in this country and one which promises to feature heavily in the run up to the General Election next year. The manifesto’s diagnosis that Britain’s housing crisis is one of affordability is correct. It is also true that the key component of affordability – house prices – depends on the interaction of supply and demand. However, much more can be done about one than the other, notwithstanding that the “other” isn’t really much of a problem at all.
The fact is that not enough new homes are being built in England: by the official projections, at least 232,000 homes need to be built every year simply to meet future demand. This would be just about enough to keep house prices (and rents) where they are now relative to wages. Currently, the average house price in Britain of £244,000 is 9.9 times the average individual earnings of £24,750. My recent forecasts for Policy Exchange show prices reaching 11.5 times earnings by 2040, on current trends. Much more, however, needs to be done to make inroads into backlog demand. We have been building an insufficient number of homes for at least a generation – we haven’t come close to meeting the 232,000 target in any single year since 1980, and the cumulative shortfall during this time amounts to over 1 million homes. Only by building 300,000 homes a year for a prolonged period could that backlog be eliminated, as well as future demand be met.
I can already predict that some will blame immigration for a boost in the demand for housing, so it is worth pointing out that only one-third of the growth in household numbers is attributable to immigration. Even if we closed the borders tomorrow, we would still be building barely half the required numbers. It is important, too, that we recognise that the growth in household numbers is being driven by internal demographic factors, including a growing population as people live longer, and an increasing number of single person households – which, in turn, can reflect lifestyle preferences.
The idea that much of the demand “problem”, to the extent that it is one, rests somehow with speculation (i.e. landlords) misses the wood for the trees. Speculation by its nature is transitory, whereas what we face is a systemic imbalance of homes being built and people needing to be housed over many decades. It is simply that the housing market has become a one-way bet as a result. The fundamental problem is a lack of supply – address that and you stop any speculation dead in its tracks.
Whilst we should absolutely be encouraging home ownership to meet aspiration, home ownership isn’t the best tenure for everyone at every point in their lives. Some households, including young professionals early in their careers, need to be able to move more frequently and with ease, making private renting a more suitable tenure for them. The private rented sector also helps to support labour mobility which is so important to our economic success. So, we will always need some private rented homes (currently about 18 per cent of homes in England are private rented) and their prevalence will tend to be higher in London.
Margaret Thatcher’s Right to Buy policy was truly visionary and ideologically well-grounded. It was effective both socially and economically. Unfortunately, the proposed measure requiring that homes in a new development only be sold to people intending to live in them is none of these things.
First, it would be ineffectual. Unsurprisingly, the housing market and affordability is affected not just by the 112,000 homes we are currently building, but by the stock of 22 million homes and the estimated 1 million homes coming onto the market for sale each year. So what is to stop buy to let landlords buying these instead?
Second, it would be counterproductive. If we are saying we want to stop buy-to-let landlords, it is as good as saying “let’s curb the supply of rented properties onto the market,” and see rents rise inexorably as a result. Ed Miliband would have a field day with that one.
Third, it doesn’t deal with the fundamental problem. Whether you house the additional 300,000 households in the owner occupied sector or inj the rented sector, you still need 300,000 houses built to stabilise affordability across both prices and rents. Favouring home ownership – not matter how well-intentioned – does not change that.
Fourth, it is wrong ideologically. It does not belong in a ConHome manifesto proclaiming Thatcherite credentials. For me, speaking as a free market economist of a Thatcherite ilk, restricting buy-to let landlords sits about as comfortably as Labour’s proposal for rent controls.
The proposal to tax institutional investment in the private rented sector also sits uncomfortably. A more competitive rental sector is precisely what is needed and something Margaret Thatcher would have endorsed. Besides which, taxation already favours home ownership; the primary residence being free from capital gains tax. Last year, house prices in London rose by 20 per cent meaning that the average capacity gains tax liability for the average London homeowner was zero, compared with around £20,000 for the average buy-to-let landlord. There are other tax advantages too.
We need to get away from the tenure debate in the context of housing affordability – when you look at the economics it is a complete red herring. We need to retain our focus on the fundamental problem; the lack of supply and measures to get us from building 112,000 homes a year to 300,000 a year. It is in addressing the lack of supply that we would absolutely endorse some of the other measures set out in the ConHome manifesto.
Supporting self build: specifically, we propose obliging councils to make land available to local people wanting to do this and supporting part-ownership products and similar innovations to support home ownership, especially those that also support new builds. Less than 10 per cent of development in this country is self build, compared with around 50 per cent in the US and on the continent.
Garden cities alongside smaller new settlements could make an important contribution to housing supply, although on their own will not deliver all the extra homes we need. Garden cities are important, too, because they could act to change peoples attitudes to new development. Garden cities that are truly visionary and are welcomed by local people (not imposed by Whitehall) would be something that people could respond to in a positive way. Regrettably, the NIMBYs often have a point in opposing new development and end up getting exactly what they fear. Garden cities and new settlements could offer an attractive alternative to the often vilified sequential development and poorly designed mock-Tudor box housing estates we have been delivering for the last 30 years.
The supply-side problems rest squarely with planning and the local decision making processes. We need to get more land into the system to build the houses on. The proposals for a more proactive planning system and greater participation by all local people through local referendums should be welcomed, and the principle of development by local consent needs to be upheld. However, we also need to address the fundamental “insider-outsider” problem – to somehow capture the interests of households still waiting to form, including young, aspiring homeowners (who might not always be local). Therein lies the tension with localism, which is why the necessary housing numbers to meet future demand set out in Local Plans should reflect what is happening nationally. Nonetheless, every cloud has a silver lining – because of the large and growing number of young adults aged 20-34 (outsiders) living at home with Mum and Dad (insiders), interests are becoming more and more aligned.
In short, the only way to significantly improve home ownership is to improve affordability, and the only way to do that is to improve housing supply. Thankfully, people already recognise this: in a Populus poll published for the Wolfson prize, 72 per cent of people agreed there was a serious shortage of good housing. Nor does building 300,000 homes a year mean concreting over the countryside as people so often proclaim. Currently, only 9 per cent of land in England is built on and even that estimate includes back gardens. Meeting that backlog of demand and future demand for the next 20 years might take that figure to 10.5 per cent, or 11 per cent at most. Now, that’s not too much to ask, is it?
This blog originally appeared on ConservativeHome