Turning housing round

February 22, 2013

Terrible news. There is no other way to describe the fact that housing starts fell by 11% in 2012 to below 100,000 new homes a year. The current deplorable state of affairs is also depressingly predictable. In 2010, in Making Housing Affordable, we argued that the planning shake-up proposed by the Government, which empowered local councils, was unlikely to succeed. We noted the reaction to the proposals was negative, “with almost all councils promising ‘no new homes’ in their area – something that should be ringing very loud alarm bells in government.” In 2011’s Cities for Growth we argued that “current solutions are not clearly related to the problems that we face.”

Solutions must understand the system they face

Quoting past reports now is not to try to say “I told you so”. It is to note that solutions to a problem have to actually tackle the issues that are causing that problem. Otherwise they are either mere gimmicks or, worse, risk exacerbating the underlying causes of failure.

So, for example, the Government will face calls to spend more or relax credit to boost housing. But the problem of housing supply is not fundamentally to do with lending. In our system, more lending largely boosts house and land prices as the graph below shows. There isan issue with first time buyers not being able to obtain high Loan-to-Value mortgages because of the way capital requirements work. But this should be dealt with by a focused attempt to tackle this bottleneck, not an indiscriminate pumping of credit into a slowly deflating bubble that would only do more harm than good.Graph

Indeed the credit-heavy model of recent years has supported a failing model used by the big developers. Because so little land is provided by the planning system, and is marked for development, then land-owners are placed in a quasi-monopolist situation. They can demand high prices and options or up-front payment for land. So developers comply. The problem is that this means developers over-leverage themselves, and they can only build when land prices and house prices rise. So, even in a housing crisis with huge affordability issues, housing numbers can still fall, as they did in the aftermath of the 2008 credit crunch.

Recent research from Savills indicates risky behaviour is being increasingly undertaken by the big developers. If there is further credit turmoil (e.g. in the wake of the UK losing its AAA rating) the housing market may be plunged into a renewed downturn – from its already appalling lows. Throwing credit at the problem makes things worse by supporting a botched model of development.

Illusions continue to distract from real concerns

Our reports Cities for GrowthMaking Housing Affordable and Why Aren’t We Building Enough Attractive Homes? all dismantle the illusions that powerful vested interests use to justify our housing crisis. Our empty homes – less than 1% of our housings stock. Immigration – an issue, but much less important than the fact older people are living much longer in large empty family homes. Our “shortage of land” – largely a myth as only 2.4% of England is built on and less than 10% developed, including all of the parks and gardens.

But there are substantial and real concerns around the quality of new homes and the infrastructure with new homes, as well as the fact new homes come with no amenities or improvements to the area they live in. NIMBYism is in many cases all too rational. These issues must be dealt and the Government must show sensitivity around them.

There is no time for radical reform

The current system governed by the 1947 and 1990 Town and Country Planning Acts has failed totally. Local people who live near new housing suffer as they lose out. The quality of new housing ranges from poor to mediocre, making England less beautiful. Those who want a home of their own, or who need a bigger house, lose out because rents and house prices are too high. But there is no time to fix the overall system before the next election.

But there is still time for action – although it needs to understand the system it works within

This doesn’t mean nothing can be done. We can still get housing numbers up to 300,000 a year, improve the quality of new homes and reduce the political tensions that come with new homes. But the first step to actually getting things done is realising how the current systems of housing, land markets, credit and other issues all fit together.

We will soon be publishing work on how the Coalition can pioneer a huge increase in self-build or custom-build homes. By procuring land cheaply, making these new homes for local people, and giving local control over quality, then we could provide a huge number of attractive new homes for those currently desperate for somewhere to live. This would boost the economy. It would also be politically attractive as it would only be about ensuring councils hit their own targets, not imposing new ones, and would create a new waiting list for self-build homes, creating a visible pro-development lobby.

Allied to redevelopment of our crumbling modernist estates into attractive terraced homes on brownfield sites, and selling off our expensive stock and recycling the proceeds, housing could be a key part of getting the economy going – at absolutely no cost to government. Politically, both sides of the Coalition are united in the need for more homes. There is still time to make more and better housing a positive long term legacy for this government.

This article originally appeared on ConservativeHome

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