Home truths about the housing market
The biggest surprise in George Osborne’s Budget was the announcement of a huge expansion of mortgage credit. This was clearly designed to portray the Tories as continuing the work of Margaret Thatcher. It is, after all, a well-known fact that the British are peculiarly obsessed with home ownership, while everyone else rents. And it is another equally well-known fact that Mrs Thatcher, who won three elections, did so on the back of an unprecedented rise in home ownership.
Both facts are well-known – and both are utterly wrong. In 2000, the UK came 11th out of 20 countries in home ownership rates in an EU survey. Another study in 2004 put the UK as a mid-level country in terms of owner-occupation. Since then, home ownership in the UK has declined quite steeply, so it is likely that we are now close to the bottom of the table.
There is also an overestimation of the Thatcher effect. Between 1981 and 1991, the proportion of home owners grew from 57.2 to 67.6 per cent. But since 1918 there has been a consistent rise in home ownership; the rise between 1953 and 1961 was a bigger leap in home ownership and it was achieved in a smaller time period. Thatcher was largely overseeing the continuation of a long trend.
Home ownership is a universal desire that can easily be explained. As a home owner, you are generally free to do what you want with it, you do not have to worry about rent when you are older, you have something to pass on to your children. Even adjusting for wealth and lifestyle, home owners are happiest, and their high rates of satisfaction hold true across different countries and cultures.
What is more unique about Britain is that we expect rising housing costs to power our economy – something that has been true of nowhere else bar the US in the dying days of Alan Greenspan’s disastrous tenure at the Federal Reserve and the bubble economies of countries such as Spain or Ireland in the eurozone. This notion reached its peak under the Blair-Brown years, symbolised on the one hand by the removal of tax support for pensions and the encouragement of a buy-to-let boom on the other.
This might have been sensible had the resulting investment been in the construction of new homes in line with demand. But between 2001 and 2007 alone, mortgage lending and house prices more than doubled, while the number of new homes barely rose by a third. In fact, because we shifted from building larger family homes to smaller flats, soaring mortgage lending went hand in hand with no increase in the rate of new housing space. Zip. Nothing. Zero.
The entire British economy became built around servicing ever-rising housing costs. By early 2008, another £20 billion each month went on mortgage lending, while of the £10 billion lent for corporate “investment”, much was tied up in property speculation. At least 66 per cent of our lending was going to a large lending bubble. The real figure was probably more than 80 per cent.
Moreover, as this credit surged through the system and New Labour politicians talked about the importance of home ownership, between 2001 and 2008 the UK saw its first fall in owner occupation. A century of progress towards a property-owning democracy began to be steadily reversed. People would get home from a day’s hard work only to find that in the last 24 hours their house had earned more than they had. More credit does not mean more owner occupiers.
Meanwhile, rents also spiralled upwards. If you are a younger reader, you are probably wondering why you are paying ever more in rent despite a rerun of the Great Depression. The answer is that we, unlike Ireland and Spain, not only had rising house prices but also had rapidly rising rents.
People don’t speculate in rents. You rent what you need. So rents are more aligned with supply, although house prices rising do impact on them slightly. And for years we built too few homes. In the 1960s we built 360,000 new homes a year. In the 2000s we built 160,000 a year, many of which were small flats. Last year we started construction on 100,000 new homes. So rents have continued to rise pretty consistently, even during the continuing recession.
This under-supply relates to another home truth. The British have become different to other nations in that they have developed a real fear of development. Other countries see new homes as attractive and spacious, believe that new homes with parks and amenities can enhance an area, and that new development is not necessarily bad. But in England we are told the loss of a single field of rapeseed oil is tantamount to the destruction of our green and pleasant land. This is despite the fact that we have only built on 2.4 per cent of England, and only 9 per cent is developed, including all the parks, gardens and other urban green spaces.
The real fear is closer to home. We fear our area being trashed and that the provision of infrastructure will be inadequate. The current planning system has basically remained in place since 1947 – and it was this that gave us the concrete council housing estate, the soulless suburb, and finally boxy flats. It is a damning indictment of the post‑1947 system that people would prefer something built before 1947 than after it. There is quite simply no other good or service where this is true.
As a nation, we simply refuse to acknowledge where our choices have led us and we keep seeking easy answers. Immigration accounts for a need for, at most, 80,000-90,000 new homes a year when we are thought to need at least 250,000. Our “brownfield first” policy introduced in 1995 coincided with the collapse of our manufacturing industry. We got a lot of nice converted warehouses. But by 2008 we had eight of the most expensive 20 cities for industrial space and six of the most expensive 50 cities for office space. We need brownfield sites for industry and offices, and in any case most of it is in deprived parts of deprived areas in deprived regions. We should reuse brownfield, but it is not the answer to all our problems.
It is too late to try to overhaul planning completely. But one thing Mr Osborne might want to ponder is the other big difference between the UK and elsewhere – that in most other countries the majority of new homes are self-build properties. The design, construction and finish of new homes is overseen by a single individual or family. This means that the whole development sector is different. Local homes largely go to local people. The quality is better as people are designing a home for themselves, not for a quick profit. Developers have to build better as well, because if they don’t, people can build their own homes instead.
This also increases the number of people interacting with the planning system. At present, because the only people who self-build in England are the professionals (often architects) that you see having a nervous breakdown on Grand Designs, much of our planning system’s lunacy goes unchallenged. It is nearly impossible to build a bungalow or thatched cottage in England due to sustainability concerns. Rules about overlooking equate most mews to slums. The real enemies are not Nimbys, who often have well-founded fears about quality, infrastructure and amenities. They are the small Bananas minority (Build Absolutely Nothing Anywhere Near Anyone) and the planning system itself. A major of expansion of self-build homes for local people with community control over quality would reduce the fear of the Help to Buy scheme inflating bubbles and developer profits. It would help support further reform of planning.
The final home truth is that throughout most of human history, the price of a house was roughly what it cost to build. A family house in England should cost around £80,000. A really nice one would be perhaps £120,000.
We can afford attractive housing. But not with the current system. While groups such as PricedOut, who campaign for first-time buyers, might welcome houses dropping to that price tomorrow, a collapse in prices would be bad for the country. A slow decline, or stable rents and prices, is preferable. But the question is whether we can afford to continue to think of property as a magic money tree – and more importantly, what will happen to our society and economy if the Government does so as well.