Professor Glen Bramley argues that the housing measures announced by the Chancellor are likely to stimulate demand within the housing market but that they do nothing to solve supply side constraints. This risks inflating prices within the housing market whereas what we currently need is a greater supply of housing
Housing people often complain that their subject is never at the top of the political agenda. But a striking feature of Wednesday’s Budget was the amount of emphasis on housing within the Government’s measures. I hesitate to call it a consensus, but there is a pretty widely shared view that more housing investment is needed and that this could help to ‘kick start’ our stalled economy. Where the consensus breaks down is whether the government should borrow more and spend a lot more cash up front, or rather rely on more indirect means to generate investment from ‘other people’s money’.
I just checked the latest figures on actual new homes started and completed in England up to the end of 2012. These make sobering reading and indicate the challenge facing the government. The figures for 2012 are the second worst in living memory, not much better than the nadir of 2009-2010. Starts, the best leading indicator, actually fell year on year, whilst completions are flatlining. These numbers would need to be ramped up by 2.5 times to meet any reasonable estimate of need. They are not much above half of the best recent years, and even those figures (for 2006-07) were well short of what was needed.
Some of the schemes being refreshed in today’s announcements were in place, albeit in more limited form, last year, yet they failed to achieve any increase in output. This suggests that they were not impacting directly enough on housebuilders decisions to actually commit to building more. There is considerable danger here that these subsidised schemes simply substitute a different way of funding the same level of activity.
The new/refreshed schemes increase the scale and scope of support, particularly in respect of mortgage guarantees for high percentage loans to avoid the crippling deposit constraint facing housebuyers. These measures may be expected to increase the level of transactions activity in the market, which has shown signs of increasing slightly recently. Some of this may filter through to new build, increasing developers’ confidence that they can sell enough units to commit to building more. However, much of it will feed into greater activity in the secondhand market.
There is a fear that the effect of easier mortgage credit may feed into higher prices, rather than higher output. There is a long history of this in UK. Some of the commentary from the sector voices this fear, which is at least partially justified. Prices are rising in London and the Home Counties anyway which suggests that in this key area there may be a price impact.
The Chancellor has not taken the opportunity to do certain things which the sector has been proposing, particularly raising the caps on local authority borrowing to build new council housing. Under the reformed Housing Revenue Account regime councils could borrow prudentially to fund something like 15,000 new homes per year, adding £5.6bn to GDP and 23,500 extra jobs.
The expanded guarantee scheme for housing associations may help to increase supply a bit more, but it is working against the effects of the government’s previous ‘affordable rent’ scheme, which seeks to generate new affordable housing with hardly any subsidy. This has the effect of exhausting the spare financial capacity of the sector, and the approach may not be sustainable into the future or capable of generating much more activity in the short term.
The housebuilding industry is sitting on a large bank of land with planning permission which it is reluctant to start building on, or build on at a higher rate. Many sites are ‘stuck’ because of a combination of factors, some of which may be ‘unstuck’ by an initiative included in today’s announcement. However, key factors underlying this reluctance to expand output are (a) the dysfunctional banking system which is reluctant to increase lending to industry, including housebuilding; (b) the reluctance of housebuilding companies, and their financial backers, to reveal and crystallize potential write-downs in the value of their landbanks, which were previously over-inflated in the boom period.
In the medium term, planning constraints on land supply for housing, particularly in the key southern regions of England, remain a major barrier to increasing housing supply. This government made this problem worse, as soon as it came into office, by abolishing regional planning and associated targets and handing the decisions over to local authorities and local communities, who are typically rather ‘NIMBYist’ in their sentiments. I have demonstrated this through research linking public attitude survey data to data on planning constraints, and the predictions of my model (of a fall in supply in the south) have been more than borne out by recent surveys of local plan provision for housing.
I believe that in order to really solve the problems of housing supply it is necessary to not only make planning for realistic future numbers more effective but also to intervene more directly in the supply of land, at least in areas identified for significant growth. I would want to see publicly-sponsored land supply agencies empowered to acquire land which plans identify as appropriate for new housing and auction it to developers on a license basis which would require the developers to actually build on the land immediately rather than bank it. Such agencies would need initial financial support to acquire land and to invest in necessary infrastructure, but would eventually be profitable.
To sum up, the overall Budget package seems likely to stimulate demand and activity in the market, but it does not really deal with the critical constraints on the supply side. Therefore, the danger that it will feed more into higher prices than into extra output is a real one.