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Preface

Housing matters. We all need a home and we all want to live in a pleasant place. We talk about the housing market endlessly. But too few people really understand the underlying economics of the market and how housing interacts with finance, planning and taxation.

The last major review of UK housing supply, which I led, was published just over a decade ago. Its key contention – that the UK (particularly England) needed to build homes at a faster rate – was controversial at the time but has since become widely accepted. And yet the number of homes built in England from 2010 to 2013 was less than half the official estimate of how many more households would want to find somewhere to live. The signs are that 2014 will have seen increased homebuilding, but still far short of what is needed. Why is this, and shouldn’t more be done to fix the housing market? Isn’t the solution still building more housing in areas where people want to live?

The recent shortage of supply has exacerbated some underlying problems. England has a relatively old stock of housing – some in poor condition and much of it in areas where the economy is now weaker, as economic activity is becoming increasingly concentrated in the South East. Empty homes are also often to be found in these less prosperous parts of the country. Yet local opposition and the failure of many local authorities to produce up-to-date plans for their area has led to a persistent undersupply of homes in much of southern England.

This means there is increasing inequality between those who are able to become homebuyers (often aided by parents who already have a stake in the housing market) and those who cannot afford to leave the private rented sector. Undersupply also contributes to volatility in house prices – illustrated by the quick pick-up in prices in 2013 when it became easier to get a mortgage. In London the price rises were very rapid, though this was due in large part to rising demand from wealthy individuals from outside the UK.

The financial crisis was clearly the major factor behind this latest period of low supply. Housing demand was strongly suppressed as the recession took its toll on household incomes. In addition, UK banks cut back on their mortgage lending and, with belated caution, asked for larger deposits. House prices fell sharply in 2008–9 and were then relatively stable before starting to climb again during 2013.

Falling prices during the downturn hit housebuilders hard, as the land they had bought at pre-crisis prices suddenly became worth much less. With cash flow also hit as fewer homes were sold, many small and medium-sized builders went out of business. Several lean years have also weakened the skills and materials base for the industry, and it is likely to be some time before new supply returns to pre-crisis levels.

Even at the pre-crisis peak, the rate of new housing supply was not enough to meet demand pressures in England – demand increases due to population growth and increasing incomes. If supply does not respond sufficiently to demand, then the outcome is obvious: prices rise and, what is worse, they are expected to continue rising. This means there is a big incentive for those who can afford it to invest in housing, while others get left further and further behind.

Housing affordability can be a misused term (indeed, I have misused it myself). It can be hard to get a mortgage due to the requirement for a large deposit and the new requirement to verify a reliable income. But once in home ownership, if the mortgage can be sustained, rising prices and favourable tax treatment mean that over the long term the costs of ownership can be quite low. It is often tenants, faced with rising rents, who really have an affordability problem.

In my housing supply review ten years ago, I pointed out that many people gain from an undersupply of housing: landowners and homeowners see the value of their assets rising, and local authorities gain from their ability to request that developers provide more infrastructure. But there are losers today: those who pay higher rents and are simply priced out of home ownership. And in the long run we all lose: there are economic costs as workers find it harder to move job around the country, the housing market is more volatile, we have a high level of household debt, which makes the economy harder to manage, and investment is diverted to too great an extent into the stock of bricks and mortar. But it is hard for people to perceive the underlying longer-term costs that are paid by everyone. Planning decisions therefore tend to give too much weight to the visible, local costs and too little to the wider and longer-term national benefits.

There are of course costs from building more homes. The most obvious is the loss of open space. This often accounts for much of the local resistance to development, alongside worries about the strain on infrastructure. But there are also very important issues concerning the balance of economic activity around England, water supply, biodiversity and other environmental pressures that require a response at a regional or national level. (At local level, it is often possible for a new development to be carried out in a manner that enhances some aspects of the environment.)

And the housing market is inherently difficult to manage. Inevitably, property is part of a household’s financial planning – it is mainly a home but it is also an investment. We take on a lot of debt to finance house purchase, which makes families vulnerable if they face a shock that reduces their income. This also means that the government needs to be cautious about any housing-related tax changes in order to avoid major market disruption.

There have been positive policy developments, though, some of which began a decade ago with a stronger focus on local land supply for housing, and over time these policies will ameliorate housing-market problems. In particular, the ­National Planning Policy Framework has given real impetus to local authorities to put plans in place, and planning inspectors now have the ability to ensure that these plans provide for enough new homes. Following the financial crisis, the new ­Financial Policy Committee at the Bank of England has powers to curb potentially reckless lending, which should limit housing market volatility.

But there are some big concerns too. The government now has a long-term role in shared equity via the Help to Buy scheme. As one prominent commentator put it:

The government has increased its commitment to frighteningly expensive housing. It is a trap from which the UK may not now escape.1

And the policy changes we’ve seen will not completely resolve the fundamentally intractable issues discussed in this book. It sets out the history of these problems and describes how the planning system, local democracy, the tax system and wealth distribution all set the framework and incentives that drive the behaviours of developers, landowners and households.

Government faces very uncomfortable choices. The housing outcomes described above are bad for many in private renting, they are bad for many young families desperate for more space, and they are damaging to the wider economy. A housing stock that is becoming ever more expensive overall, and which is not located where it is needed, results in sharp divergences in the distribution of wealth and opportunity between generations, and between those living in different areas. To create a fairer and less harmful housing market, a combination of strong central direction about housing supply and unpopular taxation changes would be required. But politicians find it hard to grasp these nettles: there is far too much short-term pain and the gain will go to their successors. It is easier for them to carry on with somewhat ineffective knee-jerk and populist help for first-time buyers.

We need to have a clearer analysis of the choices, particularly with regard to the environmental issues. The word ‘sustainability’ needs a national focus – it cannot be fully assessed locally. Are there actually serious environmental or social costs to developing more homes in London and the South East, and, if so, what would the economic cost of a different distribution of population be? The values and trade-offs implicit in planning policy should be made more transparent. We protect open land now by paying a very high price for the space for housing – but this trade-off is rarely explicitly discussed.

We should accept that the housing market cannot be made perfect. This book will suggest criteria for judging what a better housing market looks like. But these criteria can conflict, and people will come to different conclusions. Some would regard more new homes around the economic hot spot of Cambridge as a success, for example, while others would view it as environmentally damaging.

I have become less convinced that it will be possible to build enough to meet demand in much of southern England, given the strength of local opposition in many places. So building more housing will not be the only answer. We will also need to ameliorate the consequences of demand continuing to exceed the available supply.

What policies are needed now? The proposals I set out include the following.

•A clear view in government of environmental and social costs, influencing spatial planning at the national level, and leading the debate about where new towns are placed and about major urban extensions.

•A strong national influence over local planning decisions, in part to ensure better cooperation between local authorities. But a further radical reform of planning now would be unhelpful.

•Much vacant land is in the hands of public bodies. We need to get these sites into use, which may include a greater role for local authorities in buying and preparing sites.

•Financial compensation for those adversely affected by new development.

•The introduction of capital gains tax on main residences, among other tax changes.

Finally, the big impediment to this kind of package is that housing policy is currently split among several government departments and independent regulators. Some roles should be consolidated, and priorities clearly identified. If we cannot have a unified approach to the proposals set out above, housing market policies will remain ­incoherent and the housing crisis will deepen each year.

Acknowledgements

I am very grateful to the many people with whom I have discussed housing issues over the last decade, particularly Paul Chamberlain, Paul Cheshire, Kelvin MacDonald, Steve Nickell, Henry Overman, Pete Redfern, Lord Matthew Taylor, Robert Upton and Christine Whitehead. I am also indebted to Diane Coyle for giving me the chance to think all this through again and to Sam Clark for being such a supportive editor.