Britain needs more homes, not more "help to buy" the ones it already has

According to the National Audit Office report “The New Homes Bonus”:

“The government estimates that 232,000 additional households could require homes each year to 2033. Since 1970, levels of private housebuilding in England have shown no consistent growth (Figure 1) and In 2012, only 115,600 new homes were built in England. This is the background against which successive governments have tried to increase rates of housebuilding”. [i]  

Figure 1 above (from the NAO report quoted) shows how:

a) Local Councils have been effectively eliminated from the equation;

b) Housing associations have not, and are unlikely to be able to, make up the for the shortfall, which is in excess of 100,000 houses p.a.; and

c) The private sector has not stepped in to close the gap.

The rate of build in proportion to population in the UK has been lower than many countries in Europe for decades and more recently has been falling.  In 2000 it was the lowest of any north-western European nation and this trend is unlikely to have changed.  It is also harder today to buy a home today than it ever has been[ii].  Meanwhile it is widely recognised that social (or sub-market) housing remains in undersupply [iii] and the private sector rental market remains relatively underdeveloped in England (and the UK) relative to other countries[iv].

Since 2010 the government have implemented at least 15 housing-specific policies[v] , focussing primarily on encouraging first-time buyers, though with some intention to free up the supply side by relaxing and simplifying planning controls.  But, while government policy attempts to address “affordable rental” and “affordable buy”, it is doing neither in sufficient quantities to make up the shortfall.  In fact by increasing the supply of financing without sufficiently increasing the number of houses for sale, it is highly likely that these policies are helping to fuel property price inflation generally.

All political parties recognise the shortage of suitable housing in the UK as one of the most critical, and so far intractable, issues in the UK today.  It has been particularly acute since the 1980’s when the Thatcher government halted construction in the public sector.  Housing has wide implications for standards of living, health and social cohesion, and is also an important element of infrastructure underpinning economic growth. The problem is nationwide, but particularly acute in London and no more so than in Islington.  The National Housing Federation, representing Housing Associations, has called for the parties to commit to developing a long-term (ie: multi-parliament) plan after the election in May 2015, and for cross-party consensus. This issue should, like many others, be above narrow party-political jostling, but unfortunately there must be a low expectation of this happening. 

The facts are that the private sector is not building, and has no incentive to build, reasonably priced homes in the numbers needed.  In free markets, scarce capital and resources will be allocated where they generate the highest returns.  In London it is profitable to build expensive properties which are then marketed overseas as investments and if they are occupied by their owners or left empty, they do not add to the available housing stock.  The Mayor of London suggests that the effect is only marginal; overseas investment mainly affect houses in central London and account for around 6.5% of the value of purchases (of old and new stock) and 10-15% of new-build[vi].  This nevertheless amounts to 2-3,000 homes p.a. in London that are lost to Londoners. 

Nor is overseas acquisition of older properties on the scale suggested above all concentrated in high-value Mayfair and Knightsbridge mansions, so it must have some impact on prices generally as well as the availability of older houses to meet local demand.  Both Islington and Westminster Councils have measured a significant reduction in the number of registered voters, which they believe is due to “buy to leave”, ie: properties being purchased by non-residents who choose not to rent them out[vii].

But while foreign investment is mainly a London problem, the mix of new build is also an issue elsewhere.  Affordable family accommodation (3 and 4 bedrooms) is in short supply everywhere and developers are unwilling to take on the numbers of affordable homes that are needed.  They earn much better returns on so-called starter homes (tiny one- and two-bedroom flats) and student accommodation (where yields of 14% have been reported) or on the luxury end of the market.  Student accommodation is particularly an issue in Islington[viii] as well as elsewhere[ix].   

The media, and Westminster politicians (more particularly the Tory ones), are preoccupied with the private sector market and with the cost of purchase in particular. But with house prices so high, there is also clearly a large demand for long-term rental accommodation from people who would like to buy but cannot, and from those who are never likely to have the wherewithal to purchase their own home, whether at a market price or not.  In addition, there are those who for one reason or another are unable to or choose not to buy at a point in time.

The private rented sector today is largely represented by small-scale “buy-to-let” landlords, mostly in older housing stock.  Residential property returns rely on short leases and frequent rent increases, with capital gains to offset the lower income, while the normal commercial investment model is based on frequent vacant possession and rent uplift.  Long-term institutional investors in contrast require stable tenants and stable income.  Changes are required in the legal and fiscal regimes to stimulate to create a viable long-term institutional investment market, as exists in the USA and much of Europe.

In 2012 the Government commissioned Sir Adrian Montague to undertake a review of constraints to institutional investment in private rented homes (“The Montague Report”)[x].  The government responded by providing £1bln funding for private sector investment in a mixture of private-rented and private owned property, and a £10bln loan guarantee scheme for long-term institutional investors.  It also announced setting up the Private Sector Rented Taskforce[xi] .  Despite £200m promised to the new task force (presumably out of the £1bln referred to above) to be used to provide equity for private-rental projects, this received a luke-warm reception from the British Property Federation[xii].

Perhaps current market players are not interested in addressing the problem, because their interests are largely tied in with the existing buy-to-let model, or they are afraid of structural change that may occur if big investors begin to play a significant role. 

Different investment objectives, and different models, are needed to attract new players into the market, as Montague recommends. And large scale investment can also reduce the cost.  Legal & General[xiii], who claim to be leaders in institutional financing of build-to-let projects, have said that large-scale investment will lead to lower unit construction and operating costs that will partly address profitability issue.  Unit costs of £100,000 are achievable, particulalry with more pre-fabrication in dedicated factories.  Long-term and stable tenancies also reduce operating costs.  L&G have also proposed government intervention, including changes in the tax system to treat property investment consistently with other business activities. 

Perhaps social changes are also required.  It is time we separated the British public from its fixation on home ownership, and introduced them to the idea that long-term, stable rental is economically viable and socially acceptable.  It was after all the model for the social sector for many years.  But we need another 120-150,000 homes built in England every year.  Leaving aside the question of whether the building industry actually has the capacity, it is clear that the public sector cannot pay, housing association do not have the capacity and private developers prefer to use their capital on other, more profitable projects.  Only pension funds, insurance companies and other (new?) long-term investors can mobilise the funds required for this enormous task. The sooner they start, the better.

The original paper by Tim O'Brien, dated January 2015, is available here.

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[i] NAO report "The New Homes Bonus", March 2013

[ii] The Housing Federation (representing Housing Associations) paper “Broken Market, Broken Dreams”, September 2014 quotes the average deposit today as £30,000 (1980 £3,000) or roughly 100% of average annual salary (1980 about 15%).  

[iii] Local councils, building industry representatives and others, argue strongly that there are a large number of people who cannot afford to pay full market rents. Ongoing government policies involving subsidy to social housing costs, from both sides of the political spectrum, suggest this is widely accepted, at least with private sector rents at present levels. This is seen as an acceptable cost for society in order to maintain social cohesion. In any event eliminating low wages may never be possible and a significant shift would take at least a generation.

[iv] The private rented sector is largely represented by small-scale “buy-to-let” landlords, and mostly in older housing stock.   Institutional investment in property to rent is new in this country and needs stimulating. Changes are required to create a viable long-term institutional investment market, as exists in the USA and much of Europe.  See “The Montague Report”. 

[v] The list may be incomplete but I have counted the following:
Affordable Homes Guarantee Programme (AHGP) (September 2012)
The Infrastructure (Financial Assistance) Act 2012
Affordable Rent-to-buy
New Homes Bonus
The Growing Places Fund
The Get Britain Building Fund
Builders Finance Fund
Estate Regeneration Fund
Single Local Growth Fund
Build Now, Pay Later
FirstBuy
NewBuy Guarantee
Help to Buy
Mortgage Guarantee Scheme
Right to Buy

[vi] Homes for London – The London Housing Strategy, June 2014, from the Mayor of London
https://www.london.gov.uk/sites/default/files/Housing%20Strategy%202014%20report_lowresFA.pdf

[vii] An article by Rachael Holdsworth in The Londonist, 11th December 2014

[viii] The Islington Core Strategy  (February 2011) notes the quantity of student accommodation being built in the borough as a particular concern, not only because it is using up scarce development land, but also for the inevitable impact it has on the demand for services.  Ironically, new-build student accommodation is too expensive for most local students, so is also aimed largely at wealthier students (or more likely parents) from the UK and overseas, mirroring the building boom in luxury flats in central London.

[ix]Increased student numbers are worsening the housing crisis (The Guardian, 1st September 2014).

[x] See “The Montague Report”. Legal & General have also been vocal on this and are actively investing in build-to-rent. See “The UK Housing Crisis: 2014 - Lets House Britain” (May, 2014) produced jointly by Legal & General and Shelter.

[xi] See “Improving Rented Sector Housing”, DCLG policy paper 7^th September 2012.

[xii] Chief executive Liz Peace said: “We have been here before… Every so often the government trots out this idea that it wants to encourage private renting. But it has to show that it really does mean what it says.”

[xiii] Legal & General have been vocal on the housing crisis and are actively investing in build-to-rent.  See “The UK Housing Crisis: 2014 - Lets House Britain” (May, 2014) produced jointly by Legal & General and Shelter.  http://www.lgim.com/library/property/lets_house_britain_report.pdf