No place like home

This article was first published in the economia and it was written by David Adams who looks at the forces and policies which drove housing issues to the top of the political agenda.

The UK’s housing crisis boils down to one fact: not enough affordable homes where they are needed. As a result, many people face huge bills to keep a roof over their heads. One in seven private sector tenants spend more than half of their income on rent, and four out of 10 spend more than 30%, according to the Local Government Association. It also found 11% of homebuyers spend more than 30% of their income on mortgage payments while the average deposit is 71% of a first-time buyer’s annual pay. The Office for National Statistics notes house prices are 7.6 times the average annual salary, compared to 3.6 times in 1997.

Rising property prices may be good news for some, but a lack of affordable housing is making it difficult for key workers to live close to where they work. Longer commutes adversely affect productivity, put more strain on transport infrastructure and increase pollution.

High property prices also have a negative effect on some business decisions, says Jonathan Pryor, partner at Smith & Williamson and ICAEW’s housing sub-committee chairman. He adds: “Rising property prices lead to an inappropriate allocation of funds. The relative return and risks from investments in business activities appear weaker, leading to a diversion of funds away from productive use and into hoarding of assets.”

Pryor believes the current situation also contributes to social problems including breakdown of family relationships, increased pressure on the NHS, rising crime and “a lack of aspiration and engagement with society”.

The dearth of affordable homes in some areas is due to scarcity of land and lack of government intervention in the market. Anybody who wants to build houses, whether a private developer, housing association or local council, can only acquire land at a high cost – or, in the case of a council, retain it at the cost of the profit it would gain if it were sold to developers. The need to recoup some of that outlay makes it harder to build a greater proportion of social housing or “affordable” housing (which, at 80% of market rental rates, is not necessarily very affordable at all) within any development.

People who rely on housing benefit have been hardest hit. In June 2017, charity Shelter issued a policy briefing that listed problems facing this group, including fees and deposits demanded by landlords and letting agencies, delayed benefit payments; and the government’s freeze on rates paid through the Local Housing Allowance (LHA) from April 2019. Many landlords will no longer
let property to housing benefit claimants.

Those who do rent from private landlords have little security of tenure: 40,000 tenants were evicted in England during 2015, a third more than in 2003, according to 2017 research led by the Cambridge Centre for Housing and Planning Research. More than 80% of the increase was due to Section 21 evictions, where a landlord gives tenants two months’ notice without any need for a reason. Most were in places where rising property prices mean landlords have a strong incentive to sell, or to try to obtain higher rents. About 80% of the notices were in eastern or south-eastern England and 60% were in London.

It used to be the case that renting from a council or another social landlord (usually a housing association) would provide security of tenure. But the social housing sector is in crisis too. There are about 4.1 million social homes in England and Wales, including 2.2 million households in council-owned accommodation. But there are many more people who would like to live in social housing. By mid-2016 there were 1.2 million people on waiting lists for council housing in England and just under 174,000 in Scotland.

More than 1.8 million council houses and flats have been sold to their owners since the Right to Buy policy introduced by Margaret Thatcher’s government in 1980. Undoubtedly good for those who became homeowners (or landlords), the council housing stock has never been adequately replaced. The policy is still in place in England – and in 2015 George Osborne, the then chancellor, extended it to housing association tenants. But it has been abolished in Scotland, and abolition is set to follow in Wales.

Some council estates and housing have also suffered from decades of underinvestment. Many local authorities, faced with repeated cuts to their social housing budgets, have outsourced maintenance and refurbishment to private companies. Such an arrangement can work well, but there have also been appalling examples of what can happen when things go wrong, such as the catalogue of errors and mismanagement that led to the Grenfell Tower tragedy.

Underinvestment in council housing can also lead to buildings or estates being refurbished or completely replaced. When that happens in areas where the land on which a property stands is valuable, as in parts of London, for example, some former tenants – and in some cases Right to Buy homeowners too – can end up being forced to leave because the new development includes fewer social or affordable homes.

In some cases tenants have been offered new homes far from their old homes. David Cowan, professor of law and policy at the University of Bristol, who specialises in housing policy, says the worst case he has found was an individual living in London who was rehoused in Durham.

Housing associations’ ability to continue building affordable homes within new developments has been hit by another George Osborne policy: his abandonment, in 2015, of a 10-year rent settlement and the imposition of a four-year rent cut.

“That was very damaging to our financial capacity to build more homes,” says Matthew Harrison, CEO of Great Places Housing Group housing association. The National Housing Federation (NHF), which represents independent non-profit housing associations in England, estimates that the rent cut will cost housing associations £3.9bn between 2016 and 2020.

The causes and most socially damaging symptoms of the crisis have been understood for a long time, but government housing policy has continued to focus on a seemingly threatened species, the first-time buyer.

The government’s most recent statement of its priorities, outlined in February 2017 in a white paper, Fixing our broken housing market, included proposals for housebuilding and an increase in affordable housing; and to streamline planning processes, including a pledge to force developers to start work within two years of gaining planning permission. This followed the announcement in January of plans for 14 new garden villages of several thousand homes each in sites across the country and three new garden towns in Buckinghamshire, Somerset and on the Essex/Hertfordshire border – but which pledged only £7.4m upfront for the new developments.

The Labour Party also made housing a key policy area in its 2017 election manifesto. It would seek to make three-year tenancies standard and would put an inflation cap on rent rises. It also promised first-time buyers a time and cost-limited exclusion from stamp duty and access to discounted homes. It said it would ensure sites suitable for smaller developments are released as part of public land disposals, that it would start work on new towns and garden cities; and that it would build 250,000 new homes every year for a decade, including, by the end of that decade, 100,000 genuinely affordable homes each year to rent and buy.

But even if such pledges became reality, they would lag behind actual need. At present there are over 200,000 new households forming each year, more than the number of new homes built and far higher than the number of new affordable homes, according to government figures.

Pryor believes increased use of high quality, modular, prefabricated homes would help to increase housing supply. He suggests that the fact such homes are factory-built then shipped as components to the building site would also create more reliable jobs in the construction sector.

More housebuilding would also require more investment in skills. Brexit is likely to worsen the current skills shortage: at present about 8% of construction workers in the UK – 176,500 people – are from the EU, according to research from the Royal Institution of Chartered Surveyors.

Further reform of planning is also needed. NHF policy leader Adam Morton would like to see more public land released specifically for building affordable and social housing. At present, public bodies are required to get best value when selling public land, and this is usually interpreted to mean the highest possible price.

“We think there’s scope for a measure of value that takes into account the economic and social benefit of new homes,” says Morton.

There could also be improvements made to the way new housing is funded. The think tank ResPublica suggests creating a new National Housing Fund, in which housing associations, collectively, and government would each take a 50% stake. The fund would invest £100bn over 10 years to give developers the long-term financial certainty they need to commit more quickly to new projects. Government would raise money through the bond markets to lend to the fund, housing associations would manage the properties, and net rental income would deliver a return to the taxpayer.

ResPublica claims the plan would deliver at least 40,000 new homes annually, largely for people who can’t currently obtain social housing and have little prospect of becoming homeowners.

“There are some key social and economic benefits, from more tax income and job security, to welfare savings on housing benefit and increased council tax receipts,” says Edward Douglas, policy and projects manager at ResPublica. He suggests the fund could create 180,000 new jobs in construction. “There’s a really strong case for government to do this.”

In the absence of adequate numbers of affordable homes, another option would be to reintroduce controls on private rents. This would be politically difficult. Opponents can point to a decline in the quality and availability of private rented housing when rent controls were in force during the 20th century – although the rapid rise in home ownership must also have been a factor. A cap on rent increases, pegged to one of the usual measures of inflation, is possible, although controls could be difficult to police.

Labour has also suggested it might consider introducing a land value tax to replace council tax and business rates. Such a move could help persuade developers to stop hoarding land. But
it would also be very challenging.

Yet, if there is to be significant progress the government needs to intervene in a strategic and holistic way, says Cowan. “Governments – Labour and Tory – have failed to think about housing policy as a whole,” he explains. “They think about it as one type of tenure, then another type of tenure. We need a joined up policy.”

Those who now own a home possess a hugely valuable asset that could pay for retirement, care in old age, or help younger relatives buy their own home. But if our economy and society is to function properly, as many people as possible need to be able to afford to live somewhere decent, in a stable community, not too far from where they work. Can we achieve that?

A real estate investor’s view of the housing crisis

Naomi Heaton is founder and CEO of London Central Portfolio, which offers investment opportunities promising capital and rental returns on prime central London property. She believes the introduction of Additional Rate Stamp Duty – designed to increase housing supply in areas with a high percentage of second homes – has with other factors, including Brexit, contributed to a sales slump in central London.

The change appears to be deterring some foreign investors from buying in the heart of the capital – an outcome some welcome, following condemnation of residential properties being seen by some buyers as investments not homes, and left unoccupied for long periods – but Heaton argues that the slump will have negative consequences for the supply of housing.

“Clearly it’s been useful to blame the housing crisis on foreign investors, but the reality is that many properties in central London are too expensive for the domestic market,” she says. “If that stock’s not bought the developer is not going to be able to build elsewhere. You’re losing inward investment: professional fees, furnishings, trades involved in making the paint and the carpets and so on.”

To those who might ask whether some of those benefits could not be associated with the construction of less expensive homes, Heaton claims these developments have been approved by local authorities.

“Local authorities have got to be a lot more rigorous about approving schemes that do more to help the domestic market,” she says.