Demotix /Jonathan Nicholson. All rights reserved.

The market for housing in the UK is evidently badly out of balance. This Bulletin highlights with statistics and commentary the problems which have developed, and puts forward suggestions for policies to improve the situation which might be more successful than those being implemented at present.

House Construction  Set out below are the numbers of dwellings built in England per year on average during the decades since World War II:

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These figures highlight the problem of supply. The average number of dwellings constructed per year recently is now hardly more than a third of what it was in the 1960s. Part of the reason has been the 50% fall in private sector but much more of the problem stems from the public sector, where output has fallen from its peak by about 80% as the contribution made by housing associations has done nothing like enough to make up for the collapse in local authority provision. Faced with these figures, it is hard to avoid the conclusion that, if residential construction is to be dramatically increased, the public sector will have to play a much larger role in this process than it has done recently.

Local authority construction has clearly fallen because of lack of funding, but why has private sector house building also dropped so dramatically? Planning permission problems are often cited as a main reason but it is difficult to believe that these are substantially much greater now than they were forty years ago when we were building about two and a half times as many new dwellings per year as we are now. There is still plenty of land available in the UK, where only about 7% of the total land area is urbanised. House builders tend to make money out of appreciation in value of their land banks as well as out of housing construction, but again this has always been the case and does not provide a convincing reason why so much less construction is taking place. Much more significant are two recent factors which have come together to slow down the construction of dwellings in the private sector at the same time as there has been continued to be relatively little increase in activity in the public sector. These are:

The 2008 Crash  It is no coincidence that house construction fell dramatically after the late 2000s financial crash. Consumer confidence plummeted and mortgage finance became more difficult to find as banks restricted lending and borrowing criteria were tightened. As a result, demand fell.

House Prices  A number of factors then came together to push up house prices in real terms, making it much more difficult to match demand with supply. The table below shows that, having been reasonably stable from the 1960s to the 1990s, since the 2000s there has been a very large increase – rather more than 40% - in the ratio between house prices and GDP per head of the population. No doubt very low interest rates are partly responsible but shortage of supply of dwellings in relation to the growing number of people living in the UK must also have been a major factor.

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This is further emphasised in the table at the top of page 3 which shows the falling number of persons per dwelling over recent decades and the enormous increase in the ratio between earnings and house prices for first time buyers over the decades since 1981, but particularly recently.                                  

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What are the policy implications to be drawn from these figures, especially looking at the economy not only from a housing but also from a macro-economic standpoint?

More House Construction  The combination of rising living standards over past decades, rapidly increasing population, some tendency for household size to fall and falling housebuilding figures has left the UK very short of the quantity of houses and flats which needs to be provided. The only way to get house prices down to more manageable levels is to increase the supply in relation to demand.

The Public Sector  The biggest single reason why completions have fallen so much is that the public sector, particularly local authorities, have been starved of funds for housing construction. This could be made to change with more funding but doing so would increase public sector borrowing at a time when there is heavy emphasis on getting it down. One possibility would be to use Quantitative Easing to fund public sector house construction instead of lending the money to banks.

Housing Subsidies  The effect of shortage of supply has been to drive up prices, thus rapidly increasing the amount of current subsidies going to support tenants who would otherwise be unable to afford the rents which they have to pay. In 2013/14 Housing Benefit cost the Exchequer £23.8bn, about 30% of the entire welfare budget. This compares with the total cost of constructing the roughly 25,000 dwellings produced by the public sector in the same period which, at about £150,000 each including land costs and fees, came to less than £4bn. Clearly it would make sense, over a period, for the public sector to reduce revenue subsidies by producing more dwellings, thus reducing rent levels and consequently releasing more funding for public sector new build.

Constraints on Expanding Supply  There have always been complaints that the planning system makes house building more difficult than it should be, and it may well make sense to make it easier to obtain planning permission for housing, although this is unlikely to be a panacea. A big increase in construction would almost certainly cause skill shortages and shortfalls of inputs such as bricks, which would take time to overcome, but achieving a big increase in construction rates would be bound to involve delays for all sorts of other administrative and planning reasons, thus providing time for physical and training bottlenecks to be overcome. None of the supply-side constraints looks impossible to resolve if the demand was there.

Demand for Housing  Whether a big increase in housing construction takes place or not would therefore very largely depend on the extent for which demand for it materialises. For the public sector, this is very largely a question of making the money for new build available. There is every reason to believe that many local authorities, supplemented by housing associations, would be only too willing to start building again on a large scale if provided with the opportunity to do so. For the private sector, the position is more complex. House builders would need to be sure that they would make more money out of construction than by holding onto appreciating land banks. For this to be possible, they would need to be reasonably certain that there would be strong demand from purchasers capable of paying the prices for new housing being built on the required scale, either as owner-occupiers or as buyers for rent. If the rate of building of new dwellings expanded very rapidly, house prices should trend downwards as supply begins to catch up with demand, making construction more attractive than holding land banks in the hope that they will increase in value.   

Mortgages  Currently about 40% of property purchasers are cash buyers. The remaining 60% need to raise a mortgage to complete their purchases, so the availability of sufficient funds to support the volume of house purchases required is clearly crucial. Especially with the prospect of interest rate rises in the offing, for there to be a sufficient number of house purchasers capable of meeting the criteria required for them to qualify for the required finance, taking account of realistic ratios between income and house prices, house prices would need to fall, at least in the areas of the country where they are highest.

Foreign Purchasers  One significant way of getting house prices down would be to make it less attractive for foreign buyers to pre-empt so much of the housing which comes on the market in the UK. About 75% of all new build housing in London is currently sold to foreign interests as are half the properties sold for more than £1m. Steps along these lines could supplement the reduction in house prices to be achieved by much more building of social housing via the public sector.

Aggregate Saving  Stepping up substantially the amount of house building in the UK would involve both a real resource shift away from consumption to a higher proportion of our national income being invested, an increase in the savings ratio to make this possible, and sources of finance to make this switch achievable. All these three aspects of the transition required highlight the fact that it would be much easier to get the housing market in the UK back into better balance if we could increase the overall rate of economic growth in the economy as the Pound Campaign believes is possible.

John Mills is a donor to openDemocracy.