The Government Cannot Build its Way Out of England’s Housing Crisis
Julian Mercer analyses the misguided policy of successive governments of building too many new houses, but not creating any more homes
For generations, governments have embarked on seemingly ambitious building programmes to solve the housing crisis – but it stubbornly refuses to be solved.
As recently as 2017, Theresa May declared her “personal mission” to solve England’s housing crisis by turbo-charging the delivery of new homes. For decades, English housing stock had grown by about 180,000 per year. May pledged to boost the number to 300,000 – more than has ever been achieved.
The then Prime Minister’s white paper was unequivocal: “This country doesn’t have enough homes. That’s not a personal opinion or a political calculation. It’s a simple statement of fact. The shortage has slammed the door of the housing market in the face of a whole generation.”
However, as she was making this impassioned statement, England already had a million empty homes, according to the now chief economist at the Tony Blair Institute for Global Change, Ian Mulheirn.
So how could there still be a housing problem and why do governments believe that the answer is to keep building more homes?
Part of the problem is that the forecasts of the number of homes required have been based on false assumptions.
The decision on how many houses each council should build are based on biennial forecasts of house-building requirements by the Ministry of Housing, Communities and Local Government (MHCLG), which are based on Dr Alan Holmans’ model for the projection of housing need.
Holmans was a genial Scotsman who rose through the Civil Service before taking a post at Cambridge University. His love of malt whiskey was matched only by a passion for statistics which he applied 50 years ago to create the first official housing forecasts. The methodology was complex but, among the key variables, were total population and the average number of people in each household.
Throughout the 20th Century, these variables had been going in opposite directions. As the population rose, household size had been falling, due largely to slum clearance, more divorces and increasing life expectancy. In 1970, the average home in England contained 2.8 people; by 2000 this had fallen to 2.4. It doesn’t take a statistician to work out that the smaller households became, the more housing that was required. Across those three decades, that amounted to five million more homes.
In the 21st Century, the relationship between these two variables has changed, as Ian Mulheirn discovered when he realised that the forecasts were going increasingly awry.
From the turn of the century, something quite unexpected happened: the rate of household formation slowed down because households stopped shrinking. The average size remains today at 2.4, just as it was in 2000. You might expect this to have resulted in councils being given correspondingly lowered housing targets, but you would be wrong.
The full impact of this flat-lining became apparent in the 2011 Census. Two years later, Holmans judged it a temporary aberration, an artefact of various economic factors including the 2008 financial crash “which would gradually reduce as more normal conditions returned”. In consequence, the MHCLG continued to set councils increasingly overestimated targets. This has led to a widening gap between the actual number of households and that forecast by the Government.
As a result, Ian Mulheirn calculates that, for the past 15 years, English councils have been working to annual targets of up to 80,000 more homes than there were households to fill them.
For most people, the property ladder is dangling hundreds of feet above their heads from the bottom of an oligarch’s money-laundering zeppelin.David Mitchell
When Theresa May made her emotive announcement to build 300,000 more homes a year, the public, commentators and experts were on her side. Reports from a range of academics, the House of Lords, the Financial Times and the housing charity Shelter described an ‘endemic shortage’ to be solved only by building many more homes.
Mulheirn spotted a common theme: “Most roads lead back to Alan Holmans’ 2013 paper and those that don’t appear to offer no source for their projection.”
Reason caught up with emotion in 2018 when the Office for National Statistics (ONS) wrested responsibility for the forecasts from MHCLG. The ONS immediately decided that the stabilisation of household size was no temporary matter and downgraded the ministry’s projections by 24%.
But the MHCLG was not moved by reason and dismissed the new data, instructing councils to continue to rely on their obsolete and increasingly overestimated numbers: “Methodological changes are not a reason why the Government should change its aspirations… of supporting a market that delivers 300,000 homes.”
The weakness of the ‘build, build, build’ policy is that the number of empty homes keeps rising. But where are they?
Last year, the MHCLG reported that there were 650,000 empty homes in England. Just over a third were classified as long-term empty, vacant for more than six months and often derelict. Some are so-called ‘buy to leave’ properties, especially in London’s inflationary housing market where foreign investors make handsome returns from simply leaving the place empty. “Gold bullion in the sky,” said Boris Johnson while mayor of the capital. Tom Crowley, chair of the charity Action on Empty Homes (AEH), is less impressed: “We see high levels of empty property starting to emerge in areas with very high levels of housing demand”.
AEH believes that 650,000 empty homes is an underestimate because empty homes attract council tax premiums, making it likely that owners will conceal their true status. This may also have contributed to the recent growth in second homes – a sector that avoids additional council tax charges and is not included in the empty homes tally. The English Housing Survey reveals that the number of second homes has risen by 150% in five years as stands today at a quarter of a million. Over the same period, AirBnB listings in the UK more than tripled to 257,000.
“The unchecked growth of online holiday lettings is depriving communities of much-needed homes,” said the director of housing pressure group Generation Rent. “Young adults can’t afford to settle down in the areas they grew up in.”
Given that the growth in second homes mirrors the recent acceleration in house-building, one might conclude that the housing crisis is less about a shortage of homes than their diverted supply.
Greater Forces At Work
Advocates of the shortage theory frequently cite the rapid growth in so-called ‘hidden households’, whereby families or unrelated adults are forced to share a home.
“If there are not enough houses,” says Professor Paul Cheshire, of the London School of Economics, “then households do not form.”
It is true that the number of hidden households rose by 750,000 in the 20 years to 2017. If they were held back by a lack of homes, you might expect to see their numbers bumping up against the supply figures as desperate home-makers snap up every available property.
“But since surplus dwelling stock has roughly doubled over the past 25 years,” says Mulheirn, “this constraint has eased if anything.”
Once again, the ONS data offers a different perspective. The primary cause of UK population growth in recent times is immigration, averaging around 300,000 people per year. It is accepted that migrants are twice as likely to share households as their UK-born neighbours. Many are students in digs; others are single people, economising to maximise funds they send home to their families.
The ONS confirms that migrants account for the majority of the growth in hidden households. And this majority are here temporarily with no desire to move up the property ladder. Since the 2016 EU Referendum, the number of migrants has fallen. EU arrivals have been largely replaced by trans-continentals who, subject to visa time-limits, are even less likely to seek a permanent home of their own. In fact, because of Brexit, the ONS downgraded its forecast of long-term population growth by a million people. This too has been set aside by the MHCLG, which shortened the length of time to be considered and thus minimised the impact of population tail-off.
It is true that the official count of hidden households excludes one very important sector: the many young adults who continue to live with their parents. Their numbers are estimated to have risen by a million in 20 years. While some may prefer to stay at home, the argument is repeated that most have no choice and that the housing shortage is firmly to blame.
This takes us to the heart of Ian Mulheirn’s thesis: that much greater forces than a lack of supply are constraining the choices of aspiring home-makers.
It is accepted that years of low interest rates have made housing increasingly attractive to those with capital, not least multiple-property investors. In the past 25 years, their competition has bid up prices by 160% in real terms so that the average house now costs eight times as much as average earnings.
In direct contrast, aspiring first-time buyers are confronted by tightened credit conditions that typically limit mortgage loans to 4.5 times a person’s earnings and demand much higher mortgage deposits from first-time buyers. The estate agent, Hamptons International, calculates that the average first-time buyer needs a deposit of £29,000. In London’s Kensington and Chelsea, you’ll need to put down £112,000.
So it is no surprise that the majority of young adults turn for their first home to the rented sector, but the picture here is even less promising. Massive cuts in social housing has pushed tenants into the much more expensive private rented sector. The Labour Force Survey revealed that, from 1997 to 2017, the number of young adults in social housing fell by 700,000. To make matters worse, the Institute for Fiscal Studies reported that young people’s wages took the biggest hit from the financial crisis of 2008, falling 12% over ensuing years.
Now factor in substantial cuts to housing benefit and levels of student debt well over £135 billion and you begin to see why so many have no choice but to stay with Mum and Dad.
What seems to be emerging is a two-tier property market with multiple ownership expanding in direct proportion to the rise in new builds, while millions can’t afford any kind of home, no matter how many are built.
“For most people, the property ladder is dangling hundreds of feet above their heads,” wrote the comic writer David Mitchell, “from the bottom of an oligarch’s money-laundering zeppelin.”
A Suitable Return
The Government makes much of its determination to provide affordable housing, saying that most new developments should include a minimum number of affordable homes or that developers should fund infrastructure improvements, such as new roads and schools.
But the definition of ‘affordable’ is vague and the legislation isn’t robust. Typically, a developer gets planning permission on the condition that 40% of the homes in a development should be offered at 80% of local market prices. They might even start work before downing tools to invoke the notorious ‘viability assessment’ – in secret hearings (to protect their commercial confidentiality), they say that the affordable quota renders the entire project unprofitable and, unless it is reduced, that they’ll walk away. Developers can even quote the MHCLG guidelines that ring-fence profit margins of 15-20% as “a suitable return for developers”.
It is a gun to the local authority’s head. After a decade of austerity, they daren’t jeopardise the council tax revenue that new homes will raise. In Manchester city centre, no new developments between 2015 and 2018 included any affordable housing. Last year, less than 10% of England’s additional homes were classed as affordable. And the fluttering pennants outside my window speak only of three, four or five-bedroomed executives homes, way beyond the reach of most first-time buyers.
As for the infrastructure levy, look no further than the MHCLG’s Secretary of State Robert Jenrick, who fast-tracked a luxury housing scheme so that the Conservative donor Richard Desmond needn’t pay the council £45 million. Jenrick called it natural justice, telling MPs that “the viability of the project might be compromised”.
Supply and Demand
At the heart of the Government’s housing policy is the most basic tenet of economics: if you flood the market, prices will fall. As Theresa May wrote in her white paper: “The starting point is to build more homes. This will slow the rise in housing costs so that more ordinary working families can afford to buy a home.”
There is broad agreement among economists that more houses will cut prices but the effect is marginal, essentially because housing isn’t a single commodity. It comprises two quite different markets: one for investors and one for residents. In other words, you can buy a house without living in it or live in one without owning it.
But the MHCLG still cites an optimistic formula that says that a single percentage point increase in housing surplus should produce a fall in prices of about 2%. Ian Mulheirn does the maths: if the Government meets its 300,000 target for a decade, this may reduce prices by 10% – a welcome result, but a drop in the ocean compared to the 160% rise in prices we’ve seen in recent years.
Last year witnessed the biggest rise in housing stock for 30 years but Nationwide Building Society reported that prices soared by a six-year high of 5.8%. Even if we assume that developers will embrace a policy designed to reduce their profits, it may take quite a while to succeed.
In any event, do we really want to bulldoze so many green fields and create millions more empty houses for such dubious benefit? Ireland tried something similar in the noughties with an even more ambitious programme, equivalent per capita to England building a million homes per year. Their prices kept rising. Similar property bubbles developed in the US and Spain before they all burst spectacularly in the crash of 2008, leaving ghost estates as a memorial to their folly.
Even the Bank of England is now questioning the supply policy. In a recent report, David Miles, a former member of the Bank’s Monetary Policy Committee, observed: “The rise in house prices… can be more than accounted for by the substantial decline in the real risk‑free interest rate.” In another study, his colleagues, John Lewis and Fergus Cummins, concluded that “scarcity of housing has played a negligible role”.
None of this will knock the Government off-course. When Andy Burnham became Mayor of Greater Manchester, he wanted to honour a manifesto pledge to protect greenbelt land. Rejecting a target of 221,000 new homes, he lambasted “the Government’s insistence on us using old population and housing figures, which are significantly higher than the most recent ONS projections”. In response, the Housing Minister Kit Malthouse, promptly withdrew a £68 million grant to develop brownfield sites, telling MPs that “if he’s willing to be ambitious, we would be willing to support him”.
When a Liberal Democrat-Green coalition won control of South Oxfordshire District Council last year, it too set about honouring a manifesto commitment to cut the target of 28,000 homes. Hours before the decisive council meeting, Robert Jenrick invoked special powers to impose the number.
Across the land, an unlikely coalition of retired professors, statisticians and environmentalists are joining forces. In Coventry, where protestors say that the housing target of 42,000 homes is three times the actual need, they have protested to the ONS regulator, the National Statistics Authority.
Further evidence of who might be the ultimate beneficiaries comes from the government’s ‘help-to-buy’ scheme, a £12 billion fund to help buyers raise mortgage deposits. Sceptics question why, if the aim is to help everyone get on the property ladder, it applies only to newly-built homes. “Help-to-buy is a scam,” said the former Liberal Democrat leader Sir Vince Cable last year, “enriching developers while forcing buyers off the ladder by pushing up prices.”
Researchers at Sheffield Hallam University have shown that, as the rate of house-building increased by 60%, the profits of leading house-builders rocketed by 500%. The UK’s biggest builder, Persimmon, makes £66,000 profit on every house it builds, its directors sharing a £400 million bonus. The chair of Westminster City Council’s planning committee had to resign when it emerged that he had been wined and dined by property developers at least 150 times, including trips to Mallorca and the south of France.
Focus on Social Housing
Over the past four years, Ian Mulheirn has faced a powerful backlash from ministers, economists, journalists and developers. But his approach is finally gaining powerful traction.
Perhaps the most surprising change of heart comes from one of Theresa May’s former special advisors, writing anonymously in the freethinkingeconomist blog: “Ian’s ability to keep his temper in the face of so many arguments he has already heard is quite amazing… no feasible amount of house-building will make housing more affordable, or the buying of a house markedly easier.”
England stands alone among the UK’s four nations in its housing policy. Before his death in 2015, Dr Alan Holmans was commissioned by the Welsh Government to assess Wales’ housing needs. Once again, he assumed that household size would resume its downward trend and recommended 12,000 new homes per year. Curiously, the Welsh Government chose not to accept the findings. Today, Wales shares housing forecast methodology with Scotland and Northern Ireland. Its current need, per capita, is half that of England.
This Summer, on the very day when the ONS’ 2020 household projections brought the numbers down even further, Boris Johnson endorsed the English housing target of 300,000 homes per year and proposed a deregulation of the planning system in which “newt-counting delays are a massive drag on the prosperity of this country”.
The latest policy – one of Dominic Cummings’ parting gifts – introduces a new method of calculating need that dilutes the value of household projections; forces protestors to raise objections long before they see the detail of individual proposals; and further reduces the provision of affordable housing. Conservative backbenchers are up in arms, not because the methodology is flawed, but because their rural constituencies would take a bigger share of the increasingly overestimated burden.
But, for as long as developers prioritise profit over public service, they will never solve this crisis. Government policy should focus solely on social housing, probably in the order of 150,000 new homes per year. The private sector can then be released to serve the rest of the market wherever it can prove demand, no longer fuelled by fallacious targets and no longer pretending that it can meet everyone’s needs.
what the papers don’t say
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