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?
False Forecasting
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.
Household Sizes
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.”
Surplus Houses
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