Housing after the Parties

Commentary: 8th October, 2013 After the Party: who's got housing right?		@pluslusk
At their party conference a few weeks ago, Labour promised to abolish the 'bedroom tax' and talked of a major housebuilding programme. The Conservatives responded by announcing an early start on extending 'Help to Buy' to all homebuyers. On 7th October both Mark Prisk, the Coalition housing minister, and Jack Dromey, his Labour shadow, lost their jobs. Wolverhampton MP Emma Reynolds takes over the Labour housing brief and three new faces have come into the Communities and Local Government department. With many people finding themselves squeezed out of affordable places to live, housing could rise up the political agenda in the run-up to the next election. But has anyone got the answer to the housing crisis? Do we even begin to understand what this crisis is? The often-heard claim that we are building 'the lowest number of new homes in peacetime since the 1920s' misses the rather important point that, in the past, we also demolished a lot of homes (often unnecessarily, but that's another story). In fact, our housing stock has risen at a pretty steady rate over many decades. So at the start of the 1960s, Britain had 16.2million homes serving a population of 51.3million - that's one home per 3.2 people. Fifty years later, in 2010, we had 26.5million homes for a population of 61million - that's one home per 2.3 people. At the start of the 1960s, the average house price (a little over £2,000) was three times the average male worker's wage. Fifty years later, the average price (over £160,00) is over six times average earnings. What on earth has happened? And where has all that housing gone? The 2011 census shows there are 22million households in England. Of these, 6.5million are single person households, and another 4million are couples with no children. So 10.5million households - nearly half the total - only 'need' one bedroom, but in fact most have at least two bedrooms, and over 40% have 3 or more bedrooms. Overall, fewer than 5% of households live in overcrowded homes, though his figure rises to 11% in London. We have about 4million households where all members are over 65. Within this group, 75% are home owners and, of these, 92% are mortgage free. Housing transactions recorded on the land registry fell sharply after the 2008 crash, and remain around a third or more lower than pre-boom. So in short, we have a gummed-up housing market - older home owners are staying put, with no incentive to move as their housing is paid for. Younger people entering the market are short of space to go to, even though there is plenty of housing stock. The planning industry tells us that we 'need' an extra 250,00 homes per year added to the stock, but if you probe their figures you see that this increase arises from a growing number of single-person households. Accommodating this increase is only possible if we, especially older people, are ready to move to 'downsize' - and at the moment this isn't happening. The long boom in houseprices started in the middle of the 1950s and ended in 2007. Over this period, prices increased by over 9% a year on average. Except for the period from the mid-1970s to the mid-1980s, interest rates were lower than this price increase. So home-owners got their housing more or less free - the growth in value outstripped the cost of borrowing the money to buy the place. Once this became an established pattern, people bought their homes in the expectation of rising prices - so they were buying, not just a home, but an expected profit. This is the true meaning of a price 'bubble' - a bubble means not just that prices rise, but that prices keep on rising because they are expected to keep rising. At first, the houseprice boom was driven by tax incentives in the form of mortgage interest rate relief and no capital gains tax. In the 1990s into the first years after the millenium, it was sustained with low interest rates and lending terms that assumed a continuing 'bubble' (when people could borrow the whole of the asking price and then more!). After the bubble burst, interest rates were kept low partly to protect home owners, and Quantitative Easing (QE) keeps interest low and asset prices high. In the 1950s, roughly speaking, a third of all homes were owner-occupied, a third were council houses and a third were private rented. Government policy under both parties was to increase owner-occupation as the preferred solution for middle and higher earners. Private renting was driven out by rent controls. So by the 1980s, two-thirds of homes were owner-occupied and the other third were 'social' housing. In the 1980s Right to Buy started and rent controls were lifted. Now, about a third of all homes are rented but a majority are owned by private landlords. Typically these are 'buy to let' investors. They offer short term tenancies and need the flexibility to sell the homes on the open market at short notice. While they may be good landlords providing a good service, they are not investing for the long term in rented housing. Housing in the buy-to-let market offers a 'safe haven' for people with cash to spare facing very low interest rates on alternative savings products, which is one reason for prices now increasing in some parts, especially central London, which attracts international investors. The 'headline' party policies are 'Help to Buy' from the government and 'build more homes' from Labour. The Help to Buy scheme aims to help buyers use low deposits to get mortgages. It is in two parts. Part 1, now operating on new homes, mainly consists of a soft government loan on 20% of the price. This £3.5billion scheme has helped get new construction back on its feet. Part 2 (HtB2) is the bit the government has brought foward. It offers not a loan but a guarantee on 15% of the houseprice, up to £600,000. However, lenders must buy this guarantee from the government, and will charge borrowers a higher rate of interest. So while some commentators fear HtB2 will fuel a new bubble, others predict little take-up. The key test will be not just houseprices but transactions - will turnover in the market increase? Labour started its Brighton conference announcing (via shadow chancellor Ed Balls) that it would spend £10billion in two years building 400,000 homes. The following day, Ed Milliband spoke of 200,000 homes a year by 2020 and also suggested that under a 'use it or lose it' policy, land with planning permission could be the subject of compulsory purchase if not developed. By the end of the conference, questions about the scale of housebuilding were answered by referring to a commission, chaired by Michael Lyons, which will look at housing investment. Why the uncertainty? The problem with the '200,000 homes a year' figure is that it quotes a cost to the government of £25,000 per home - this assumes that the grant rates in the current 'affordable homes' programme can be maintained on a much bigger scale (the current programme is building about 170,000 homes over four years, at a grant rate as low as 20%). This cannot be done - it is only being achieved now by raising rents to up to 80% of market rates, not just for occupants of new homes but also for newcomers to housing association 'relets', this cost falls mainly on future Housing Benefit, and landlords are also using future profits to support borrowing. Below the radar there were some interesting ideas floating around the two conferences that might start to address the problems. A new report from the think-tank Demos says that older, underocuppying home owners do want to move but the housing product they need - smaller homes for active retired people who face a risk, but not a certainty, of rising care needs - is barely offered at all in the housing market, mainly because neither the planners nor the housebuilders understand it. Labour say they support the Liberal Democrat idea of a 'mansion tax' on higher value properties, and would use the money to reduce income tax. Boris Johnson argued that Stamp Duty Land Tax, by taxing turnover in the market, is helping to keep the market gummed up. But nothing was heard of another idea floated by Ed Miliband in the past - using the state's buying power through Housing Benefit to get better deals in the rented market. Housing, with the collapse of the price bubble, was at the heart of the worldwide 2008 financial crisis. In my view, housing solutions will lie at the heart of economic revival as well as being essential for the wellbeing of the younger generation who are being denied the start in life enjoyed by my generation and its successor. The solutions will come only from a radical review of where we are now, how we got into this mess, and how to get a proper housing market functioning. That debate won't be started by politicians -it must come from sound information and a will to face the future honestly.
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Commentary: 8th October, 2013

After the Party: who's got housing right?

@pluslusk

At their party conference a few weeks ago, Labour promised to abolish the 'bedroom tax' and talked of a major housebuilding programme. The Conservatives responded by announcing an early start on extending 'Help to Buy' to all homebuyers. On 7th October both Mark Prisk, the Coalition housing minister, and Jack Dromey, his Labour shadow, lost their jobs. Wolverhampton MP Emma Reynolds takes over the Labour housing brief and three new faces have come into the Communities and Local Government department. With many people finding themselves squeezed out of affordable places to live, housing could rise up the political agenda in the run-up to the next election. But has anyone got the answer to the housing crisis? Do we even begin to understand what this crisis is?

The often-heard claim that we are building 'the lowest number of new homes in peacetime since the 1920s' misses the rather important point that, in the past, we also demolished a lot of homes (often unnecessarily, but that's another story). In fact, our housing stock has risen at a pretty steady rate over many decades. So at the start of the 1960s, Britain had 16.2million homes serving a population of 51.3million - that's one home per 3.2 people. Fifty years later, in 2010, we had 26.5million homes for a population of 61million - that's one home per 2.3 people. At the start of the 1960s, the average house price (a little over £2,000) was three times the average male worker's wage. Fifty years later, the average price (over £160,00) is over six times average earnings. What on earth has happened? And where has all that housing gone?

The 2011 census shows there are 22million households in England. Of these, 6.5million are single person households, and another 4million are couples with no children. So 10.5million households - nearly half the total - only 'need' one bedroom, but in fact most have at least two bedrooms, and over 40% have 3 or more bedrooms. Overall, fewer than 5% of households live in overcrowded homes, though his figure rises to 11% in London. We have about 4million households where all members are over 65. Within this group, 75% are home owners and, of these, 92% are mortgage free. Housing transactions recorded on the land registry fell sharply after the 2008 crash, and remain around a third or more lower than pre-boom. So in short, we have a gummed-up housing market - older home owners are staying put, with no incentive to move as their housing is paid for. Younger people entering the market are short of space to go to, even though there is plenty of housing stock. The planning industry tells us that we 'need' an extra 250,00 homes per year added to the stock, but if you probe their figures you see that this increase arises from a growing number of single-person households. Accommodating this increase is only possible if we, especially older people, are ready to move to 'downsize' - and at the moment this isn't happening.

The long boom in houseprices started in the middle of the 1950s and ended in 2007. Over this period, prices increased by over 9% a year on average. Except for the period from the mid-1970s to the mid-1980s, interest rates were lower than this price increase. So home-owners got their housing more or less free - the growth in value outstripped the cost of borrowing the money to buy the place. Once this became an established pattern, people bought their homes in the expectation of rising prices - so they were buying, not just a home, but an expected profit. This is the true meaning of a price 'bubble' - a bubble means not just that prices rise, but that prices keep on rising because they are expected to keep rising. At first, the houseprice boom was driven by tax incentives in the form of mortgage interest rate relief and no capital gains tax. In the 1990s into the first years after the millenium, it was sustained with low interest rates and lending terms that assumed a continuing 'bubble' (when people could borrow the whole of the asking price and then more!). After the bubble burst, interest rates were kept low partly to protect home owners, and Quantitative Easing (QE) keeps interest low and asset prices high.

In the 1950s, roughly speaking, a third of all homes were owner-occupied, a third were council houses and a third were private rented. Government policy under both parties was to increase owner-occupation as the preferred solution for middle and higher earners. Private renting was driven out by rent controls. So by the 1980s, two-thirds of homes were owner-occupied and the other third were 'social' housing. In the 1980s Right to Buy started and rent controls were lifted. Now, about a third of all homes are rented but a majority are owned by private landlords. Typically these are 'buy to let' investors. They offer short term tenancies and need the flexibility to sell the homes on the open market at short notice. While they may be good landlords providing a good service, they are not investing for the long term in rented housing. Housing in the buy-to-let market offers a 'safe haven' for people with cash to spare facing very low interest rates on alternative savings products, which is one reason for prices now increasing in some parts, especially central London, which attracts international investors.

The 'headline' party policies are 'Help to Buy' from the government and 'build more homes' from Labour. The Help to Buy scheme aims to help buyers use low deposits to get mortgages. It is in two parts. Part 1, now operating on new homes, mainly consists of a soft government loan on 20% of the price. This £3.5billion scheme has helped get new construction back on its feet. Part 2 (HtB2) is the bit the government has brought foward. It offers not a loan but a guarantee on 15% of the houseprice, up to £600,000. However, lenders must buy this guarantee from the government, and will charge borrowers a higher rate of interest. So while some commentators fear HtB2 will fuel a new bubble, others predict little take-up. The key test will be not just houseprices but transactions - will turnover in the market increase?

Labour started its Brighton conference announcing (via shadow chancellor Ed Balls) that it would spend £10billion in two years building 400,000 homes. The following day, Ed Milliband spoke of 200,000 homes a year by 2020 and also suggested that under a 'use it or lose it' policy, land with planning permission could be the subject of compulsory purchase if not developed. By the end of the conference, questions about the scale of housebuilding were answered by referring to a commission, chaired by Michael Lyons, which will look at housing investment. Why the uncertainty? The problem with the '200,000 homes a year' figure is that it quotes a cost to the government of £25,000 per home - this assumes that the grant rates in the current 'affordable homes' programme can be maintained on a much bigger scale (the current programme is building about 170,000 homes over four years, at a grant rate as low as 20%). This cannot be done - it is only being achieved now by raising rents to up to 80% of market rates, not just for occupants of new homes but also for newcomers to housing association 'relets', this cost falls mainly on future Housing Benefit, and landlords are also using future profits to support borrowing.

Below the radar there were some interesting ideas floating around the two conferences that might start to address the problems. A new report from the think-tank Demos says that older, underocuppying home owners do want to move but the housing product they need - smaller homes for active retired people who face a risk, but not a certainty, of rising care needs - is barely offered at all in the housing market, mainly because neither the planners nor the housebuilders understand it. Labour say they support the Liberal Democrat idea of a 'mansion tax' on higher value properties, and would use the money to reduce income tax. Boris Johnson argued that Stamp Duty Land Tax, by taxing turnover in the market, is helping to keep the market gummed up. But nothing was heard of another idea floated by Ed Miliband in the past - using the state's buying power through Housing Benefit to get better deals in the rented market.

Housing, with the collapse of the price bubble, was at the heart of the worldwide 2008 financial crisis. In my view, housing solutions will lie at the heart of economic revival as well as being essential for the wellbeing of the younger generation who are being denied the start in life enjoyed by my generation and its successor. The solutions will come only from a radical review of where we are now, how we got into this mess, and how to get a proper housing market functioning. That debate won't be started by politicians -it must come from sound information and a will to face the future honestly.

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