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The 2013 budget and housing

professor glen bramleyProfessor Glen Bramley argues that the housing measures announced by the Chancellor are likely to stimulate demand within the housing market but that they do nothing to solve supply side constraints. This risks inflating prices within the housing market whereas what we currently need is a greater supply of housing

Housing people often complain that their subject is never at the top of the political agenda. But a striking feature of Wednesday’s Budget was the amount of emphasis on housing within the Government’s measures. I hesitate to call it a consensus, but there is a pretty widely shared view that more housing investment is needed and that this could help to ‘kick start’ our stalled economy. Where the consensus breaks down is whether the government should borrow more and spend a lot more cash up front, or rather rely on more indirect means to generate investment from ‘other people’s money’.

I just checked the latest figures on actual new homes started and completed in England up to the end of 2012. These make sobering reading and indicate the challenge facing the government. The figures for 2012 are the second worst in living memory, not much better than the nadir of 2009-2010. Starts, the best leading indicator, actually fell year on year, whilst completions are flatlining. These numbers would need to be ramped up by 2.5 times to meet any reasonable estimate of need. They are not much above half of the best recent years, and even those figures (for 2006-07) were well short of what was needed.

Some of the schemes being refreshed in today’s announcements were in place, albeit in more limited form, last year, yet they failed to achieve any increase in output. This suggests that they were not impacting directly enough on housebuilders decisions to actually commit to building more. There is considerable danger here that these subsidised schemes simply substitute a different way of funding the same level of activity.

The new/refreshed schemes increase the scale and scope of support, particularly in respect of mortgage guarantees for high percentage loans to avoid the crippling deposit constraint facing housebuyers. These measures may be expected to increase the level of transactions activity in the market, which has shown signs of increasing slightly recently. Some of this may filter through to new build, increasing developers’ confidence that they can sell enough units to commit to building more. However, much of it will feed into greater activity in the secondhand market.

There is a fear that the effect of easier mortgage credit may feed into higher prices, rather than higher output. There is a long history of this in UK. Some of the commentary from the sector voices this fear, which is at least partially justified. Prices are rising in London and the Home Counties anyway which suggests that in this key area there may be a price impact.Real estate

The Chancellor has not taken the opportunity to do certain things which the sector has been proposing, particularly raising the caps on local authority borrowing to build new council housing. Under the reformed Housing Revenue Account regime councils could borrow prudentially to fund something like 15,000 new homes per year, adding £5.6bn to GDP and 23,500 extra jobs.

The expanded guarantee scheme for housing associations may help to increase supply a bit more, but it is working against the effects of the government’s previous ‘affordable rent’ scheme, which seeks to generate new affordable housing with hardly any subsidy. This has the effect of exhausting the spare financial capacity of the sector, and the approach may not be sustainable into the future or capable of generating much more activity in the short term.

The housebuilding industry is sitting on a large bank of land with planning permission which it is reluctant to start building on, or build on at a higher rate. Many sites are ‘stuck’ because of a combination of factors, some of which may be ‘unstuck’ by an initiative included in today’s announcement. However, key factors underlying this reluctance to expand output are (a) the dysfunctional banking system which is reluctant to increase lending to industry, including housebuilding; (b) the reluctance of housebuilding companies, and their financial backers, to reveal and crystallize potential write-downs in the value of their landbanks, which were previously over-inflated in the boom period.

In the medium term, planning constraints on land supply for housing, particularly in the key southern regions of England, remain a major barrier to increasing housing supply. This government made this problem worse, as soon as it came into office, by abolishing regional planning and associated targets and handing the decisions over to local authorities and local communities, who are typically rather ‘NIMBYist’ in their sentiments. I have demonstrated this through research linking public attitude survey data to data on planning constraints, and the predictions of my model (of a fall in supply in the south) have been more than borne out by recent surveys of local plan provision for housing.

I believe that in order to really solve the problems of housing supply it is necessary to not only make planning for realistic future numbers more effective but also to intervene more directly in the supply of land, at least in areas identified for significant growth. I would want to see publicly-sponsored land supply agencies empowered to acquire land which plans identify as appropriate for new housing and auction it to developers on a license basis which would require the developers to actually build on the land immediately rather than bank it. Such agencies would need initial financial support to acquire land and to invest in necessary infrastructure, but would eventually be profitable.

To sum up, the overall Budget package seems likely to stimulate demand and activity in the market, but it does not really deal with the critical constraints on the supply side. Therefore, the danger that it will feed more into higher prices than into extra output is a real one.

4 Comments Post a comment
  1. What was interesting about the budget yesterday was that he failed to mention the Green Deal once. Flagship policy initiative to stimulate the renewable energy and energy efficiency sectors, and the sole basket in which they’ve put all their eggs to meet the EU Energy Efficiency Directive, and they don’t mention it? Found that odd.

    March 21, 2013
    • Vicky. That’s because green and energy efficiency homes and sectors are the least of a potential home owners priorities, and always has been.

      March 21, 2013
  2. David Tannahill #

    Yes Vicky what a wasted opportunity. Yes Streetballet (?) it may be a low priority now but energy costs are increasing and people will wake up very soon. The companies with the product will clean up once the market takes off. Governments can accelerate and shape latent markets through regulation to the benefit of the national supply chain. This is short term narrow conservative political agenda. Don’t mention green before 2015!

    March 21, 2013
  3. An incisive and quality take of the sort we have come to expect form Professor Bramley. For me, however, it might partly reflect the UK housing policy makers’ continuing obsessing with, and deification of, home ownership.

    It’s often asserted in the UK that, ‘the vast majority of people aspire to own their own home’. But the ‘vast majority of people’ probably aspire to own their own car – should Government step in and subsidise, or ‘underwrite’ the purchase of cars?

    Moreover, why are UK and regional Governments in the UK incentivising low and moderate income households into the home ownership sector when that is the very last form of tenure for such households to be in. Support for this argument can be found in the excellent productions of the Resolution Foundation on the ‘squeezed middle’, or JRF, or if you prefer a more neo-liberal political perspective, the Adam Smith Institute.

    Many of the rest of us are asserting that the really and pressing need is for more action and activity to deliver affordable rented housing. The UK Coalition Government is seemingly ideologically prejudiced against an additional supply of social rented housing (subsuming it under the unctuous term ‘affordable housing’). It could, therefore, increase support (alongside appropriate regulation) for the private rented sector. Instead, the UK and regional Governments continue to redeploy already-inadequate public investment away from the more compelling and immediate need for affordable rented housing. These Governments prefer the subsidising of the ‘aspirations’ for property ownership and future personal private gain – all of course at the taxpayers’ expense.

    UK policy makers (and their advisors)should continue with their grudging and halting acceptance of what should be one of the core planks of UK housing policy. That plank has to be a replenished core social housing for rent programme; but alongside that a scaled-up and growing private rented sector that is well-regulated, populated by reputable landlords offering secure, long-term tenancies and invested in by the large (private sector) funding institutions.

    That will far more substantially ‘encourage investment and create jobs’ than any relatively small scale and minimal impact schemes and devices to attempt to kick-start a problematic home ownership system. The sheer variety and history of this schemes suggests there’s something here that just won’t ever work.

    Unfortunately, housing’s share of the UK budgetary ‘omnishambles’ has again been confirmed by the UK Chancellor’s highly politicised Budget Statement 2013. At this stage his proposals for new, expansive, taxpayers’ support for home purchase represents a return to the excesses of earlier periods – and one immediate possibility is a new rash of speculative purchases in the problematic Buy-to-Let residential market, complete with increased house price inflation.

    March 22, 2013

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