post image

14

October

By Kate Barker, former member of the Bank of England’s Monetary Policy Committee

It is now a commonplace to assert that there is a housing crisis, or, as the government’s 2017 White Paper put it, a ‘broken housing market’. Yet in England 34% of households now own their homes outright, and over the last ten years the number of homes failing the decency standard has been dramatically reduced.

This is a situation in which the averages don’t count for much – the vast majority are well-housed in homes they can afford. But several minorities are poorly served – for different reasons which can also differ across regional geographies.

A problem visible when walking around our major cities is the rise in homelessness – less obvious are the 30,000 extra households in temporary accommodation since 2010, or the 130,000 increase in overcrowded households (which are mainly in the rented sector) over the past 20 years. These data suggest an undersupply of housing for the most vulnerable, and the quality of accommodation is too often worst for these households. Regulation of landlords, including local authorities, needs to be more stringent.

The obvious solution is to increase social housing supply, however the number of new affordable housing has been lower over the most recent five years than the previous five years. And the stock of affordable rented housing is almost 200,000 below that 15 years ago. Many local authorities are now tackling this gap by finding ways to finance additional stock – but the scale of finance needed to really push supply up is beyond their current means. Either centrally or locally – the public sector should borrow more to fill this gap. For younger people there are different issues. Research by the Resolution Foundation suggests that millennials spend 23% of their income on housing, compared with 17% for baby-boomers at the same age. While rents have been rising faster than average earnings since around 2010, part of the reason for this higher spending is that young people’s wages have fallen relative to older workers. This has not put downward pressure on house prices, as might have been expected, due to new housing supply in England increasing more slowly than desired household formation.

If we build more, where should we do it? There is an increasing fashion for new settlements – and these may well have a place, especially in the more economically dynamic parts of the UK. But much economic evidence points to the benefits of agglomeration for productivity, and it also makes public service provision more efficient and cultural facilities more viable. Surely, we should be considering facing down green belt protests to add well-designed urban extensions to cities outside London such as Bristol, Oxford and Cambridge – while continuing to densify or extend the major cities further north.

The recent Ministry of Housing, Communities and Local Government (MHCLG) policy consultation ‘Planning for the right homes in the right places’ suggested a formulaic approach to producing new supply targets for local plans. This would neither enable the creation of large extensions or, perhaps more importantly, permit a fresh look at England’s geography with a view to tilting the growth of economic activity away from London and its satellites and towards a new vibrant linked economy across the Northern cities.

Even if the present rate of new home supply were doubled, however, after a decade it would have done little to ease the problem faced by many young people, especially if their parents are not home-owners, which is that they do not have the ability to raise funds for a house deposit (even if their income is adequate to meet the subsequent repayments). This situation would only be ameliorated by a significant fall in house prices relative to incomes in many areas.

House prices have of course been pushed up, alongside other asset prices, by the downward shift in real interest rates, a shift which at present seems likely to be only partially reversed over the next decade. The wealth of those owning homes before the mid-2000s has risen sharply, and their children are often enabled to buy as their parents downsize or withdraw equity to facilitate deposits. Meanwhile others are priced out.

If this is thought an important issue it would be best addressed by introducing a form of wealth tax – perhaps charged on a proportion of the value of a home which belongs to the homeowner (to avoid pressure on those who have recently taken out mortgages). As this tax would be capitalised into house prices, it would tend to reduce their level. In addition, increased inheritance tax on housing assets could reduce the intergenerational issues around wealth. And then the proceeds of these taxes could potentially be recycled into social housing.

So, to truly resolve the problems perceived in the housing market, the government would need to:

  • Increase public debt to raise social housing supply
  • Strengthen the regulation of standards in rented accommodation
  • Build more around existing settlements and invest in public transport links
  • Tackle England’s marked regional imbalances
  • Increase the relative wages of young people
  • Use taxation to change inter- and intra-generational housing wealth distribution.

Sadly, snowballs melt in hell.