In the first in a series analysing the nation’s housing crisis and examining possible solutions, James Pallister looks at why we are in this mess
More from: The housing crisis: how did we get here?
We are in the worst housing crisis for 30 years. Not enough houses are being built, and those that are remain financially out of reach for most. In the last two years alone property prices across the UK have gone up 18.3 per cent.
In the 1980s the average UK house buyer could expect to pay 2.8 times their salary. Now the figure is nearer five times. In London, the average house price is almost nine times that of the first‑time buyer’s average earnings. According to figures quoted recently by the former head of the civil service and new Peabody chair Bob Kerslake, the typical first-time-buyer in London needs a salary of £77,000 to get on the property ladder.
Yet, while the population is booming, the number of new homes being built is its lowest since the Second World War.
How did we get to a position where we are providing so few homes for people, at prices that put them beyond the hope of many?
1: Supply is falling
The UK housing crisis is largely down to one problem: supply. For years we’ve been building fewer and fewer homes. A complex web of factors feeds into this shift, but housebuilding completions are now at their lowest point since 1945. From 1951, for 31 consecutive years, more than 200,000 houses were built in the UK every year. In contrast, since 1990, annual housing completions have exceeded the 200,000 mark only five times.
2: Demand has gone up
Government estimates suggest that 221,000 new households are forming each year in England alone. Yet in 2014/15, just 140,500 new homes were built in England. The population increased by 7.6 per cent increase in the 10 years between 2003-2013. When he announced his research for the Institute of Public Policy Research, Kerslake said London was building fewer than half the homes it needed to sustain its growing population – 18,000 last year against the necessary 49,000.
Of this, affordable housing is becoming an ever smaller percentage. In 2014 the Financial Times reported that Britain lost nearly 35,000 proposed homes for households on low incomes in one year as a result of the coalition government’s housing policies.
Criticism over developers dodging or watering down Section 106 obligations is fuelling concern about an imbalanced provision of housing across income levels.
3: The effects of the 2008 global economic crisis are still with us
The recession brought with it a more difficult lending environment, which took liquidity away from potential development budgets. But that was not the only short-term effect of the financial crisis. Research by the University of Oxford has shown a link between political and economic crises and the inflow of capital to ‘safe’ investment zones. The UK – and London especially – without a major revolution or mainland invasion for more than three centuries, is one of these. This overseas investment has upsides and downsides, whether that’s overseas developers snapping up large pieces of real estate such as Battersea Power Station or in the perceived or real aggregate price increases across the capital as a result of buying ‘investment properties’.
On a domestic level, low interest rates mean property has become an even more attractive investment proposition – why keep your money in a fund that is tootling along at one per cent? And if you’re an ageing, equity-rich baby boomer riding the wave of increased property prices, covering the deposit for a city flat for your offspring looks tenable. Once this becomes normal, price rises follow.
4: Most of the UK’s new homes are provided by volume housebuilders
Over the last two decades the shape of the house-building industry has shifted, with small-to-medium-sized developers pushed out through a process of mergers. I
In 2014, Barratt Developments, Taylor Wimpey and Persimmon accounted for about 25 per cent of total UK housing output. Successive takeovers have not always gone hand in hand with increased output. In 2007,Taylor Woodrow merged with its rival George Wimpey to form the UK’s biggest housebuilder. Prior to this the two firms were collectively completing more than 21,000 homes a year. Now Taylor Wimpey annually produces only 10,000 units.
5: Housebuilders are under no pressure to build quickly
Volume housebuilders could release more houses on to the market, and do so in a non-phased way, but this would cause the prices for each house to drop. With this in mind, it is perhaps naive to look to them to solve the housing gap. As Toby Lloyd, head of policy and planning at Shelter, told the Financial Times, good housing provision always needs state involvement: ‘Housebuilders are profit-making developers, that’s their job. Why would they build more homes to sell them more cheaply?’
6: Successive demand-side stimuli from government are credited with helping fuel price escalation
Rather than choosing to approve supply-side investment, George Osborne sought to stimulate the housing market and help first-time buyers join the market with his Help to Buy Scheme – a combination of mortgage guarantees, equity loans and a subsidised savings account.
Some have criticised the scheme for having the unintended consequence of further pushing up prices. Since its introduction in 2013, prices have risen by 18.3 per cent.
7: The government has had little control over the land market
As Paul Finch has written in these pages before, ‘there is no land shortage, just a shortage of political willpower’. Central government has had little say on what happens to the nation’s land and, until recently, has sat on swathes of plots without any urgency to develop them.
Developers have been able to land-bank and win planning approval for homes – or change of use from farmland for example – and then sit on sites while values increase. This is another reason why the big housebuilders are in no rush to provide the homes the British public needs. In late 2013 there were 507,000 sites with planning permission yet building had begun on little more than half.