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The housing crisis: how did we get here?

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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

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.

What are the solutions? Contact us on ajbetterhomes@emap.com

  • 6 Comments

Readers' comments (6)

  • Dear James - NUMBER 1 on this list should be the economic nostrum that if you tax something - especially if you tax something heavily - you will get less of it. Oddly, it seems if you subsidise something you get more of it. No other industry has to ensure that 30% - or even totally unrealistically as some local authorities have to tried to insist - that 50% of its product must be made 'affordable'. Bonkers! Ideological nonsense that has stifled the UK housing market's ability to provide what we now need most of. I know, let's nationalise the development industry...

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  • Very good analysis. Point 5 about house builders only developing for a profit goes to the core of the argument. Why on earth would they do anything else? The top 10 not only have 25% market share, they share between themselves land on which outline permission has been granted got 394,000 units. Any politician who says "we will build xxx homes" should be taken for a fibber. Developers build homes, not politicians. But there are two bits of good news. Politicians are dimly realising this is the case and a shift to councils building again is under way; two, extrapolate the near 25% leap in starts since Christmas and 200 000 new homes a year will b being built by 2017. Problem solved, except in London, which is another country.

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  • Lack of supply is the number one. Lack of political will as so much is invested in wealth creation by rising house prices. Unlike any other modern economy, ours would fail if we increased supply of houses, thus lowering prices, and the "Wealth" of those marginal voters.

    If the supply was good, competition would start solving the other problems.

    But that would need political will, and some brain cells, both in acute short supply.

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  • The seeds of the housing crisis were sown when Thatcher simultaneously curtailed council house building and enforced councils to sell off their stock while pocketing the proceeds. She probably believed that the private sector would step in to pick up the demand but volume house builders have no interest in satisfying demand let alone producing a surplus. With scarcity come price inflation. See Danny Dorling "All that is Solid - the Great Housing Disaster".

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  • An excellent article. At last, there seem to be some truly sensible opinions being added to, and some real momentum gathering, in the debate about the housing crisis. Hopefully, sensible policies that meet the needs of the many will be introduced before too much of the future is set in stone - or concrete. Thanks.

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  • Its good to see a tight and clearly-articulated summary of the components of the housing crisis. I suggest two further components to consider:
    First,construction costs aren't changing that much. The increase in value goes to the landowner. Taxing land value would slow its inflation,and capture the betterment for public rather than private benefit.
    Secondly, and more importantly, we have to turn the popular acceptance of the 'property-owning democracy' dogma of the main political parties . The paranoiac conviction that only home-ownership can protect us from a cruel and uncaring world has been fuelled by successive governments that have persuaded sitting tenants to buy their home as the only way of ensuring long term security. (see my June 2 blog http//www.academyofurbanism.org.uk/chairmans-blog-10-shouting-at-the-radio/)
    In the early post-WWII period, municipal housing was occupied by a broad socio-economic spectrum. For three or for decades, families enjoyed well-built and spacious flats and houses in well-laid out and well-managed estates. Few were clamouring for the right-to-buy - people could afford their home and weren't afraid of losing it. Since then we have seen reduced public investment, management cuts and housing sell-offs. Today home-ownership is presented as as being for the responsible and 'aspirational' citizen, and public housing as catching the poor, marginalised and feckless.
    Some local authorities are once again exercising their housing powers and political confidence to build housing for local need. It is inevitable, and right, that these will go first to those in greatest need. In the longer term, and on a larger scale, they might again serve a wider community. A community of people no longer terrified of not being on the 'housing ladder', and able to invest their disposable income, after a fair rent, in activities that are more social responsible and economically productive.
    Steven Bee

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