Posted by: Colin Wiles24/07/2012
Three contrasting yet related housing items caught my eye last week. The first was a report from Shelter pointing out that people in the UK spend more on their housing than any other European country, apart from Denmark and Greece. One in six of us (16.5%) pay more than 40 percent of our net income on mortgage, rents and related running costs. This compares to only 5.2% in France. Shelter commented that “Chronic lack of supply of affordable homes and years of easy access to mortgages” had driven up house prices.
The second was a report from the IMF warning of an “extended housing market slump” in the UK and that property values are still 30 per cent above their historical average in relation to incomes. The IMF says that prices could drop by another 10 to 15 per cent. I’m sceptical about this, because the latest census shows an increase in population of around 3.8 million in England and yet we have built only 1.4 million homes over the same ten-year period. It’s estimated that that 232,000 households will form each year for the next thirty years, and, with households reducing in size, the demand side pressures on house prices (and thus rents) are remorseless. But the IMF admits that supply in the UK is contrained by a tight planning system and we all know that the moment mortgage lending is relaxed there will be a rush to buy and, with no increase in supply, there will be an inevitable increase in prices. I predict we will be in the foothills of another housing bubble within the next two years.
The final item was an article in the New Statesman by Shelter’s Robbie de Santos who argued cogently against Ken Livingstone’s calls for rent caps in the private rented sector. Homes in the PRS, argued de Santos, are often unaffordable, unstable and of poor quality, but rent caps would have the perverse effect of reducing supply and making life worse for the majority of new households who now see the PRS as their only chance of a home. Instead, we need to look to the German model where rents are set by the market at the outset but increases are capped. This is matched by longer, secure tenancies something that lenders in the UK are reluctant to endorse, as David Lawrenson has pointed out. Of course, we need a better licensing and regulatory system for the PRS, to drive out rogue landlords, but de Santos is right to argue that rent caps would only make matters worse. They attack a symptom, and do not address the root of the problem, which is lack of supply.
All three of these items highlight the point that supply is at the root of our problems. As a result, we are over-burdened with excessive housing costs and therefore have the lowest saving rate in the G7. More spent on housing means less spent in the economy, so our recession deepens. The PRS is taking the strain because private housebuilders will not build and the public sector is under-funded. So it all comes back to lack of supply, and the constraints imposed by our planning system, our lenders who will not lend and our unfit-for purpose housebuilding industry. When we built a record 352,000 homes in 1968 it was because local authorities were regularly building 150,000 homes each year. Now, the public sector is building about an eighth of that figure. One ambition for a future government should be to set a goal of reducing the ratio of house prices to wages, something that Kate Barker argued for in her 2004 and 2006 reports on planning and housing supply, where she called for 250,000 homes to be built each year as a way of restring balance to our dysfunctional housing market and reducing macroeconomic volatility. This can only happen if enough land is released for housing, something the Germans understand well enough – they set regional and national targets for land release and as a result, Germany has seen a real reduction in house prices of 10 percent over the past thirty years.
Meanwhile, we continue to spend twenty times more on propping up high rents than we do on public housing investment. It’s a crazy world and we are failing to get our message across.
From Inside out
An independent look at the housing sector and beyond from Colin Wiles