It has come as no surprise to anyone in the housing industry that the number of houses being built this year has fallen dramatically.

Although the government has declared that its target remains unaltered, it is clear that that is meaningless and pointless in the face of a severe downturn in the housing industry. The fall in house building numbers has been greeted with much concern, but in reality we should be relieved that the number of houses being built has fallen. If by coercion, arm-twisting or incentives the government managed to persuade the private sector to build 240,000 homes this year, or the private sector was silly enough to build that number of houses without government intervention, the current housing situation would be much worse.

At the moment, house prices appear to be falling by about 1 per cent per month. Prices are determined by demand and supply. If we build lots of houses, then the price goes down. This is because builders have to offer good deals to shift the stock of houses that they have built. In contrast, fewer houses means less downward pressure on house prices. Although there are very good reasons to believe that many things in Britain would be better if house prices were lower, large swings in house prices are not desirable.

Rapidly falling house prices increase the number of people who are caught in negative equity. That makes it much harder for them to move house, or for that matter, to remortgage. The fact that fewer homes will be built this year will reduce the extent to which prices fall. Given that prices are already falling fairly dramatically, that is a desirable outcome. The fall in the rate of house building is therefore a good thing. Nevertheless, it has bad implications for the social housing sector.

These days social housing is built overwhelmingly as part of section 106 agreements with private sector developers. The problem, then, is that as private sector developers stop building private houses for the market, the supply of social housing dries up. That is a bad thing.

What this shows is that the method of delivering social housing is flawed. It works tolerably well when the market is booming, but very badly indeed when there are problems. Yet it is at times like this when social housing is most needed.

The best solution would be to decouple private-sector house building from social sector house building. Section 106 agreements are simply a disguised tax on developers. Disguised taxes are rarely a good idea. It would make much more sense to tax developers explicitly when they are given planning permission to build houses. That money would go into the general government pot. Equally, social housing would be funded directly by the government. This would mean that social housing was funded by a much more stable revenue stream, and that similar numbers of social houses could be built year on year.

There are dangers with this model. First, it would make the currently implicit subsidy to social housing much more explicit, and force social housing to compete with other government spending priorities for funding. This is both an opportunity and threat for the sector: if it can show that it offers better value for money than other areas then it may see an expansion. But equally, if other areas can present a more compelling case to government for funding then social housing will suffer. Clearly that has risks, but anyone committed to seeing government get value for money from public expenditure should welcome any change that makes costs and benefits of funding different areas of government more explicit.

Buck the market

Such a change is unlikely, because making hidden taxes explicit would lead to an increase in the official ratio of tax to national income, something that all governments wish to avoid at almost any cost. For that reason, the sector needs to think about how it can best cope with big changes in the supply of market housing, causing, in turn, big changes in the supply of social housing. In the boom years, when developers wanted to build more houses, the government could easily buck the market, and force the supply of housing to fall below market levels (causing the house price boom). In lean years, though, when developers want to build fewer houses, government finds it much harder to buck the market.

It is easy for governments to prevent people doing what they want to do, but not so easy to force them to do things they don’t want to do. It is very hard to get developers to build more houses than they want to build — and getting them to build just the social housing elements of new developments is very expensive. This means that everyone should treat government housing targets with at least a kilogram of salt.

Dr Tim Leunig is an academic in the department of economic history at the London School of Economics