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Ripe or rotten?

A major new review aims to lay bare the true scale of meeting housing demand in England. Researcher Jenni Viitanen begins with a look what happens when things turn really ugly

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How many houses do we need to build if we are to meet the needs of Britain’s growing and ageing population? What will different scenarios for the future of the economy mean for the types of housing we will need to rent or buy? Can we afford not to build more housing? And if the answer is ‘no’, where will the money come from in austerity Britain?

These are among the issues which England’s future housing policy must address. To kick off a comprehensive debate, the Institute for Public Policy Research this week launched a fundamental review of housing policy by publishing a report which scans the housing horizon. The paper projects future household formation up to 2025 and illustrates how different economic scenarios might influence tenure split between the social and private sectors.

Inevitable problems

So what are we in for? Our findings send a clear message to policy-makers: however the economy evolves, a serious gap looms between housing supply and demand - with significant consequences for social landlords.

How so? Under a poorly performing economy, the need for social housing is likely to increase. We project the share of the social rented sector to grow by up to 2.5 per cent under the worst economic scenario, which could mean 1.2 million more households unable to afford private homes. Under good economic circumstances, the share of the sector is projected to remain steady, which would still suggest 550,000 additional households for whom social housing would be the tenure of choice by 2025. Either way, there are serious questions to be answered about how this demand can be met.

The paper argues that the number of additional households in England is likely to be around 250,000 per year between now and 2025 if the economy performs well and there are no major shifts in net migration. The annual figure could fluctuate between 206,000 and 282,000 additional households, based on different economic and sociological drivers, including migration. However, it is important to note that an ageing population and rising living standard expectations linked to economic prosperity also drive up housing demand.

Of course, housing need is already poorly catered for. Net additions to the dwelling stock in England over the past two decades averaged just 160,000 per year. At that rate, by 2025 the gap between demand and supply could be equivalent to the housing demand of the populations of Birmingham, Liverpool and Newcastle combined.

To get a better understanding of the potential policy implications, there is a need to understand how different tenure types might be reflected in future demand. IPPR’s housing demand model seeks to do this based on recent observed data on the economy and housing. The projections outlined in the report are not forecasts or predictions; they are illustrations of what might be in store under three possible economic scenarios.

Using unemployment, affordability and overall household growth as key variables, the three economic scenarios outlined demonstrate how different economic futures may affect housing demand. There are significant regional variations in these projections, echoing England’s north-south divide.

Private sector growth

In practice, it seems the private rented sector can be expected to have a more prominent role in future. As well as those who are priced out of owner occupancy, the private rented sector is likely to absorb some of the unmet demand for social housing. Other households will remain ‘hidden’ and some will face homelessness.

Undoubtedly, one of the most challenging aspects of this analysis is the projected need for social housing under the more pessimistic economic scenarios. The supply of social housing is extremely unlikely to meet this need, even if aspirations such as building 150,000 ‘affordable’ homes by the end of this parliament are realised.

A key question for government will be to identify those likely to bear the brunt of the mismatch between demand and supply, and endeavour to meet their housing needs through policy instruments. This will not be easy: we already have 4.5 million people on social housing waiting lists in this country, and a government which, in last year’s spending review, cut the housing budget in half.

Jenni Viitanen is a research fellow at IPPR North
IPPR’s programme of housing research is sponsored by Amicus Horizon, Orbit Group, Home Group and the Residential Landlords Association

The good: an improving economy

  • Unemployment recovers by 2020 to the near full employment levels of 2004
  • Strong recovery boosts incomes, but because house prices will always rise faster than incomes, affordability remains a problem at 2010 levels
  • The strong economy sees net migration for England remain at similar levels to those of the past decade

Under the good economy scenario, England’s preference for owner occupation continues unabated, with 71 per cent of households projected to be owner occupied by 2025, compared with 67 per cent in 2010. The increase in owner occupation affects mostly the private rented sector, which would shrink almost 3 per cent by 2025, compared with a steady or slightly reduced (-0.5 per cent) share for the social rented sector.

Tenure split

71% Owner occupied
11% Private rented
18% Social housing

The bad: a flatlining economy

  • Unemployment remains at 2010 levels
  • Affordability improves as house prices fall as a result of constrained incomes and demand, reaching 2001 levels by 2020
  • As a result of the weaker economy, migration levels are low, around 97,000 people a year

Under a flatlining economic scenario, home-owning policy aspirations are not met. Owner occupation remains near current levels, accounting for 68 per cent of households by 2025.

Private renting falls from 13 to 11 per cent, with considerable pressure emerging for social renting - projected to increase from 18 to 21 per cent of the tenure split.

Tenure split

68% Owner occupied
11% Private rented
21% Social housing

The ugly: a deteriorating economy and a housing market crash

  • This worst-case scenario follows a similar path to the Japanese economy between 1997 and 2008: unemployment rises initially before levelling at around 9.5 per cent
  • The housing market crashes, house prices fall by 20 per cent in 2012
  • As with the ‘bad’ scenario, affordability returns to 2001 levels by 2020 and net migration is low

This ‘ugly’ economic scenario would impact negatively on housing demand across the owner-occupied and private rented sectors, creating significant pressure on social housing. Across England, owner-occupation contracts by 1 per cent, while private renting could reduce by 2 per cent. Meanwhile, the social rented sector’s share of the tenure split would grow by 2.5 per cent.

Tenure split

67% Owner occupied
12% Private rented
21% Social housing

What influences tenure choice?

The overall strength of the economy, as indicated by levels of unemployment, and housing affordability are key factors influencing tenure choice. The IPPR housing demand model is based on the interaction between these two factors and the overall volume of households. However, in practice, a wider set of factors affect tenure choice, including:

  • Cost of borrowing relative to incomes. Macroeconomic conditions influence the cost of borrowing for mortgaged owner occupants through interest rates. Moreover, when house prices are rising, lenders tend to be prepared to offer a higher loan-to-value ratio and reduced deposit requirements, which encourages owning with a mortgage. However, the relationship between the cost of borrowing and demand is not linear.
  • Confidence. Where confidence in the market is high and there is an expectation of rising incomes and equity growth, demand for mortgages can remain high even when housing is unaffordable and the cost of borrowing high.
  • Cohort change. Cohorts of young adults are renting or living in shared households for longer than this social group used to. This may be due to a number of economic as well as sociological factors.
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