Don’t Let Our Housing Crisis Go Unnoticed

We saw plenty Brexit-related headlines last week, after the government suffered its first Parliamentary defeat over the Article 50 bill. Theresa May insisted her plan to trigger Brexit before April “remains unchanged”, despite the House of Lords trying to force the government into guaranteeing the rights of all EU citizens currently living in the UK. The Prime Minister is “confident” the Lords’ amendment will be voted down when the bill returns to the Commons.

Our newspapers and airwaves are dominated not only by Brexit, of course, but also the spoken and tweeted words of Donald Trump. The US President gave his first speech to Congress last week – an address generally seen as more statesmanlike than his previous efforts.

With this Trump-Brexit media obsession unlikely to abate, we should remember there are other issues of enormous importance to the British public – the crushing unaffordability of housing, for instance. So forgive me if I break with media convention and focus on new data in light of recent ministerial claims, after years of chronic housing under-provision, that “we’ve got the country building again”.

During the final three months of last year, the total number of new homes completed was actually 2pc lower than the same period in 2015. In 2016 as a whole, some 140,660 new-builds came to market, down on 2015 and way below the 250,000 additional homes needed annually to meet demand.

While fewer homes are being built, the large developers that dominate the market just reported surging profits. Barratt saw a 40pc rise to £295m during the second half of 2016 – despite completing fewer homes. Taylor Wimpey made £733m last year, up 22pc. Persimmon’s full-year profits were £775m, 23pc higher.

I applaud wealth-creation. I applaud developer dividends flowing to shareholders such as UK pension funds. But, under existing arrangements, our highly-concentrated house-building industry is on a deliberate building go-slow. This pushes up prices, landing home-buyers deeper in debt and, for many, ending dreams of property ownership altogether.

As last month’s government’s white paper acknowledged, “the UK’s housing market is broken”. For decades, far too few homes have been built. As a result, the average house now costs almost eight times annual earnings – an all-time record.

While the white paper was strong on analysis, it was a missed opportunity in terms of proposing radical solutions. But a new study from respected campaigning charity Shelter lays out some bold ideas – which, amidst the on-going Brexit-Trump cacophony, are worth outlining.

“New Civic House-Building”, published last week, argues that planning permission is no longer a major obstacle to adequate house building. I agree – not least as “developers already receive planning permission for 50pc more homes than they build”.

Spending more public money, either directly procuring more homes or subsidizing first-time buyers, also won’t work says Shelter – given the risk that public subsidies “feed into land prices or developer profits without making homes more affordable relative to wages”.

Shelter instead calls for councils and city authorities to create powerful Development Corporations that acquire land and sell it on to developers with planning permission, together with use-it-or-lose-it time limits on home completions. Variations of such a model have been successfully used in Germany, Holland, Singapore, South Korea and elsewhere.

Shelter also advocates the use of more compulsory purchase orders to acquire land at valuations reflecting “existing use” – say farming – plus negotiable compensation. When planning permission is granted today, converting say arable land to residential use, the landowner receives practically all the massive valuation uplift.

Yet land is a public good – it can’t be replicated and, while it can be privately owned, how it’s used is of legitimate interest to everyone. Why should vast gains be limited exclusively to those who have “land-banked” farming acreage, often big developers via crafty subsidiaries, once planning permission is granted?

When this happens, local councils must then conduct exhaustive “Section 106” negotiations to try to claw-back some of that gain via developer contributions to social housing and local infrastructure. These are often way lower than originally agreed, as large house-builders drag their heels, knowing councils will be penalized by central government if a certain number of new homes fail to appear in a given time frame.

Shelter rightly recognizes that, as private listed companies, big house-builders maximize profits within the system as it stands – which is their job. But the report also says, and I agree, that the vast value created when planning permission is granted must be more fairly and efficiently shared. The state should do this by buying land relatively cheaply, then selling it on to house-builders at a profit once planning permission has been granted.

The price would be high enough to ensure funding for local infrastructure and social housing, but lower than the sky-high valuations currently produced on the open market, which in turn ramp up the final price faced by homebuyers.

Some will be uncomfortable with such state activism. But we can’t be squeamish – the UK’s housing shortage is acute and, under the current system, is getting worse. Supporters of free markets must recognize that, when markets consistently produce deeply unsatisfactory outcomes, they need modification – lest broad support for capitalism, and faith in politics, is seriously undermined.

“Land planned for major development should be bought well in advance by a public authority for disposal to private enterprise or to public enterprise as required,” said then housing minister Keith Joseph back in 1963, “both to control and phase the development and to help in meeting the cost of bringing it into development”.

Joseph was right. And no one could describe Margaret Thatcher’s future economic guru as an enemy of free markets.

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