At present we have housing policies which revolve around clichés. If something is repeated often enough, it soon begins to be taken for truth. We are told time after time that there is a housing crisis. We are also told that the level of new build is too low and lower than in the past. Finally, there is the policy stereotype that we need national targets to solve the crisis. The crisis is usually defined in terms of affordability, and measured in terms of the ratio between income and house prices. Income is taken as the income of an individual. Yet most mortgages are taken by couples both with earnings so a more realistic figure would be the joint household income. There are no published figures for such joint income: but partners who are both on the minimum wage would be earning £30K between and across the labour market, £40K would be a more reasonable estimate.

Outside London, the South East, and East: prices paid by first time buyers in 2014 were:

West Midlands - £146,000
East Midlands - £137,000
Yorkshire and the Humber - £133,000
North West - £136,000
North East - £118,000

(Source ONS)

The average price across these five regions is £134,000. The (Help to Buy) scheme with a 5% deposit has been popular in these areas, but even a 10% deposit should be feasible in a population where most young people under 30 have ISAs. For a 10% deposit, in the extreme case in which they had no savings at all, our young or not so young couple would have to save between them £600 a month over two years - from a gross income of £3300 a month. In Scotland, the average first time buyers price was £137K and in Wales £133K.

In other regions there are more serious problems of affordability. In the East the starting price was £204K, in the South East £231K and in the South West £181K. But even in these regions there are lower priced properties in some areas. There is a real affordability problem in London where the starting price was £364K. So in terms of affordability, there is a range with no problems in five regions, some in three, and an acute problem in London.

Excess Demand -The second test of crisis is the existence of strong excess demand. There are 124 post code areas in the UK. Our estimate is that of the 124 there are 30 with intense demand pressure, 70 where turnover is steady, and 24 where there is a housing surplus measured by the existence of housing stock that hardly ever sells. Again the problems are much more limited than the usual description in terms of crisis.

The Holy Grail of Owner Occupation

There is another idee fixe which has a great influence on policy— there is a crisis in terms of reduced access to owner occupation. Between 1961 and 2008 owner occupation rose from 43% to 68% of households and private renting rose from 9% to 14%. This rise in owner occupation was due to some factors, such as, the coming of the right to buy not likely to be repeated on this scale. The private rented sector has made several contributions:

Local initiative through buy to let has led to increased choice and the availability of tenancies in every town and city including London. This was a totally different situation from that at the end of the era of rent control in the 1960s.
Renting gives people with middle to low incomes much more choice of the area in which they live. Every year many thousands of new graduates and new migrants find accommodation in London. The rental market even in London has adjusted to the purchasing power of the customers which is much lower than that for house buyers.
Renting allows people to find accommodation quickly in new areas—the transaction costs are much lower. Owner occupation fitted well to a labour market in which people had jobs for life, but makes little sense for people who may move jobs, become self-employed or even move abroad for a period.
There is a tendency to exaggerate the shorter term capital gains to owner occupation. If house prices rise 5% a year in real terms, they would double in 20 years. The £134K house would be worth £270K—but the owner occupier –allowing for mortgage payment and depreciation of £2k a year for repairs, would have paid £180K even before discounting which would reduce the long term gains. The capital gains to owner occupation accrue mainly to those with very long term occupation who have paid off their mortgages—in fact the generation who were in jobs for life.
Even the problem that young people continuing to live with their parents is not as simple or heart rending as it sounds. This is not just a question of housing shortage. It may be the better option if the parents are under occupying larger houses. There are also gender differences with many more males in their 20s continuing to live at home. Perhaps the next Whitehall programme should be to promote evening classes for young males on how to turn on washing machines and cook simple wholesome fare.

The Myth of Under Production

Housing policy is deeply affected by the view that we are building far too few houses. Often mentions are made of the 400,000 plus built in the 1960s. However these numbers were a once for all event in conditions which were very different. There were residual problems with slum clearance and bomb damage: but the main feature of the 1960s was the ruthless demolition of large areas of housing, especially in Manchester and other Northern cities, and replacement with large estates often of poor quality. There was much demolition of houses which should have been improved. Many of the properties built in the 1950s and 1960s have had to be demolished because of their poor quality having caused misery to their residents. Many of the famous Macmillan 300,000 houses have had to be demolished. The photos show striking examples in Hackbridge, South London. workers cottages at least 200 years old could be on the market for £500K while a 40 year old development by the River Wandle is being demolished.

In social housing the Peabody properties built 150 year ago are of better standard than many of the modern properties close to them. Whole estates have had to be demolished such as the Quarry Hill flats in Leeds and the Ferrier estate in South London—but not before they had caused misery to successive generations of tenants.

In fact the output of private sector housing has been quite stable up to 2008, at around 150,000 houses a year — one of the few features of the housing market that has shown some stability. (See graph) The lessons of the past are that national targets promote poor quality in housing and that government interventions have been the main cause of a repeated boom and bust cycle in the housing market.

The New Realities of the Housing Market

There used to be a housing life cycle which involved early periods of renting or living in the family home, followed by movement to a small house or flat, and then for some after a few years moving to a larger house with family space. The stay in that house could be decades. This life cycle pattern led to a stable core of long term owner occupiers—or council tenants.

Now the market is more divided into sub-markets depending on a much greater variation in housing preferences by ‘consumers’. The market is adjusting to changes in household types which are leading to greater variations between local areas. There is not one national housing market but a series of sub-markets between housing of different types and sizes, and with differing economic incentives. We need much more information about the housing demands of specific groups including:

Single people—now 44% of households.
Regional and sub-regional differences demand for properties of different types and sizes.
Housing mobility by younger people and housing aspirations.
Likely downsizing by older people—and how equity release has reduced the incentive to downsize. Mobility and post retirement options.
How do people see options for changing housing space without moving? There is a much more extensive business in terms of additions to properties than there was in the past. How far will these options affect local demand for housing?

The most obvious regional difference in housing is between London and the rest of the UK. The London market is distinctive in its housing stock with more than half the flats in the UK in London. It is distinctive in the average price and in the top end property values. It is also distinctive in turnover and mobility.

The London market is affected by Hirsch effects named after the economist Fred Hirsch[1]. (Hirsch 1976) There can be intense competition for scarce positional goods. The word “cool” is worth £200K on the London housing market as formerly low income areas such as Balham and Tooting acquire social cachet. The Sloane rangers have now moved to Battersea. Transport and tube availability reinforce the Hirsch effects. Such effects are found much more strongly in London than in any other parts of the UK. These special conditions certainly require feasible measures to increase the availability of housing—but they are a bad guide to policy for the rest of the UK.

Policy Directions: Quality and Choice

Housing needs to use DevoMax. We need not national housing targets but a series of more local and sub-regional policies to build momentum for further improvement. There has been some very significant progress over the last two decades in raising quality and choice. 90% of British properties now have central heating and reach standards which would have seemed out of reach 40 years ago. Social housing agencies have greatly improved management of rented public housing. Buy-to-let investment has increased choice and mobility.

Local Enterprise Partnerships can be leaders in improving the local environment. Some LEP plans and County Councils are already setting targets for housing. They now have the chance to lead in better local environments. For example SEMLEP the LEP for the South Midlands covering Buckingham, Northampton and Milton Keynes with a current population of 1.7 m has set out aspirations for building 100,000 houses in the next ten years.

West Sussex is expecting 56,000 houses over the same period.

Overall LEPs are planning 1.5m houses over the next ten years. These developments create opportunities for some distinctive high quality additions to the local stock. But first LEPs should commission studies of the potential customers in the area. What seem to be the gaps in the existing housing stock? There are opportunities for many different types of scheme, from starter flats for young people through to extra care housing. Targets for ‘housing’ are too simplistic. What kind of housing in a time when there is much less standard life cycle than used to be the case?

Targets lead to a focus on numbers and easy options to reach numbers. This will tend to push action towards building large numbers of houses on the outskirts of exiting towns, often without adequate infrastructure and social amenities. Instead of ribbon development we will get rectangle development. There is a danger that opportunities will be overlooked for infill developments within towns. Change on the High Street and on supermarket sites is creating new opportunities for much more building in towns. LEPs can provide information both in terms of the types of housing required and for local opportunities. There are particular opportunities for social housing agencies to develop these local schemes. Instead of national targets we need different market driven opportunities which will vary between LEPs. Devolution means promoting housing choice and housing quality—for people with lower income as well as the better off.

A local approach is highly relevant to the special problems of London. Here there are pressures but also an active market for any middle income housing either for rent or buy. There are many new opportunities to develop sites. For example one supermarket chain (Tesco) in London has just released ten large sites for development.

The reduction in planning restrictions on adaptation of offices into residential has had highly positive effects but there is far more that could be done, especially in the suburbs, for more intensive use of smaller, often semi derelict industrial and garage sites, as well as for change in High Streets to redevelop unused shops. There is of course scope for developing new kinds of industrial site as is being done in Shoreditch, but many of the smaller sites in the outer suburbs such as Richmond and Hounslow are not suitable.

There are already positive developments in rented housing in London. Under the Build to Rent scheme there are already close to 14,200 units in planning, completed or under construction in London compared to 7,112 in the rest of the country. These schemes are attracting pension fund and institutional investors and can do for the wider range of mainly young people what investment has done for student housing.

The housing problems of London should be addressed by local initiative not by national targets.

[1]Hirsch F. Social Limits to Growth . Routledge 1978