Friday, 17 November 2017

A solution to our housing problems: consider reforming the planning system, abolishing the greenbelts, introducing taxes to deter speculation, and limiting foreign ownership.

There are no simple 'solutions' to our housing problems...

One such solution is not to simply build more housing to satisfy 'demand':
Futures Forum: The solution to our housing problems: forget about 'supply and demand'

Here's a reply from the Financial Times to a piece this blog posted a couple of days ago:

The problem isn’t lack of supply, it’s that the current supply is too expensive


Anyone who read last week’s House & Home will have seen that John Kay has solved the housing crisis. Or rather, he says, his parrot has. Teach Polly the words “supply” and “demand” and it could hit on the solution: build more homes.

Except trying to build yourself out of a housing crisis is like trying to dig yourself out of a hole. If you don’t recognise the particular challenges your situation presents, you’re going to make things worse.

Kay’s numbers aren’t wrong. To make up for immigration and other societal changes that have swept Britain in the past 40 years, he estimates we should be building 300,000 new homes a year. Well, perhaps we should. And that’s not even such an outrageous number; they build that in France in a bad year.

Nor is Kay wrong about the fact that new housing supply has dwindled since the mid-1970s — and nosedived since policies such as Right to Buy were introduced by the first Thatcher government (though Thatcher built more council homes in every year of her premiership than Blair and Brown did in their combined 13-year tenure).

Where I disagree with Kay is that I don’t think building 300,000 homes this year, or next year, or every year for the next five will make any difference whatsoever.

London isn’t under-supplied; it’s over-supplied with homes that are too expensive

This is because London isn’t full. Walk around fancy new developments in Aldgate or Battersea or, in fact, any street you like in what estate agents call prime central London: you’ll see darkened windows peering back like vacant eye sockets in a skull. Log on to the property website Zoopla and you can find multi-million-pound homes that have sat on the market for years.

London isn’t under-supplied; it’s over-supplied with homes that are too expensive. The real question then is: how did homes become so expensive?

Supply and demand has played a part. But that’s not why homes are expensive. Homes are expensive because land values are very high, the planning system promotes stasis and because, fundamentally, we, as a society, want them high. Imagine what would happen if a government reduced house prices by 20 per cent; that party would be obliterated in the time it took to organise a snap election.

But mostly, homes are expensive because the banks got involved.

The Bank of England first allowed banks to offer mortgages in the 1970s (before that, such lending had been restricted to building societies). Then in the 1980s, a bonfire of banking regulations opened the door to international competition. In the 1990s came a flood of credit. By the end of the decade, banks were freely issuing mortgages of 100 per cent loan to value, which required no deposit.

There’s a saying: a rising tide lifts all boats. Well, that’s what happens to house prices when you increase everyone’s spending power.

After the 2008 crash, it got worse. Low interest rates and quantitative easing measures lifted asset prices to the point where property looked like a sound investment. In came newly swollen real estate arms of investment banks, institutional investors and wealthy individuals from China, Malaysia, Hong Kong and the rest.

So the fact is, if overnight you could build 10,000 truly affordable homes in London, tomorrow morning you’d have a queue half a million people long, and from all over the world. That’s because, in world cities such as London, demand is global and supply is local.

Short of diminishing London’s global appeal — which, according to leading Wall Street bankers last week, Brexit might yet do — the only other option is to limit foreign ownership. Developers tell me that would be a disaster as well because the only reason projects get off the ground is the early injection of overseas capital. So unless the government reverses 35 years of housing policy — the so-called shift from bricks to benefits — and starts seriously building social housing again, we are going to have to rely on the private sector to fill the gap.

Of course it won’t — because there’s no incentive for it to do so, and the current mechanisms local authorities have for making developers do their bit are woefully inadequate. But mostly it won’t because developers are strapped.

At current market rates, homes in London look fully priced. Buy-to-let investors are turning up their noses because rents haven’t been growing anything like as much as house prices, so annual yields have been squeezed — to an average of 3.5 per cent in London. Deutsche Bank calculates that, at that rate, after tax and interest, it would take a buyer 200 years to see profit.

Which brings us to Generation Rent. Kay says it’s facile to assume that this is a function of high prices because mortgage repayments are often cheaper than renting. That’s true, but the problem isn’t the monthly repayments; it’s the deposit.

However you analyse it, housing in Britain is a mess. I rent a one-bedroom flat in Stepney Green, east London. If I wanted to buy it, providing I could get a 4.5 times salary mortgage, I’d need a deposit of more than £186,000. On my current salary, presuming I save 20 per cent of my take-home pay every month, it would take me 57 years and four months to afford it. I’d be 89 years old before I could move in. And when I did, I could be paying 38 per cent less in repayments than I currently am in rent. (That’s if they issued mortgages to 89-year-olds, which they don’t.)

The truth is there are no easy solutions to the housing crisis — save giving up on the idea of home ownership altogether (an Englishman’s house is not his castle, the rate of owner-occupation only breached 50 per cent for first time in 1971). We need to seriously consider reforming the planning system, abolishing the greenbelts, introducing taxes to deter speculation, and limiting foreign ownership. And after that? Well, nudge John Kay’s parrot because it’s his time to shine: “Build more homes!”

Nathan Brooker is House & Home’s property editor

Follow Nathan Brooker on Twitter @ncbrooker

Why solving the UK housing crisis requires more than new homes

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