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Home Ownership versus Asset Affordability: A change of perspective is needed

    There is no question that beneath the widespread umbrella issue of Brexit, the recent election was decided by domestic, rather than international concerns. Of these domestic matters, the affordability of housing in the United Kingdom is one of the most pressing.  Between 1996 and 2016 the average growth in London’s housing prices of 518% has significantly eclipsed the growth of wages in the city which have risen 47%. This has led to an extremely expensive market for homebuyers to break into and research released by PwC in 2016 suggests that this will only get worse, with only 40% of London’s residents expected to own a home in 2025. London is the epicentre of what is now being called a housing crisis that is alarming first home buyers across the UK. A home is the most significant investment many will make in their lives and therefore has become an electoral issue of paramount importance in a country with a strong culture of ownership. 

    When introducing helpful policy, improving the affordability of residential real estate assets must be the focus instead of simply improving home ownership rates. Actions should be taken to enable the organic reduction of property prices through an increase of housing supply.  Previous government interventions focusing on simply the concept of boosting home ownership figures have only created distortions contributing to the problem. The opportunity must be taken to allow the private sector to invest in projects to increase supply in the market. Research conducted by Savills shows that 300,000 new homes are required each year to tackle the undersupply. In 2015, only 171,000 net additional homes were built. 

    An example of a government intervention focusing solely on house ownership figures is the Help-to-Buy equity loan scheme which has increased access to mortgages and added demand in a market which is severely undersupplied. Shelter estimated in 2015 that Help to Buy has increased the price of the average home by £8,250, with areas where loans and guarantees have been used most, rising above regional price trend rates.  A study by the Berkeley Group also found that the government’s significant increase in the stamp duty tax for homes over £1 million in 2014 has actually increased the prices of cheaper homes in South Eastern England.  This has increased competition in the space where first time buyers are looking to enter the market by discouraging the purchase of more expensive dwellings. Another government intervention, the stamp duty also impedes mobility of market participants, with Berkeley also reporting a slowdown of transactions, which in a high demand environment contributes to price rises. 

    The UK’s greenbelt areas, which have more than doubled since 1979, have also been one of the most significant impediments towards increasing housing supply.  In England, more than 1.6 million hectares, 13% of the land area, is comprised of greenbelt land kept free of development. Compared to the greenbelt, only 1.1% of England’s landmass is occupied by homes, according to research by Shelter in 2013. Attitudes towards developing greenbelt land are changing as The British Social Attitudes Survey found that the 46% of respondents who, in 2010, opposed any new homes being built in their local area had decreased to 21% in 2014.  Support for the construction of new homes in local areas rose from 28% to 56% in the same period.

    The approach necessary for lowering residential property prices is through encouraging the private sector to engage in projects that can increase housing supply organically.  To do this, various regulatory changes must be completed.  Planning permission procedures must be simplified so that firms take on less risk when committing to a project.  Currently, the process of gaining planning approval bears risk of rejection at every level and offers little opportunity for the values of the various stakeholders to be aligned.  Any financial transparency that can be created through a simplified process also provides firms with enhanced capacity to borrow from funding organisations that will have more certainty when calculating project risk.  This provides opportunities for smaller firms to participate and increase competition in an industry which is currently dominated by a handful of large firms.  Liberation of greenbelt land for development and the reorganisation of greenbelt boundaries by local authorities must be encouraged to facilitate new projects.  Government interventions such as help to buy and stamp duty taxes should also be discontinued in order to allow for a more natural market with higher transactional volumes.  Importantly, government support for private sector investment and expansion in housing construction should not come via provision of subsidies to the private sector to avoid waste and inefficiencies. 

    Action must be taken quickly and aggressively in order to establish an environment in which the private sector can thrive and therefore increase housing supply. The cheaper pound after Brexit has increased the costs of imported materials and potential anticipation of rising interest rates may further restrict industry borrowing levels. It is vital that the residential construction industry functions without the same level of regulatory restrictions it experiences today in order to successfully increase housing supply in the UK. The private sector is a powerful tool which can achieve the results needed without significant taxpayer expenditure, while also providing many other social and economic benefits.  

     

    DISCLAIMER: The views set out in CPS blog posts are those of the individual authors only and should not be taken to represent a corporate view of the Centre for Policy Studies.

    James Walker is one of the CPS' economic research interns for summer 2017. James comes to us through the Mannkal Economic Education Foundation, which offers international scholarships to students from Western Australia. James is a second-year science student who aims to work in finance and investments.

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    Comments

    Tony Ransley - About 134 days ago

    13 % is to low for "Green Belt". If we want to control the environment we need to ensure that 20% of landmass is populated by trees (every 6 year old used to be able to tell you that trees generate oxygen which strangely people need to survive). Its the land hoarders and the way builders share prices are set that is the real problem here.

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