Supply and Demand? Demand Supply!

‘Building more homes’, the Select Committee on Economic Affairs report into the current housing market arrived with little fanfare and its conclusions are hardly ground breaking.  It crystallises in clear terms however that, despite much political rhetoric to the contrary, the UK’s housing crisis is escalating.

A growing population, expanding immigration and rising incomes have increased demand for housing in England, whilst supply of new housing has stalled with consequent market pressure inflating house prices.  Large numbers of people are now priced out of buying or even renting a home, and the problem is particularly acute for young people and those on low or average incomes, who can’t get a foot on the property ladder or afford rising rents.

The aim – to control price and increase supply

Analysis by Hometrack shows the average value of a home in Bristol rose 14.1 per cent in the year to May, faster than London at 13.8 per cent and Cambridge at 13.4 per cent. Bristol’s problems are replicated across the country and, in common with the rest of the UK, the West Country is looking to Westminster for a solution to the housing conundrum.

The Select Committee on Economic Affairs notes that the Government’s long standing aim to address housing market problems, by building one million homes in England by the end of this Parliament, is not enough to meet future demand and the backlog from previous years of undersupply. The report advocates that to meet that demand and, as importantly, have a moderating effect on house prices, at least 300,000 homes a year need to be built for the foreseeable future.

If the Government is serious about its desire to build more houses across all sectors, it should relax arbitrary limits on how much local authorities are able to borrow to build social housing so that local authority housebuilding can take advantage of historically low long-term funding rates.  This is needed to deliver a consistent supply of new homes across the economic cycle and bring much needed competition to the large building firms which dominate the house building market.

The report directly criticises current Government policy for:

  • Setting a new homes target which will fail to meet the demand for new homes or moderate the rate of house price increases.
  • Restricting local authorities’ access to funding to build more social housing.
  • Creating uncertainty in the already dysfunctional housing market by frequent changes to tax rules and subsidies for house purchases, reductions in social rents, and the extension of the Right to Buy. All of these changes reduce the supply of homes for those who need low cost rental accommodation.
  • A narrow focus on home ownership which neglects those who rent their home.

To stimulate building in the private sector, the large gap between the number of planning permissions granted and the number of homes actually built must be bridged. Penalties for hoarders of permissioned land are recommended, with local authorities to be granted the power to levy council tax on developments that are not completed within a set time period. This needs local planning departments to be adequately resourced, and to set and vary planning fees.

These recommendations come hot on the heels of the Treasury considering a ‘use it or lose it’ policy on land owned by house-builders to help speed up the delivery of new homes.

Who will build and commission new homes?

The key to stimulating the housing market is, however, to ensure that developments are financially viable.  As such, threatening house builders with penalties and the loss of permissions is unlikely to have the desired effect of mobilising housing where most needed.

The Lyons Housing Review, updated in February 2015, also made clear that the nation cannot rely on the volume house builders, important as they are, to meet housing need.  Instead, the Government is urged to look at diversifying sources of housing supply, by attracting new entrants into house building, supporting SME house builders, and encouraging a greater contribution from the wider construction industry, including councils, Housing Associations, landowners and other developers to play a larger part. An effective incentive package could bring quantity and quality in equal measure, delivering homes to the highest possible standards and more quickly than volume house builders.

Looking to land supply, a significant amount of undeveloped land remains in public sector ownership, but in areas of the country that do not attract sufficient land or property values to make development financially viable. Whilst incentivising developers to build in these areas would unlock developable land, innovative thinking will still be needed from Central Government to deliver the housing, together with a willingness on the part of Local Government to be flexible on the financial contributions normally expected.

Supply of more affordable homes for those already priced out of market housing means that mechanisms must be found to unlock the viability of marginal sites, increasing development viability so that there is less need for reducing affordable home requirements through the planning process.

Whilst action is clearly needed to arrest the ever increasing housing shortage, across the UK, an intelligent package of measures, involving carrots and sticks, is needed.  Despite the political upheaval and economic uncertainty following Brexit, the new government continues to emphasise the need for housing.  Meanwhile, SMEs are being heralded as the obvious alternative to the volume housebuilders and delivering the new government’s priorities, incentivising their place in the market would seem to be the logical path to an increased housing supply. With demand continuing to outstrip supply it is up to both central and local Government to find a viable solution that will stimulate development to a level that begins to meet the demand. Stability will be welcomed by most in the sector.

 

Subscribe to our monthly digest of news…