'Our housing crisis is a question of supply, supply, supply. Or is it?'
Building more homes will only go so far in solving our housing crisis argues Peter Williams, one of the authors of the UK Housing Review.
Successive housing ministers and indeed prime ministers have rooted England’s housing problems in the failure of housing supply, rightly arguing that governments have regularly failed to secure the building of enough homes to keep pace with growing household numbers. At the simplest level we can all agree that supply is crucial but in reality the picture is far more complex.
As we have shown in the UK Housing Review 2017 supply has been rising but is still lagging behind overall demand as reflected in household numbers. Indeed, such is the pressure on delivery and not least from the housebuilders perspective there is now a considerable focus on what is actually being achieved.
The government and most commentators now use the annual data on net additions to housing supply in England, ie, new completions minus demolitions and adding in conversions and changes of use. However the quarterly housebuilding statistics have consistently underestimated output and this has now triggered a DCLG review which gained added momentum when the Home Builders Federation publishing a critique of housebuilding data.
Even if we can agree on the numbers being achieved that is a long way from answering the question of whether supply is the sole solution? In reality we have to ask what is being supplied and where? Across England the supply/demand imbalance varies greatly (as we show there is actually a crude surplus of dwelling over households but that takes no account of second homes or vacant dwelling – or where they are!). Indeed in some areas the output of new homes is close to what is needed and the big issue is improving the quality of the existing stock.
Then as we show in the Review there is the question of what is being built – it is not only a debate about social versus private output but where the new private supply is concentrated – the evidence suggests it is increasingly focussed on the more affluent end of the market – where effective demand is most obviously found. And some of this in turn may be a market driven in part by government support schemes such as Help to Buy and by the purchasing power of overseas investors.
So even if we can agree how much housing supply has increased, the numbers themselves simply raise further questions. We cannot assume more supply in itself is the answer to ‘the problem’. Indeed as the recent Oxford Economics report published as part of the Redfern Review has argued, it is not the case that new supply will bring house prices down except in the very long term and with sustained high output of new homes relative to household growth. Even boosting (UK) housing supply to 310,000 homes per annum in their model only brings a 5% reduction in the baseline forecast of house prices, a conclusion also reached by modelling done for the National Housing and Planning Advice Unit in the mid-2000s.
As the Oxford report comments:
This has important implications for a policy debate that has focused heavily on supply as both the cause of the problem of high house prices and its solution. It suggests instead that the major sources of volatility in house prices lie beyond housing policy’s focus on the need to provide sufficient dwellings to house the population at reasonable cost.
Incomes and the cost and supply of credit are also key factors in the process of bringing house prices under control and here the constraints being imposed by mortgage regulation and a range of macro-prudential controls from the Bank of England and elsewhere come into the equation. Then of course there is the question of taxation.
Annually the UK Housing Review explores help with housing costs, taxation and subsidies. Owners still experience net tax benefits from their housing with reliefs of the order of £22 billion in 2015/16. Stamp duty has been or will be reformed across the UK and to a degree is now much more progressive. As it stands the absence of a capital gains tax on the primary residence alongside the absence of any tax on the imputed rental return on an owner-occupied property are two obvious areas where policy might shift.
The council tax regime is another example of a regressive tax which to date remains unreformed despite calls for it to become a proper property tax. Recently the government reduced the rate of capital gains tax (CGT) on all asset sales excluding residential property, in effect penalising residential investment. In 2015 it also imposed a new CGT tax on the sale of UK residential property so it is paid by all non-residents on all values of property (but only on gains since April that year). What both indicate is a hardening of the tax agenda. It is clear from the market reaction that the softening in house prices that has followed is in part a result of this tougher tax regime.
As political pressure on how to fix a ‘broken housing market’ increases and as the limits of a supply-only based agenda continue to be exposed, so there may be more appetite to consider tax and subsidy reform. Clearly it carries huge political risks and with other issues dominating and with a small majority it seems unlikely that the government in England at least will go there, but the evidence from the devolved nations is that the political appetite for reform has now been expressed in action.
Perhaps in the next decade we might see the mantra of ‘supply, supply and supply’ be replaced by a policy that is both more comprehensive and effective.
Peter Williams is departmental fellow at the Cambridge Centre for Housing & Planning Research.