If there’s one thing that Brits enjoy even more than moaning about the weather, it’s chewing over the state of the property market. House prices have been a staple of the national conversation for years, a largely rising tide that has fuelled many a self-congratulatory chat across the dinner table or over the garden fence.
But in recent times the tenor of those conversations has switched from satisfaction to alarm, as post-war dreams of a property-owning democracy have crumbled into a nightmare of skyrocketing prices, unsustainable debt and disappointed aspirations. The average UK house price has risen by two and a half times since 1997 and is now £186,000 – over £500,000 in the capital. Many millennials are now resigned to never being able to afford to buy their own home. And as the children of homeowning parents are priced out of the market, the tide of home ownership has turned. From a high in 2001 of 69%, by 2011 the figure had fallen to 64% (ONS data). The last time that happened was in 1918, and it’s still going down.
Meanwhile, renting is on the up – despite the fact that contracts are generally short term and rarely cheaper in terms of regular outgoings, as the abundance of ‘£600 a month to live in a broom cupboard’ headlines attest. PWC reports that by 2025 a quarter of all the UK’s housing will be rented, rising to over half for the 20- to 39-year-old bracket. In London, the proportion of households renting has already passed the 50% mark.
These developments have left even many property owners hoping for another of the cyclical crashes for which the British housing market is infamous, to restore a little sanity to proceedings. But for others it seems like a good thing, a sign that a model which is past its sell-by date is in the process of being superseded.
‘All the money tied up in property doesn’t do anything productive, a house doesn’t produce anything,’ says Paul Stanworth, MD of L&G Capital, the direct investment arm of the life insurance giant. Formed in 2013, part of its remit is funding and managing build-to-rent housing projects, with the aim of creating long-term revenue streams for its pensioner customers. ‘The challenge we face in this country is that people think their house is part of how they create their wealth. In Germany they do it by investing in businesses, here we put all our money into an unproductive asset and hope the price goes up – that’s a problem. If people got their returns from savings which were invested in industry instead, that would be a good thing,’ he says.
There isn’t much purpose-built rented accommodation in the UK at present, but Stanworth has a £5bn solvency buffer burning a hole in his pocket and reckons that is going to change. Not least because bond yields and returns on other traditionally safe assets are so low, that build to rent with its attractive combination of capital growth and income looks like a surefire winner. ‘We are a long-term institution that is geared towards retirement income, so we’re trying to find new asset classes to deliver that. Housing is a big focus for us.’
Government measures to encourage home ownership such as Help to Buy have also stimulated prices. Credit: Matt Cardy/Getty Images
It’s true that renting is more in tune with the 21st-century mores of the sharing economy, and the flexible ‘pay as you go’ lifestyle preferred by footloose twentysomethings. And if long-term rental is really going to replace ownership for substantial numbers of people, then it needs to be both more secure and more affordable (read plentiful). Aspects which a shift to larger institutional landlords rather than thousands of small, private ones might help address.
The national obsession with home ownership has damaging consequences for the wider economy: for every pound lent to a manufacturing business in the UK, some £35 is lent to someone buying a house. With capital allocation skewed that badly, no wonder there is a productivity crisis.
So why is mass home ownership assumed to be such a good thing anyway? It’s a very British phenomenon, which may date back to the days when the only people with land and property to call their own were the aristocracy. Owning your own pile of bricks and mortar thus became the ultimate status symbol for those poor benighted souls who had to work for a living. But in modern times, the theory became more about social cohesion, that a common interest in their properties and neighbourhoods would help bring disparate communities together.
For a while, it seemed to work. But gradually the penny dropped with politicians that homeowners vote for the governments that make them feel the most prosperous. Prime ministers from Macmillan to Mrs T, and Tony Blair to David Cameron, figured out that rising house prices equal more votes, and they have done everything in their power to make it so. No surprises then that even factoring in the crashes in 1990 and 2007, prices have risen by an average of 7% per annum since 1980, creating a huge bubble that is only sustainable with ever-increasing government support.
‘What’s happening is that prices are being massively stoked. A whole series of measures have come in that have bid prices up in relation to income. It’s QE, it’s Funding for Lending, it’s Help to Buy one, two and three, it’s discounted houses,’ says Erik Britton, co-director of Fathom Consulting and ex-Bank of England macroeconomist. ‘This country has never seen even as much as a quarter of the stimulus for the housing market as there is in place now. It’s all been done quite deliberately by the government and the central bank.’
The consequences of making public policy so obviously subservient to political expediency are now plain – there are substantially fewer first-time buyers than there were 35 years ago and unaffordability is almost back at record highs – the average house price nationally is more than five times average earnings. Interest rates are stuck at artificial lows because even modest rises might force a wave of selling among owners so stretched they couldn’t afford the larger payments. And speculative investors from all over the world are taking punts on British property, the bricks and mortar that, first and foremost, should be places for us to live rather than traded financial instruments. It could all end very badly.
The solution, says Britton, is as simple as it is unpalatable. ‘A consumer recession and lower house prices. If I was a central planner for the UK economy, I would order the Bank of England to raise interest rates by 200 basis points [2%], take all the subsidies away and I would expect to see house prices fall by 25%.’
But a lot of buy-to-let landlords would go out of business, and a lot of ordinary voters would lose money. No political party is going to put that on the front page of its manifesto and expect to win (although one should probably try, if only because policies that might appeal to younger voters appear to have been largely abandoned by the big three. And as one insider who prefers to remain anonymous puts it, ‘What’s a government for if it can’t house its people?’).
But the alternative may be even worse, reckons Britton – the ‘Japanification’ of the whole UK economy. ‘Zero interest rates equals zero growth because you are tying up resources – money and people – unproductively.’ It’s the very opposite of Schumpeter’s creative destruction. ‘There is no destruction because there is no need for it. So there is no creation either. Twenty-five years of no growth.’
If trying to get the house price genie back into the bottle on the demand side is too much for our leaders to stomach, what about trying to expand the supply? Can we find more grounds for optimism here? On the face of it yes. Output by the big housebuilders – the Persimmons, Barratts and Taylor Wimpeys – is up (at least from the lows of the post-2008 slump). Something like 145,000 houses are being built every year (although most projections say 200,000 per annum is the ‘break even’ point). Chancellor George Osborne even said in the Autumn Statement that he wants to build 400,000 more new homes by 2020, and claims to have set aside £4bn for housing associations, local authorities and the private sector to help make it happen.
But the constraints on building new houses are many and varied, notwithstanding the crucial point that the big players have a substantial vested interest in keeping prices up. Doubling the numbers will – all other things remaining equal – require twice as much working capital, twice as much land, twice as many materials and twice as many brickies and chippies to do it (see box below). And would likely result in falling prices and lower margins for builders. Hardly surprising that there are not many in the industry who think that the 400,000 target is even nearly achievable.
‘Without incentives in the form of tax relief and more land availability, 400,000 is going to be pretty challenging,’ says Martin Samworth, EMEA CEO of US commercial property giant CBRE. People in their 20s and 30s still aspire to own, he says, but ‘in London in particular, less than half the new houses that are required are getting built’.
To get anywhere near the chancellor’s target, housebuilders need to take a leaf out of the commercial property players’ book and look to their pipeline. ‘Speed up the process from site identification to delivery. You’ve got to focus on finding development opportunities and getting planning consents,’ says Samworth.
German Huf Haus factory: a switch to offsite building methods in the UK would speed up the number of homes that could be constructed. Credit: Hannelore Foerster/Bloomberg via Getty Images
One person who thinks it might be possible, in theory anyway, is Dennis Seal, chair of the Buildoffsite Housing Hub, an initiative to get the fragmented and immature offsite industry (otherwise known as factory building) working more effectively. ‘The most we can get from traditional methods is 150,000 a year. But we could build 100,000 houses offsite, it would be a transformation in the housebuilding market.’
Offsite building covers a lot of territory, from homes that arrive fully finished on the back of a truck, are craned into place, hooked up to the services and ready to go in a day, to prefabricated wall, floor and roof panels which are fitted together and finished on site. What unites them all is that they are built in clean, controlled and scalable factory conditions rather than on dirty, dangerous building sites. The famous German Huf houses are probably the best known, but more modest modular homes are popular in Scandinavia and even Japan too. Toyota makes thousands every year, and they are better quality than much traditionally built new UK housing.
‘The big advantage to offsite is speed. The customer can go from placing a deposit to getting the keys to their new house in 90 days. And because it’s so quick to build, the house has been sold by the time the builder actually has to pay for it. They can reinvest much more rapidly.’
There is a catch, and it’s a big one. Industrialisation relies on economies of scale, and there is currently no scale in offsite building. Perhaps 15,000 houses per annum are built this way, and without serious investment in production facilities that’s not going to change. Consequently offsite is usually more expensive, which rather defeats the object of the exercise. Although as Seal points out, conventional costs especially in the south east can hit £2,000 a sq metre, a level at which offsite starts to make more sense.
Most of all, though ‘continuity of demand is required – that’s 500 units per annum for 10 years’. But who is going to put big money into a capital project to build houses in a factory with a 10-year payback, when the chances are there will be another property crash within that timescale?
Perhaps the answer lies in disruption, that all-prevailing buzzword of our times. Everything from hotels to healthcare is being disrupted, so why not housing too? A big factory builder with a long-term investment horizon – from China perhaps – might look at the UK and think it was worth a punt.
So if we can’t build them ourselves, we face the frankly ignominious prospect that someone else may end up building them for us – still with no guarantees that prices would drop much, without changes to subsidies and interest rates too.
Whatever happens, the status quo should not be an option. As Britton says, ‘I worry. I have two kids just going to university, where are they going to live? They are going to live in houses bought with the equity in my house. So what is the point of that equity? Are we wealthier as a country because of it? No, we are not.’
Can we build them…
Housebuilding in the UK peaked at 425,830 in 1968 and the trend has been downward ever since. As very few new council houses have been built since the 1980s, if George Osborne’s stated intent to scale those heights again is to be met, it’s people like Jeff Fairburn (left) who will have to make it happen.
Fairburn is CEO of York-based Persimmon Homes, which builds around 13,500 houses a year and along with Barratt and Taylor Wimpey make up the UK’s top three housebuilders.
Can the industry deliver the numbers of new homes that are being asked of it? ‘I think it’s very challenging. Since 2012 we have increased our volumes by 50%. But it’s increasingly challenging to keep growing at that rate,’ he says.
A big part of the problem is skills. There just aren’t enough bricklayers and carpenters to do the job. ‘I do think careers advice at schools could be much better. It’s all about further education, which does not suit everyone.’
Fairburn is proof that a university degree is not compulsory for a successful career – he left school without A levels, and trained as a surveyor for a local builder thanks to a YTS scheme. Now he is running a business that turned over £1.33bn in the first half of 2015 and made a profit of £272.8m for the same period, up 11% and 31% respectively.
The severity of the last recession caused an estimated 300,000 workers to leave the building trade, many never to return. There are now only around 70,000 brickies working in the UK, down from 100,000 in 2008. ‘We need to train more people. Last year we started to retrain ex-forces people – they have a great attitude.’
Despite a report from the Local Government Association claiming that 450,000 houses for which planning permission has been granted remain unbuilt, planning and land availability are the other big issues, he reckons. At least parts of the green belt should be built on, he says. ‘People think we are concreting over the whole country. It’s simply not the case. You could build 200,000 new houses a year for 10 years and it wouldn’t even be another 1% of land built on.’