Shelter is a simple yet fundamental need. Britain is a wealthy and developed country. How remarkable, then, that we seem to live in a perpetual housing crisis. The average house price to earnings ratio keeps rising, now approaching 8:1, double what it was twenty years ago.
This has huge implications for productivity (capital sits in unproductive bricks and mortar), inequality (only the rich can get benefit from rising prices and escape the ‘rental trap’) and financial risk (more expensive houses mean bigger mortgages, increasing our overall exposure to bursting property bubbles).
Whatever can we do about it? Steep prices are of course a function of supply and demand. Demand is rising primarily because of shrinking households, but also because of immigration. Neither is an easy issue to deal with.
Fixing supply, on the other hand, sounds simple. Just build more houses, right? This is usually where the familiar criticism of the housebuilders themselves comes in: that they’re just sitting on landbanks, building a trickle of new homes a year in order to protect their margins, the greater good be damned.
There is truth to that (welcome to capitalism, comrade), but it’s hard to expect them to do anything else under the circumstances.
This isn't just because they have a fiduciary duty to make profits for their shareholders, it's also because this isn't just a question of margin for them, it’s also a question of risk. Unlike in most countries, the major British housebuilders are also effectively landowners – they speculate on the land on which they later build, taking the project from cradle to grave, as it were. Developments therefore take a long time - and the housing market is fickle.
If housebuilders were to ratchet up the number of new homes they built, they would make themselves vulnerable to serious losses should demand falter and the price drop (which is of course exactly what would happen if they did release more homes onto the market), so they have to play it safe with the margin.
The profitability of speculating on landbanks has also led to the widespread consolidation of the sector, with a few major firms now dominating. This reinforces the problem, because big developers favour big developments, which means a lot of smaller-scale, local demand gets neglected, which probably wouldn’t happen if there were more small and mid-sized independent builders.
If the government really wanted to encourage the private sector to build faster, it could maybe consider regulating to separate the land ownership and construction (it’s already talked about giving councils the power to force housebuilders to start building within a shorter time frame or lose their planning permission), but it can’t really expect existing companies to play the game differently until it changes the rules.
Besides, housebuilders’ low-pressure property pipelines are hardly the only cause of our housing shortage. Another key factor is the availability of suitable land (i.e. affordable and in places where people actually want to live), which is limited as a result of the greenbelt and other planning restrictions.
There has been some progress in streamlining the planning process, with the number of permissions granted increasing in recent years, but the greenbelt remains largely sacrosanct. It remains to be seen, meanwhile, how successful the government’s £3bn Home Building Fund will be in encouraging and financing smaller builders, many of which are still recovering from the recession.
The biggest obstacle, ultimately, is not structural but political. The long-term health of the economy demands that house prices at best stay roughly level, so that the price to earnings ratio can gradually drop. Yet pursuing this policy would be political suicide, the downside for homeowners being much more tangible than the upside for prospective homeowners and renters.
If we really want to fix the housing market, we need to address the political costs of suppressing house price rises, opening up the greenbelt and building social housing. Blaming the housebuilders, who are currently just giving a rational response to the risky, cyclical market they’re in, is just a bit too easy.
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