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Levelling-up the land market under Labour

On the 6th August 2020 the Conservative Government announced a change to the standard method for calculating the housing need requirement. The debate had up until this point shifted from the ‘numbers’ question. Towards the ‘how’ and ‘where’. Now the proposed new method seeks to achieve a ‘fair share’ under Boris Johnson’s ‘levelling-up’ agenda. But is this the right approach?

The Government’s housing targets have come under fire for contradicting its ‘levelling-up’ agenda.

Recent claims by the Local Government Association (LGA) argue the proposed new standard method would seriously jeopardise the Government’s ‘levelling -up’ agenda.

While the Campaign to Protect Rural England (CPRE) said “the last thing we need is another ‘mutant algorithm’ – this time deciding where development takes place”. We have seen from the exams fiasco the damage that can be caused by erroneous calculations.

Backlash has also come from within the Conservatives. Neil O’Brien, MP for Harborough (Leicestershire), claims “it would be quite difficult to explain to Conservative voters why they should take more housing in their areas to allow large Labour-run cities nearby to continue to stagnate rather than regenerate”. Neil had written for Conservative Home. He argued the new formula would “level down our cities, not level up”. Yet we know large parts of existing suburbs in England and Wales are providing almost no new homes. Tory shires staying untouched? Evidently delusional.

Analysis by the LGA found under the new formula lower growth in housing stock would be expected in Northern regions. London on the other hand would see a 161% rise in homes built. An increase of 57% is expected in the South East. 39% in the South West. For those in the North East proposed targets are 28% lower. While 8% lower in the North West.

On average the house price-to-earnings ratio across the UK stands at 10.7. However, price-to-earnings ratios are still below their previous 2007 peaks in the North East, North West, Yorkshire and Humber, and Wales. In London, the price-to-earnings ratio has worsened by over 50% since 2008. Similarly, the South East, South West, East, and the East and West Midlands have all surpassed their Pre-Covid19 crisis peak. Surely adopting this approach makes sense for these targets to be reduced. Or does it?

On new projections the housing targets are well below what we really need, and fall short in basic economic terms.

On the new proposed standard method it is estimated to be 337,000 – so an annual increase of 1.4%. Currently the Tory housebuilding target of 300,000 accounts for an annual increase of 1.2%. Compared with the two decades between 1931 and 1951 housing stock grew on average at 2.85% per year.

Labour should be attacking the Tories over their lack of ambition. To achieve the levelling-up agenda we need greater supply responsiveness to house prices and housing stock to grow faster than incomes. Only then will we achieve a less volatile housing market. But how could we achieve this?

The Bank of England targets inflation at 2%. As at April 2019 the total number of dwellings was 24.4 million. In effect to ensure growth in housing stock exceeds growth in full-time earnings. Thus, we should be setting the national target closer to 490,000. Somewhat 45% higher than the Tories current level. If we achieved the growth in housing stock at rates seen between 1931 and 1951 this figure would be closer to 696,000.

The average house price-to-income ratio now stands at a whopping 18 times the average salary in London. In London housing supply targets have either been based on land capacity. As seen in the recent Draft London Plan. Or in times gone (and still to date) by projections based on ‘nonsense demographics’.

It makes sense for the Government to require those areas that are seeing the most demand. And demonstrably so in areas that have increasingly high price-to-earnings ratios. Even the North West, North East, and Wales have seen increases in price-to-earnings ratios from their Pre-Covid19 crisis trough. Housing supply should remain an important policy concern for all when considering the ‘levelling-up’ agenda.

It is no surprise why house prices have rocketed in London, the growth in housing stock has not exceeded incomes.

For the period 2009 to 2019 housing in London stock grew by merely 8.6% in aggregate (0.8% p.a.). While full-time earnings grew at 16.9% (1.6%). Almost double the rate. A ten-year target set at the anticipated growth rate in wages, using the inflation rate as a proxy, would see London housing stock need to grow by 2% p.a. or 21.9% in aggregate.

By the end of 2019 London the total number of dwellings across all the tenures reached 3.6 million. London would need 786,700 net additional stock delivered over the following decade. Sadiq Khan would need to increase his original annual target from 65,000 homes per year up to 78,700. This would see London take its fair share of the levelling-up agenda.

London has not seen such levels built, largely by the private sector may I add, since 1935. This is a time that pre-dates the permanent protection of London’s antigrowth local land regulation, namely the ‘Green Belt’. And the tortuous Town and Country Planning Act, which has poisoned London’s well of supply ever since.

Figure 1: New build homes in Greater London, 1871 to 2018
Source: GLA, Housing in London 2019

Sadiq had his own target reduced by the naysayers. An independent review said his small-site target was unachievable. This reduced the original target of 65,000 to 52,000. Still more than Boris Johnson’s 41,882. Yet considerably lower than the proposed new standard method of 93,532. A figure London has never built in its history.

Targets set under the Housing Delivery Test (HDT) over the three years between 2016 to 2019 required one home for every 80 residents on average. Or 38,400 annually. Output would need to increase by 200% to increase housing stock at the same pace as income to hit a target of 78,700. Or 243% to hit the levels set out using the proposed new standard method.

The race to the bottom of build cost and quality is a symptom of a broken land market.

The endemic cladding scandal has left over 3 million in worthless flats. Economic incentives of landowners under the current planning system have led to economic growth and value from cost cutting measures absorbed by land values. The result? A race to the bottom on build quality to pay the highest price.

Our land market has been so constrained that the economic interests driven by the current planning system has seen build quality deteriorate. Literally to the point where basic fire safety has too often become hard to achieve.

Housing targets under the Tories remain a tabula rasa, only Labour has the ambition to level up our nation.

Levelling-up the land market requires planning reform and appropriate housing targets. And densifying cities. Only then will we re-balance the see-saw between land values and build quality. Liberal socialist John Rawls has advocated a move from a broken system of welfare state capitalism, to a property-owning democracy. Where everyone can participate in the productivity gains of a nation.

If every British citizen had a stake in a sizeable amount of property, access to capital and the productive decisions of society, then we can put power in the hands of the many and not the few. In China, the homeownership rate is as high as 90%. We should try to emulate this ambition. And while no silver bullet, revolutionary rent-to-buy schemes such as Rentplus could provide one such solution.

The levelling-up agenda will require a significant amount of homes at social rent levels for those on low-incomes. Particularly in big cities. Labour needs to ensure housing targets are driven on the premise we need to make homes more affordable. This can only be achieved by committing to more supply. And a huge, huge amount of it.

<strong><span class="has-inline-color has-accent-color">Chris Worrall</span></strong>
Chris Worrall

Editor of Red Brick. He currently works in land acquisition for Guild Living. Chris currently sits as a Non-Executive Director of Housing for Women and is a member of the Labour Housing Group Executive Committee.

Previously Investment and Finance Manager at both Quintain and Thor Equities. Chris has expertise in developing new residential investment strategies, real estate development finance, and the investment and development of affordable housing. He writes in a personal capacity.

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Busting the housing supply shortage ‘myth’

Supply is one of the key problems in the UK housing market. Sadly, the latest in-vogue argument is that the perceived housing supply shortage is a misconception. This track of thought has permeated right across the political spectrum. But do these claims hold weight?

Both centrists and the left have bought into the housing supply shortage myth. It is wrong to do so.

Last year the Labour Party produced its ‘Land For The Many’ report. In it all housings ills were laid at the feet of finance and speculation. Namely by the likes of Beth Stratford, Guy Shrubsole and Laurie Macfarlane. They argue there were “more powerful forces, besides supply shortages, putting upward pressure on house prices”. ‘Red tape’ in the planning system? Merely a “discredited theory”.

But this argument has not become just a line for the left. Even centrists from across the globe have bought into the mantra of the ‘housing supply myth’. Both Dr Cameron Murray and Ian Mulheirn of the Tony Blair Institute cited all sorts of claims recently on The Jolly Swagman Podcast. From “look at all these approvals”. To if supply were the issue “rents would be increasing at the same rate as prices”. Or it is the cost of capital doing “most of the heavy lifting” for changes in price. All these claims are false. Misguided at best.

Regulatory supply constraints inherent within the current system have made house prices substantially more volatile. Research by Hilber and Vermeulen found the planning system has been an important causal factor behind England’s high housing prices. It was published in the flagship title of the Royal Economic Society. The Economic Journal.

Of course, undoubtedly more than just supply shortages over the past 30 years has exacerbated house price rises. Particularly given the global trend toward lower interest rates. Yet even those at the Bank of England widely acknowledge lower interest rates are not the sole determining factor of house price inflation. In this blog I set out why as progressives we must give planning more attention, better understand its relationship with housing supply, and acknowledge that solving the housing crisis does indeed require some form of planning reform.

Low interest rates would not explain 90% of house price growth if supply was more responsive

“Soaring UK property prices are due to low interest rates, not lack of housing supply, Bank of England finds” states yet another tabloid headline. Housing supply “will not solve the housing crisis” clamours Ian Mulheirn. If there were two more opposite statements of the truth these are it.

The low-interest rates “fuel” house price rises line of argument has caught up far too many economic commentators. Mulheirn claims institutions, lending policies, narratives, all interfere with the transmission that is the tide of global interest rates. Supply though? Not the answer.

Ian’s claim simply bears no logical validity. First and foremost, the same Bank of England report that acknowledges low interest rates have been the key explanatory factor of house prices rises, does not validate his own understanding. The doubling in house prices over the past 30 years would have been different if supply were more responsive to changes in price.

It suggested that had we had doubled the responsiveness of our housing supply to changes in price, and assumed lower income elasticity (i.e. the same change in income triggered a smaller percentage increase in demand), house price growth would have been cut by almost half. House price growth would have amounted to 88%. In contrast to the 173% modeled by the Bank of England on the current assumptions.

Income growth would have explained 55% of the increase. Decreases in interest rates explained just 40%. Therefore if supply was more responsive then both centrist and left-wing economist claims of mortgage lending being the key driver of house prices would simply not hold true.

In Japan housing affordability has improved despite a low interest rate environment

We can look to other countries and see low interest rates do not always explain housing unaffordability. For example, Japan has had low interest rates since the 1990s. Yet Japan’s price-to-income ratio has decreased by 31.3% since the year 2000. Over the same period the UK the price-to-income ratio has increased by 35.7%.

Cheap credit simply puts rocket boosters on demand in an already supply constrained market. Nothing more. Progressive housing policymakers need to recognise there is more to increases in house prices, and subsequently land values, than mortgage lending alone.

Antigrowth land regulations hand massive windfalls to landowners

Beth Stratford, one of the authors of Labour’s ‘Land for the Many’, claims the planning system is “counter intuitively” not the major driver of recent land price inflation. Despite claiming “housing is unaffordable because the land underneath our homes has ballooned in value 544% since 1995”.  Guy Shrubsole, argues that “ripping up the Green Belt and planning regulations will simply hand massive windfalls to landowners”.

Both are sadly defending the very man-made regulations that capture value into land. Enrico Moretti from UC Berkeley argues fixed or equitably anaemic housing supply results in productivity increases capitalised into land values. On the contrary if housing supply were infinitely on tap to meet demand then these productivity gains would go into workers’ wages. This is a given where there are fundamental economic drivers at play.

Not to mention what we have witnessed. In Central London for example, residual land values increased by over 600% in 20 years. Sounds to me like under the status quo landowners have been capturing massive windfalls for quite some time.

Research by Albert Saiz tells us the biggest determinant of poor housing supply responsiveness is geography. This is predominantly due to the physical constraints on land availability. Poor responsiveness of housing supply occurs indirectly due to increased land values resultant from this scarcity of land. Geography also indirectly creates higher incentives for antigrowth regulations such as the Green Belt. Of which ‘neighbourhood defenders’ like Guy Shrubsole and the CPRE vociferously protect.

Prices and past growth is empirically linked to planning regulations

Saiz tells us prices and past growth is derived from both physical and man-made (planning) regulations. Ian Mulheirn was presented this widely acclaimed study during his feature on The Jolly Swagman podcast.

But what did Ian Mulheirn make of the Saiz study dating back to 2010? He embarrassingly admitted he has never heard of it. Although still acknowledges there is relationship between prices and supply. Despite not recalling the paper Mulheirn claimed studies like this get the “order of magnitude wrong”. But we know this to be false. The assertion low-interest rates hold a higher magnitude does not hold true if supply responsiveness were more in line with international norms.

The link between responsiveness of supply and planning is not widely understood by housing supply shortage critics

We know poorly designed planning policies restrict supply responsiveness. Cross-country research by the OECD found that housing supply responsiveness is related to regulations on land-use and planning.

Professor Ed Glaeser found in Greater Boston the decline in new construction, and associated increase in price, reflected increasing man-made regulatory barriers to building. Based on his empirical analysis he calls to ease housing regulation to increase supply.

Shrubsole, Stratford and Mulheirn all ignore or deny the empirical link between restrictive antigrowth land use regulations, lower levels of housing stock expansion, and exacerbated house price growth. While in places with relatively fewer barriers to construction the results are moderate increases in house price growth and a larger expansion of housing stock. Development professionals understand these international comparisons. And funnily enough, so do landowners.

The Federal Housing Finance Agency analysed a US data set of 14 million land values. It found supply restrictions and levels of land price positively correlated. Regulatory burdens and topographic difficulty in building result in an increase in the price of land. It is the largest dataset to suggest planning regulations impede the responsiveness of supply.

Unlike other countries Britain keeps making land more scarce in areas of high demand rather than expanding its supply

We must recognise the UK’s discretionary planning system is deepening wealth inequality by design. Political reluctance to review the Green Belt in terms of suitability for new homes has meant these restrictions have persisted for a prolonged period of time. All the while British urban conurbations have grown.

Other countries regularly review Urban Growth Boundaries (UGB) for expansion. For example, in the USA the state of Oregon expanded its UGB no less than three dozen times since it was first drawn. In the UK, the Green Belt has doubled since 1979. Instead of releasing land as our cities grow, we have done the complete opposite.

Thinly traded markets demonstrate the scarcity of land

The Investment Property Forum (IPF) notes the paucity of information on residential land values in the UK reflects the thinly traded nature of its land market. Being thinly traded means it cannot be sold easily without a significant change in price. This is due to there being a limited number of buyers or sellers.

Laurie Macfarlane believes this paucity of information makes it “difficult for policymakers and market participants to make informed decisions”. I argue to the contrary. Actors are making rational informed decisions. And those who are in the know are in the know. Landowners know in the long-run the economic incentives derived from the planning system will rule in their favour and that prices are sticky.

Developers on the other hand do face difficulties. Mostly with the planning system. In Britain developers can propose something not forbidden by the local plan, yet still lawfully be denied the right to build.

The planning system in Britain forces developers and planning authorities to haggle over height and affordable housing. Once a scheme is consented the permission can be sold on to crystallize the planning gain. The current system drives behaviour that plays on this uncertainty.

Some landowners (but not all) try to capture uplift from planning rather than build out. Particularly in times where it has become apparent more and more people cannot afford to buy in places they grew up in. The lack of market confidence has led to record levels of unsold stock.

Land traders and middlemen punt around a thinly traded market consented schemes. Where often it can be slim pickings. This is in the hope another developer will take a view on height, massing, affordable housing once again. If house prices have moved on, they can capitalize these gains into land value. Simply stating 9 out of 10 applications are approved does not absolve the planning system for not seeing homes built out. It is at the heart of driving landowner economic incentives.

The current system has failed – how should Labour respond?

Anthony Breach draws parallels of the current system to the failed former Eastern Bloc. Our “Soviet-style planning system” has created crippling shortages of housing through institutional design. All ratified by political will. It is the case-by-case discretionary planning permission system that has created shortage economy in our housing market. This needs to change.

To grapple with the planning system Breach recommends a move to reconnect local demand through a rules-based zoning system. He claims should a developer propose a compliant scheme within zoning, design code, and building regulations then it must result in a building permit. Development proposed in line with neighbourhood plans that have been consulted on with the community will be determined by the need for new homes. Rather than by how much land has been rationed by the local authority and remains unsanctioned by local opposition. This gives the market certainty and takes the haggling out of land values.

In today’s context Breach’s recommendations should be revisited with a renewed focus on how such a planning system interacts with housing and the wider community. It is a myth to claim there is no housing shortage. And a myth to suggest planning plays no role in the responsiveness of supply to changes in price. We must turn to the academic literature and an empirical evidence base to inform our decision-making. Breach’s proposals may just have the answer.

Duncan Bowie argues the Labour Party has in the past failed to grapple with the planning system. He also said the Labour Housing Group should focus acutely on the relationship between housing supply and planning. I agree this needs to change. Labour needs to recognise and debate the positive and negative consequences of discretionary planning. Perhaps Breach’s proposals to the Labour Planning Commission can garner some further attention from the left. After all, they may be more relevant now than ever before.

<strong><span class="has-inline-color has-accent-color">Chris Worrall</span></strong>
Chris Worrall

Editor of Red Brick. Land Acquisition, Guild Living. Non-Executive Director of Housing for Women. Labour Housing Group, Executive Committee.

Previously Investment and Finance Manager at both Quintain and Thor Equities. Chris has expertise in developing new residential investment strategies and real estate development finance. He writes in a personal capacity.

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When averages don’t have to be so mean

With the Tories on the proverbial housing policy ropes, Labour must continue to focus on progressive policies that result in more support for households at lower parts of the income distribution. To roll with the punches Labour must call for an increase in the Local Housing Allowance (LHA) to the median 50th percentile, scrap the discriminatory age restrictions to the Shared Accommodation Rate (SAR), and put those most in need at the heart of any emergency coronavirus plan and comprehensive vision for the future.

Shelter have announced we have a public health crisis on top of an already existing housing emergency. This is because millions of tenants, whether they be private, social, or intermediate, are presently not working due to the fact society has lost confidence in our ability to move around without catching a killer infection. This has happened in the middle of an existential housing emergency that has been significantly exacerbated by the Tories over the past decade.

Vicky Foxcroft, Lewisham Deptford MP, brutally exposed this in the Commons in Julylast year:

“Local housing allowance is supposed to cover the lowest 30% of market rents, but research by Shelter found that that is not possible in 97% of England. For example, in south-east London, local housing allowance will cover only the bottom 10% of rents. We have a housing crisis across the country and local housing allowance is not fit for purpose. Does the Minister agree that it must be raised to reflect the true cost of renting?”

House of Commons | Hansard | 01 July 2019 | Local Housing Allowance

Virendra Sharma, Ealing Southall MP, also explained how a staggering number of members in his constituency had a very real risk of homelessness as they struggle, month after month, to make up the shortfall between their rent and the level of LHA.  

For example, a single young person under the age of 35 in Ealing Southall would have found just 1% of shared properties affordable with the SAR available in 2018. A family with children looking for a two-bedroom property would find the LHA rate covered just 6% of the private market. This would mean they would have to find an extra £150 per month to afford a property within the cheapest third.

In 2019, 88,330 households in England found themselves living in temporary accommodation, a figure tragically up from 48,010 in 2010. That is equivalent to the size of a town like Grimsby, Guildford, or St Albans often having to live in bed and breakfast accommodation in the first instance, until something more suitable can be found.

Figure 1: Total Number of Households in Temporary Accommodation 31st December 2019
Source: https://www.gov.uk/government/statistical-data-sets/live-tables-on-homelessness

The Tories have at least attempted to unwind the horrendous consequences of their own bad policy through reforming “no fault” evictions, removing Section 21 of the Housing Act 1988, and making changes to the grounds for possession. Yet much of this will be a mere sticking a plaster over what are much deeper structural issues, with pressure on the housing benefit system having been exacerbated from years of weak wage growth and domestic price rises

The severity of the impact on households’ living standards has been to an extent normally associated with a severe recession, which has left the huge shortfalls between LHA and the true cost of renting one borne by the poorest.  The result has left the country ill-prepared to face such a crisis, particularly as it braces itself for the biggest economic slump in over 300 years. This was not what Labour had it mind when it introduced LHA back in 2008 following evidence based research.

After an initial three-year pathfinder Labour set the LHA rate at the median 50th percentile of the local private market. Shared Accommodation Rates were applicable for those under 25, which meant that single claimants under 25 were forced to share with others rather than live on their own. It had an aim to give a flat fair allowance for the local area and enabled people to have choice. LHA was argued to increase incentivisation to work, namely through greater clarity of in-work benefits, and most importantly it was simple.

LHA was slashed in 2011 to the 30th percentile by the Coalition government, with the Liberal Democrats crooning it in, like mice singing in the cats choir. A year later LHA rates were delinked from market rents and increases there forth capped by CPI. An uncaring cap on benefits was further introduced in 2012 following George Osborne’s famous Conservative Party conference speech where he asked “where is the fairness?”.

Three years later George Osborne thought it was still not fair enough and pushed the benefit cap even lower in his Summer Budget of 2015.  He brought this alongside an extension of SAR up to the under 35s, with a 5-year freeze to LHA announced in 2016.

Turns out George’s idea of “fairness” leaves poor families with mounting debt and pushes children into deeper poverty, with many families financial circumstances having worsened following the introduction of the policy. In large part having been left with an average gap between rent and housing benefit of £3,750 per year.

That said, evidence from Crisis identified that investing in LHA rates to cover 30% would prevent 6,000 households from becoming homeless over a three year period. It would also lift 32,000 households out of poverty, which would include 35,000 children. Off the back of this research, and vociferous campaigning by Labour Party politicians the Tories buckled, and ended their very own LHA freeze one year early.

Hurrah!

Announced in January 2020 under The Social Security (Coronavirus) (Further Measures) Regulations 2020 the Government stated it would relink the LHA to the 30th percentile, which was set at the same level seen in the 2019 Labour Party manifesto.

But was this rate high enough?

The Liberal Democrats thought not. Their manifesto included a call to increase LHA in line with average rents in an area. Though fell short on whether this was the mean average, or the more robust to statistical outliers mean average. In any case nobody was going to believe that commitment with the Liberal Democrats having been the hand maiden for such cuts in the first place.

Yet their policymakers did have a point, as a move back to the average rent level for LHA is one backed by credible research. In August 2019 Crisis demonstrated a higher cost benefit could be achieved if LHA was restored to the 50th percentile rate in areas where the rates fall behind rents the most, and to 30th percentile everywhere else. The research also gave a nod to restoring all the rates to the cheapest half, which would bring the highest overall benefit. In effect restoring LHA to the progressive median average, not seen since the last Labour government, would be more equitable and more cost effective.

This begs the question why previously Labour only sought an increase to the 30th percentile when, under the previous Labour Government, the median average left fewer people choosing between eating or paying rent. Shelter have recently joining the ranks call for an increase in housing benefit to cover the cost of average rents and to lift of the benefit cap.

Labour’s recent announcements chime well. Thangam Debbonaire’s emergency five-point plan echoed such calls through laying out increases to LHA rates and an improved provision of Universal Credit. Shadow Secretary of State for Work and Pensions, Jonathan Reynolds, also called for urgent action on social security. Through a suspension of the benefit cap and removing the savings and two-child limit to Universal Credit.

At least now renters can take comfort both Labour and the experts are on their side.

Sadly, the Tories will be difficult to move on from the below average LHA rate and age discriminatory SAR policy, which will remain unfair and incredibly impudent towards those on the breadline. Yet Labour must continue to be bolder than its Tory counterparts on housing. For it to work effectively for a just society, it must call for an increase in LHA to the median 50th percentile rate, not the mean, and in the interest of fairness push for the abolishment of age discriminatory housing benefit criteria.

<strong><span class="has-inline-color has-accent-color">Chris Worrall</span></strong>
Chris Worrall

Co-Editor of Red Brick. Non-Executive Director of Housing for Women. Labour Housing Group, Executive Committee. Exploring innovative new models in housing with care in the for Guild Living. Previously Investment and Finance Manager at Quintain and Thor Equities.