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We cannot borrow our way out of the housing crisis: mortgage credit is part of the problem

We cannot borrow our way out of the housing crisis: mortgage credit is part of the problem

One of the key issues highlighted in my new book about ‘Generation Rent’ is how mortgage lending drives the UK housing crisis. I am far from the first person to point this out: my understanding of the problem is drawn from the research of the think tank Positive Money, IIPP economist Josh Ryan-Collins, property cycles expert Philip J Anderson, and many others.

But no-one in government seems to be taking it seriously. As a result, a dangerous policy proposal in the 2019 Conservative manifesto has gone largely unchallenged: the promise to support the mortgage industry in delivering long-term low fixed-rate mortgages for first-time buyers, which will ‘slash the cost of deposits’. This may sound like an enticing idea, but in practice it will only pour more petrol on the fire.

The truth about where mortgages come from

When you take out a mortgage, the lender conjures new money into existence. The money doesn’t come from other customers’ savings accounts, nor does it come from bank ‘reserves’: it is created from nothing.

The main constraint on mortgage eligibility is the borrower’s ability to repay the debt. Effectively, a mortgage is a large withdrawal from The Bank of Future You. And while you can typically only borrow 90%-95% of the property value, this does little to keep mortgage borrowing in check, as property prices can rise in response to expanding mortgage credit and vice versa.

When property and mortgages collide

When cheap and readily-available mortgage credit meets residential property, house prices shoot up. This is because the supply of land, which accounts for about 70% of the value of a home, is fixed. No market can produce new land in response to the demand for housing created by expanding mortgage credit. And you cannot take out a mortgage against a home that hasn’t been built yet.

So, what you get is an ever-expanding supply of money chasing after a finite amount of property. Maybe we should think of it this way: rather than house prices going up, the value of money itself has been systematically trashed relative to the value of property.

What if we pour new money into new homes instead?

This was the rationale behind the government’s Help to Buy Equity Loan scheme, which was reserved for new-builds only. The idea was that, because the new loans would be used to increase the housing supply, the scheme wouldn’t lead to house price inflation.

But since the scheme was rolled out via huge private housebuilders, these companies were able to control the supply of housing by hoovering up as much land as possible and drip-feeding their (often shoddy) new-builds onto the property market at a slow enough rate to keep sale prices artificially high. In consequence, housebuilders’ profits have swelled, and Which? recently reported a trend of Help to Buy homes falling in value, despite rising local house prices. Most worryingly of all, Help to Buy mortgage arrears are running at six times the ordinary rate.

A culture of land speculation entrenches the issue

Maybe the land-credit feedback cycle would be dampened if it were possible to take out a mortgage to fund a self-build property. But to acquire land, you normally have to satisfy a landowner’s price expectations (claiming vacant or unregistered land in this country is almost impossible). These expectations are likely to have been warped by the speculative nature of the land market.

Most landowners know that, under current rules, a piece of agricultural land can become around 92 times more valuable with a grant of planning permission for residential buildings. If the seller doesn’t like the price on offer, they can withhold their land indefinitely with no consequences.

A whole ‘land promotion’ side-industry has sprung up to enable speculators to share in the planning uplift, using legal mechanisms like ‘option agreements’ and ‘promotion agreements’ to reduce risk and increase profits. As a result, land is scarce and acquiring it is both costly and difficult, despite the fact that only around 6% of UK land mass is actually built on.

Why planning reform won’t solve the problem

Perhaps because land speculation is so rampant in Britain, the planning system is currently painted as the big bad wolf of the housing crisis amongst conservative thinkers. There is a belief that the land market will magically start behaving like any other free market if we scrap the 1947 Town and Country Planning Act. But for all its flaws, the planning system is not the fundamental issue here, even if there is a genuine case for planning reform.

In Victorian Britain, slum housing, rising rents and overcrowding plagued the Capital and other areas of rapid economic growth. This had nothing to do with rules and regulations (which were next to non-existent), and everything to do with the power that comes with land monopoly. The poor got poorer and the landed got richer: ‘twas ever thus.

We need to keep talking about land and credit

The only way to permanently stop the price of property ballooning out of all proportion is to tax the land beneath it. A land value tax could replace council tax (a ‘highly regressive’ policy that falls hardest on the least well-off), business rates and Stamp Duty Land Tax, and would disincentivise land speculation. It could raise much-needed revenue for public services hit by austerity cutbacks. Or it could even be redistributed in the form of a ‘citizen’s dividend’ or Universal Basic Income.

This idea has garnered support from across the political spectrum, but has traditionally been opposed by governments beholden to wealthy landowners and a predominantly homeowning public. So, since it may take some time to get the electorate to come round to the idea of a land value tax, a more urgent and politically possible course of action would be to reform the land acquisition process, so that local authorities can afford to build genuinely affordable social housing at scale.

In addition, the Right to Buy policy must be scrapped immediately to stem the loss of social housing – especially given that nearly half of the homes sold are ending up in the private rented sector and contributing to the soaring cost of housing benefit. The shortage of genuinely low-cost homes is acute; the number of people stuck on social housing waiting lists stands at well over 1 million.

For too long, spiralling house prices have been dismissed as an inevitable force of nature, or the product of too little housebuilding, or too much immigration – even though research from the Bank of England has concluded that the quadrupling of house prices over the last 40 years is ‘more than accounted for’ by falling interest rates. It may be dry, knotty and difficult to fit into a soundbite. But until we increase public understanding of the land and credit feedback cycle, the housing debate will only keep going around in circles.

<strong><span class="has-inline-color has-accent-color">Chloe Timperley</span></strong>
Chloe Timperley

Author of “Generation Rent: Why You Can’t Buy a Home (Or Even Rent a Good One)”. ORDER: http://bit.ly/2AX2LhE

Chloe’s professional background is in financial planning, which involves analysing pensions and investments. This led her to delve into how the financial sector sits at the heart of Britain’s housing crisis. During her research, Chloe went undercover at landlord events, spoke to MPs and activists, and joined a tenants’ union.

She also listened to the stories of scores of tenants who — like her — remain stuck against their wishes in the private rented sector.

Now, she wants to shift the housing debate away from simple narratives of supply vs. demand, and towards the underlying mechanisms that drive our dysfunctional land and housing markets.

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Making land deliver

Last week saw the launch of ‘Making land deliver’, a new report from Network Homes proposing three big ideas to reduce land costs for providers of social and affordable housing. I took part in a panel discussion along with the report’s co-author, Reuben Young, Rico Wojtulewicz from the House Builders Association and Cllr Shama Tatler from Brent.

There is no doubting the importance and timeliness of the land reform agenda, and on this our panel was unanimous. Since 1995, the value of land owned by UK households has grown by an astounding 583%, while the combined value of the assets overlying land (i.e. buildings) has risen at less than half this rate. We are effectively channelling ever more of our national wealth into the hands of those who own a fixed supply of land. This represents a significant challenge for any government hoping to build, build, build its way out of a Covid recession.

 ‘Making land deliver’ suggests a three-pronged attack on the land value problem:

  1. Allow local councils, Homes England, and the Greater London Authority to compulsorily purchase land at existing use value.
  2. Consider social value and market value when selling public land.
  3. Reform the system of developer contributions to affordable housing.

Network Homes are right to look to the rules on Compulsory Purchase Order compensation for a mechanism to moderate the land market – an issue discussed in detail elsewhere on this blog. Removing ‘hope value’ from CPO compensation awards would tackle a critical barrier to solving the housing crisis in England and Wales.

However, I would caution that Network Homes’ specific call for compensation to be reduced to ‘existing use value’ is likely to conflict with Protocol 1 of the European Convention on Human Rights, which rightly requires compensation at market value. Instead, the UK should simply align itself with other ECHR signatories including Germany, France and Netherlands, by excluding potential development value from definitions of ‘market value’ for CPO compensation purposes. Removing ‘hope value’ would have the effect of reducing awards to levels closer to ‘existing use values’, while still fairly compensating landowners.

Secondly, public bodies considering land disposals should consider social value as well as market value. The government’s Public Land for Housing Programme so far boasts a build out rate of just 15% over the decade that it has been running, and just 6% of the homes planned for these sites will be for social rent. Reviewing and clarifying ‘best consideration’ rules to ensure social value is paramount in decisions about how to use public land is an obvious win.

But the really fresh thinking comes in the third proposal: to replace the Section 106 system for delivering affordable housing on market-led schemes in England with a new, ‘un-gameable’ and non-negotiable system of developer contributions. It works like this:

  • Councils set an affordable housing tax rate for all development in their area.
  • Developers submit a Gross Development Value, on which they will pay the local tax rate.
  • That GDV is used to set the price at which the council can buy homes on the scheme on completion for use as social and affordable housing.

A developer could submit a ‘pessimistic’ GDV to pay less tax, but would then be required to sell homes to the council at ‘pessimistic’ values. This balancing of incentives is the beauty of the proposal. However, there are some thorny issues to work through.

Firstly, this system appears to leave developers in control of the type, size and design of the homes they will build, with councils having only the right to purchase those homes at a pre-set price at the end of the process. There is no guarantee that developers will build the right homes for meeting local housing need, or even that they will meet minimum space standards for social housing. True, councils could spend their tax revenues on delivering the right homes elsewhere – but this relies on Network Homes’ first two recommendations to provide an alternative source of land right-priced for social and affordable housing.

Secondly, the intention to balance power between developers and councils through this proposal may be undermined by the broader planning system. Could a council find itself under pressure to purchase homes of the wrong type or at the wrong price to prevent sites stalling in this system? If that council was worried about how to satisfy its Housing Delivery Test and so avoid losing its planning powers, perhaps. This could be resolved by capping the price which can be paid for affordable housing, for example using plan-stage viability assessments when allocating land.

Despite my quibbles, new thinking from social housing providers is extremely welcome here. Network’s ‘Making land deliver’ follows on the heels of its 2019 report into barriers to social rent delivery for HAs. Both reports provide valuable insights from the front-line of housing delivery, and crucial back up for non-practitioners like me who are campaigning on these issues. I would absolutely encourage other social housing providers to share their experiences and ideas.

<strong><span class="has-inline-color has-accent-color">Rose Grayston</span></strong>
Rose Grayston

Rose has 10 years of experience in providing policy, research and strategic communications support to progressive campaigns and their leaders. 

She has managed and led successful campaigns to reform English planning rules to incentivise the delivery of affordable homes, to reduce borrowing rates for local authority house-building, and to build political and public support for reform of England’s broken land and house-building systems.