The Housing Crisis

One of the reasons why I started this website was a growing frustration with the narrative around the housing crisis. Politicians, commentators and practitioners all have the same solution – we need to build more homes. If it were so easy, why, does the crisis still persist? Why do we see house prices continue to rocket and abysmal conditions in the rented sector?

All of the policy prescriptions which have been pursued, help to buy, estate regeneration, deregulation of the planning system have failed. The real crisis in the London housing market is not of prices, but in the fact that no one seems to have a grip on the situation.

In this long essay, I set out my analysis of how we got here, and how our thinking of the housing crisis needs to change if we are to truly address the issues raised by it. Please do let me know what you think by leaving a comment below.

The absence of hope

What is the housing crisis? To Ewa, it is an exploitative landlord. For £1,000 per month she lived with her 10 month old baby and a dog in a flat measuring just 10 sqm. The flat was in a house with six others, in one below her lived a crack addict and in another a serial sex abuser. There are cheaper flats in London but she had little choice, as few landlords accept housing benefit claimants.

For a woman living with 5 children in a 2 bedroom council flat in Newham, it is the failure of society to provide for people living on lower incomes. She is one of the 25% of council tenants living in that borough in overcrowded conditions.

For a well paid young couple who dream of buying a home and settling down, the housing crisis is a wildly overinflated property market that has taken away the economic means for them to start a family. A brick built monument to the economic reality of a life poorer than their parents.

The thing all these people have in common is the absence of hope. Although the housing crisis has been a first order political issue for the best part of a decade, no political party is offering a compelling, comprehensive solution.

In fact it has often been used as cover to promote a set of extremely bad policies which exacerbate the malaise suffered by victims of the crisis.

The dead

The model of housing promoted by successive governments since Thatcher, mass home ownership supplemented by council housing for those who can’t afford to buy, is now dead.
For young couples and families without inherited wealth, buying a home is virtually impossible.

These people have to rely on their incomes to secure a mortgage to fund a house purchase. And they can’t get a mortgage. With average house prices in London now running at 12x average income, buying a home is now absolutely out of the reach of these people. No sane lender would loan money at such high loan to income ratios. They know that the borrower will never be able to afford to pay back their loan.

These people normally live in rented accommodation, the high price of which allows them little financial slack to save for a deposit. And house purchases today require a substantial deposit. According to the most recent English Housing Survey, the mean deposit in London is close to £100,000.

Social housing, where rents are much lower, is not an option. There are over 1m people on the waiting list for a social home and the amount of new council homes being built numbers just a few thousand each year. In terms of Government policy, social housing is no longer seen as an alternative, viable form of housing tenure, but a form of welfare, only to be made available to the poorest and most desperate.

Although relying on the fruits of one’s labour alone is now not enough to own a home, inherited wealth can be a way out for some. Today, according to Legal and General, 57% of people under 35 who buy a home receive help from family and friends, 25% of all home owners across the country and 32% in London.

This trend of using family wealth to buy a home is now referred to as the “bank of mum and dad”, a nice sounding euphemism for rampant inequality. Today in the UK your access to a home is as dependent on the wealth of your parents as it is on your own talents and income.

All of this means that home ownership is rapidly declining. At the beginning of the 1990s, 45% of 25-year-olds owned their own home, by 2010 that had dropped to 20%.

The political consensus

All of the current political debate on the housing crisis focuses on the lack of supply in the UK housing market. The high costs of housing, the overcrowding and poor conditions are all simply a symptom of a lack of homes.

As a result every government and opposition political party over the last decade has supported the idea of major new house building programmes. Building more homes is one of the few issues that there is consensus on, although there are differences over the number of new homes needed.

In 2007 the Labour government announced that the country would build 270,000 a year by 2017. In 2015 Labour went into the election promising 200,000 new homes a year. The Lib Dems promised 300,000 a year and the Conservatives promised a million new homes by 2020 – or 200,000 a year. In 2017 that pledge from the Tories was restated to be 1.5m by 2022. In the 2017 General Election, Jeremy Corbyn pledged that his government would see 200,000 new homes a year built, half of which would be council housing.

The figures are on the whole fairly meaningless. Even if these targets were met, there still would not be enough new homes to keep up with demand. Experts claim that between 250,000 and 300,000 a year are required, and in any event, the targets are not being met.

The number of new dwellings built in the United Kingdom has never recovered to the 215,000 new homes built in the year before the last financial crash, 2006/7. In 2016/17 the number of new homes built was 178,000 – the highest level since the crash, but still well short of the targets set out by politicians.

Planning for housing

One reason why governments perpetually fail to meet their own housing targets is that governments do not build housing. In 2007-8 just 250 council homes were completed in the United Kingdom. That has risen today to just under 3,000 – in 1969 councils built 180,000 homes.

Instead of building, one of the main tools of the government is land use regulation. In the UK, land use is managed and controlled by the planning system. Land owners do not have complete freedom to build whatever they want. To change the use of land you must seek permission.

New development must in theory comply with a development plan put together by local government. Local plans must not conflict with national planning policies and must supply land to meet the requirements of the community, whether this is enough new housing, spaces for employment or community facilities such as doctors’ surgeries.

In terms of housing specifically, it is a requirement that local plans provide 5 years’ land supply for new housing. Since 1996 local authorities have also been able to demand that new housing developments include a proportion of social or affordable housing to meet the needs of lower income households. The amount of affordable housing required on new developments is calculated on the basis of local need. In most of London this affordable housing requirement is 40% of new build housing or more.

Developers are not expected to give away affordable housing on their developments. Affordable Housing is sold at a profit to a social landlord, such as a housing association. However, the profit is much much lower than can be pocketed for private housing.

If a development proposal is brought forward that does not meet the development plan, a planning application can be rejected and no building is allowed.
If landowners don’t wish to build local authorities have the power to force them to sell their land to someone who will via a compulsory purchase. This tool is not just reserved for new motorways or railways, but can be used for regeneration projects too. A forced sale is not necessarily a bad deal for the seller either. The government has to compensate landowners for the land at the market price of the land pre-development, plus 10%.

The failure of town planning

So the question remains, with these powerful tools to shape our built environment, why does the the country continually fail to build the amount of new housing required? Why has town planning failed?

The first thing to understand is that the relentless focus on supply has resulted in government at all levels favouring anyone who says they can build more – almost regardless of the cost. Private developers and their lobbyists have had an open door to government for many years.

In some cases government has even allowed lobbyists into government to direct civil servants. In 2012 the Department of Communities and Local Government set up a group called the Planning Sounding Board. The group included representatives from development industry trade bodies such as the British Property Federation, British Land and others. Hosted by the department the group met in secret, with no minutes of meetings being taken, and yet had a remit to advise on live planning policy issues and the reform of the planning system. The terms of reference for the group made clear that civil servants were expected to implement decisions of the board.

To the development community of course, the planning system is not an attractive proposition. They don’t want to be told what to do. They certainly do not want to be told to build sustainable housing for low-cost rent or sale. They would much rather build tall buildings full of very high cost ‘luxury’ housing, or small homes for rent.

As a result of this bias towards developers in policy making, and the dominance of the development industry in the public debate on housing, a consensus has developed that the planning system is simply too difficult, too costly and too complicated. It is an inefficiency that creates a drag on the system, holding back house building. Planning is not the solution to the housing crisis, it is the problem.

The assumption that seems to underlie government policy appears to be that there is a vast army of public spirited developers, fighting to build more and better homes for young families, defeated by an army of town hall bureaucrats, fuelled by the most pernicious force of all – NIMBYs.

The sentiment is summarised by one such heroic developer, Tony Pidgley, the Chairman of Berkeley Homes. Speaking to Engage Magazine he said – “Central Government, local authorities, the Mayor of London – they need to understand housing as a force for good, and reduce red tape to allow this happen. Planning should be debated, but needs to be viewed in the context of the housing crisis we’re in. We need more homes and they need to be affordable, so make the planning decisions quickly and let the housebuilders get cracking.”

Land use planning is a necessary part of any human society. No government could get rid of it entirely. Land use changes require a significant amount of investment and time, an economy which does not plan and control land use is headed for catastrophe. Imagine if we were to redesignate all of our agricultural land for housebuilding, just because the price of homes was more than the price of farms. We would quickly end up with a crash in house prices and no food.

But the drive on the part of government to satisfy developers has eviscerated the planning system, and enormous loopholes have been inserted into the system. Government encourages local authorities to be flexible to encourage development – which means waiving though development even if proposals fail to meet the requirements of development plans.

The biggest loophole in the system is the economic viability rule. This allows planners to drop any planning constraint if the developer persuades them that to meet it would render the development ‘economically unviable’. To make this case, developers employ armies of surveyors who all dutifully look at the books and grimly inform planners that their desire for a sustainable community is simply unaffordable.

This practice has had a devastating impact on the delivery of affordable housing. A recent study by Shelter found that 80% of planned affordable housing in 11 local authorities had been lost due to the viability rule.

And it is not just affordable housing which is being reduced by the viability loophole. At the Shell Centre, the developers argued that the only way to build a viable development was to build at super density – 30% of the new homes would have inadequate daylight, 40% inadequate sunlight. It didn’t matter though, because the vast majority of the new homes on the development would be sold before they were even built to offshore to buyers who would have little opportunity to see the light before they bought a home.

The planning system gives huge discretion to local authorities to adopt this flexibility – and there is little the local community can do to respond. Although developers have a right of appeal if their development proposal is turned down, the community has no right of appeal if a council goes against its own plan – short of going to the High Court, a process which is expensive and being made more difficult all the time.

Opportunities for neighbours to object to schemes have been closed down. In the London borough of Lambeth, developers are invited in to meet with the planning committee before a decision on their development application is made in so called ‘technical briefings’ which can last for several hours, members of the public are given just two minutes to put their objections forward on the night of the decision, after committee members have already made up their minds. Still, it could be worse, in Wandsworth, members of the public can’t come to the planning committee to object at all.

The speculators

Rather than unleash a new era of house building – all this flexibility in the planning system has encouraged is land speculation.
To understand land speculation we first need to understand that town planning is not just a form of land management, but that planning decisions have a fundamental impact on land value, and the distribution of wealth.

The price of land is linked to what can be produced from it. If someone wants to build a new car factory they will not pay more for the land to build the factory than they are able to make selling cars. The same goes for residential development. If developers cannot pay for the land from the profits they make from selling their homes, they will not pay for it.

This means that if a land owner was to buy land which under planning rules could only be used for farming, but persuades the planners to changes its designation to high value luxury housing, they could then sell on the land with the benefit of the new permission for a huge profit, and without any actual work taking place.

When a developer presents a development to a planning committee they are seeking to maximise the money they can make from their development. In London that will mean building highly expensive, tall buildings that can be sold off to wealthy offshore clients. In Surrey that might mean building yet another luxury golf course.

It will mean minimising or even eliminating the amount of affordable housing that must be provided on a development. It will mean cramming as many homes into as small a space as possible, regardless of the impact that will have on daylighting, open spaces, and other qualities which make homes desirable places to live.

Planning speculation feeds though into the land market. Developers seeking to buy land know that they will be able to get more money from their schemes if they manage to get a planning authority to drop planning conditions like affordable housing, building heights, and density guidelines. They can then make their bid to acquire the land more attractive by sharing part of this excess cash with the land owner by offering them a higher price for the land. Other developers know this too, and there quickly begins a race to the bottom.

The calculated gamble being made by all the developers is how far they can push the planners before they refuse a development proposal. For that, insider knowledge of the council is crucial, and developers frequently hire former council employees as planning consultants to help with this process.

From the land owner’s point of view, they will almost always accept the highest bid – meaning the bid which proposes the least sustainable development and is the least likely to gain planning permission. This can lead to years of conflict between land owners and local planning authorities.

Once the land is secured the dice are also loaded in favour of the developer. Planning permission lasts for three years normally, but once building work is started it is made permanent. What constitutes starting work can be as little as digging a trench on the site. This means that once permission is secured, a developer loses little in trying again, coming back with another proposal with even less affordable housing, even taller buildings or with even fewer amenities. And in a rising market, every year that they continue to try it on sees their land increase in value, giving little incentive for the developer to give in and get building.

Research done in 2016 showed that there were 475,000 homes with planning permission which had yet to be built. This was up by 25% over 5 years, precisely the time when government was seeking to free up developers by introducing more and more flexibility to the planning system. At the same time, it was estimated that house builders were sitting on land which could supply another 615,000 homes.

The demands on housing

Even if governments were to meet their housing targets, it would not solve the problem. To really deal with the crisis, we need to talk about the demand side of the equation.
Price is a function of both supply and demand. If supply increases, but the number of people demanding a home increases faster than supply, then prices will rise regardless. If supply doesn’t move, but demand drops, the price will drop too.

Demand is almost never discussed as a problem in the housing market because it seems to be generally accepted that little can be done about it. Demand is driven by population. The more people there are, the more people want to buy a home, and the greater competition there is for homes. Demand is just something we have to deal with.

The reality is that the demand for housing can be managed without any real harm being caused to the right of anyone to live in a decent home. That is because not all demand represents housing need.

Indeed, much of the excess demand in the housing market seems to be coming from the already wealthy and well housed. According to Professor Danny Dorling, in the UK, the homes of the rich have five times more rooms per person than lower income families.

Government policy seems to ignores this problem, it has punished those in social housing with an extra room with the so called ‘bedroom-tax’ – whilst the under occupation of privately owned homes is around 50%, and any attempts to tax larger homes (such as with the so-called mansion tax) are pilloried.

So we can increase housing supply, but how can be sure that the supply will go to the right people – people in real housing need? Well, we can pretty much guarantee it won’t.

The flood of offshore money

One huge injection of demand into the housing market has come from the explosion of wealthy foreign buyers into the London property market. These buyers have a lot of cash, and are willing to spend it.

The high price of oil, combined with deeply unequal social structures saw vast fortunes being accumulated in the Middle East and Russia. The huge economic growth of China has seen a rise of a wealthy middle class in the Far East with money to spend.

Inequality often comes hand in hand with political instability, incentivising many of these wealthy buyers to seek to export their cash, to hide it overseas. To these buyers a UK property represents a safe haven. A strong legal system guarantees that what is yours is yours. You can buy a home, forget about it and in 10 or 15 years your asset will still be there. That might not be the case with your home in Caracas.

These buyers are also not particularly sensitive to price. To a wealthy individual who lives in a country where the government might take 100% of your cash, putting it into an over inflated housing market doesn’t seem like such a bad idea. Yes, prices may decline in the future, but you will never lose it all. A home is a form of financial insurance, a way of protecting the family from the ravages of hyperinflation, state appropriation or state collapse. This phenomenon is precisely what led the former chief planner of the City of London to refer to new residential towers in London as gold bars in the sky. For this class of buyer London property has become a form of currency. At that point price becomes irrelevant because currencies are simply a store of wealth. The value is not in the use of the thing itself, but in the fact you might be able to exchange it for something else in the future.

Another attraction of property is financial secrecy. In the UK the land registry only records the name of the legal owner, not the beneficial owner of land. That legal owner could be an offshore company allowing the real owner to keep their name off the books and away from the prying eyes of the tax authorities and other government agencies who might be interested in where you got your cash from. Afterall, it is said that behind every great fortune lies a great crime.

The British Virgin Islands companies offer a particularly attractive option for the modern kleptocrat. BVI companies offer almost complete anonymity for the buyer as the owners of the company are not required to be disclosed under BVI law. Even better, if slightly more exotic, a Liberian bearer share corporation; a company where the names of the owners are not written down anywhere at all, and ownership of the company can be transferred simply by handing over a piece of paper. The Liberian Bearer Share Corporation was the favoured vehicle of the son of Nawaz Sharif, the former Prime Minister of Pakistan, when he aquired his home in London. That purchase was exposed in the Panama Papers, and after the family were unable to provide evidence of where they got their funds from, his father was removed from office.

The value of a system that allows people to keep their ownership of property secret was tested when the coalition government introduced the Annual Tax on Enveloped Dwellings. The tax put an annual charge on homes owned by offshore companies. The tax was expected to raise little money as it was thought that individuals would abandon their offshore ownership structures and register their properties in their own names. In the end the tax ended up raising 5 times more money than expected. The real owners of such homes were willing to eat the change and keep their secrecy.

It is not just oligarchs and kleptocrats who are buying up London property either. One factor in the increase on foreign buyers in London is the relative ease of getting a mortgage abroad. In Malaysia for example, you can get a mortgage for a property that has not yet been built, whereas you can’t in England. In London a bank will typically lend between 3 and 4 times an annual salary, in Singapore you can borrow ten times your annual salary. This increased borrowing power puts more cash in the hands of the Singaporean buyer, allowing them to outbid domestic house buyers.

The amount of money being pumped into the UK market, stoking demand is far from trivial. A report by Transparency International found that 36,342 properties in London were held by anonymous offshore companies. In Westminster this accounted for one in ten homes. In 2011 alone £3.8bn of property purchases in the UK were made by BVI companies.

And the trend is continuing to increase. A study from the University of York found that 17.9% of purchases of newbuild properties in London in 2016 were from non-resident owners, up from 10.5% in 2014.

Those figures, which look at the entire city, mask the intensity of offshore ownership in central London’s prime industry. During the public inquiry into the Shell Centre redevelopment, a leaked investor presentation I was given showed that in the Prime Central London Market 85% of buyers were from overseas.

The effect of this is that this offshore demand has soaked up new supply, restricting housing growth which might have eased some of the other pressures on the housing market. For all practical purposes these homes are never brought to market. They are sold to offshore investors before they are even built.

The area between Battersea Power Station and Lambeth bridge in London was designated an opportunity area by the previous Mayor Boris Johnson, a city centre redevelopment area where 16,000 new homes have been promised. Vast numbers of those homes have been bought by foreign buyers, before they were completed, often using offshore companies. Imagine if instead we had built a new town to provide homes to buy for workers in London.

The rentiers

The other group of people outbidding the young for homes is an older generation, seeking to secure their retirement though capturing the rents of the young. With safe, income-baring investments such as government bonds generating exceptionally low returns for a decade, many people have sought to secure an income through investing in property.

To get an idea of the incentives in the buy-to-let market – the average rent in London is £1,500 a month, or £18,000 a year. The average house price in London at that time was £456,000. That is an annual return of 4%.

However, if the buy-to-let investor was to borrow at say 3% to fund 50% of the sales price, then the investor would have to pay £6,840 a year in interest payments out of that 18,000 rent, but the return would be £11,160 on an investment of £228,000 – or an annual return of 5%. Increase the loan to value ratio to 90%, and the buyer gets a post-interest return of £5,688 on an investment of £45,600 – a return of 12.5%. That is before any appreciation in the value of the house, which would increase returns substantially. This is at a time when government bonds are yielding a return of close to 0%.

The practice of buying a home to rent it out to others, buy-to-let, has exploded in the UK over the last twenty years. Today, more people live in privately rented housing than social housing and 20% of all homes are owned by private landlords. This is an increase from 10% in 2001.

One important reason has been the expansion of credit. In 1996 banks were allowed to grant buy-to-let mortgages for the first time. This radically reduced the cost of borrowing for landlords as previously to buy a property to rent you would have to take out a commercial loan.

At its peak in the first quarter of 2016, more buy-to-let mortgages were being granted than mortgages to first time buyers. In total 21% of all mortgages were for buy-to-let. That figure has now decreased to just over 14%, but it remains a substantial component of the market.In addition to those who buy a home on borrowed money, there has been a substantial increase in cash buyers. Today over one in three homes that are bought and sold are paid for upfront, without borrowed money. For one bedroom flats, it is two in three. At the beginning of the 21st century the figure was closer to 10%. Many of these will be buy to let landlords who have built up savings, have recently cashed in their pension or are expanding their portfolio by remortgaging existing property. Some will be the offshore buyers talked about above.

The influx of buyers from offshore, and from buy-to-let landlords, has meant plenty of people with cash to spend and who can out-bid those traditional home buyers, people looking to buy a home to live in.

The birth of the new

So what needs to be done?

Before we can do anything, we must free ourselves from bad assumptions and base housing policy on some solid principals for radical action.
House builders do not always have our best interests at heart. The planning system can guide the delivery of new homes. We can control housing demand.
Government policy needs to focus on ending speculation in the land market. Rather than having a flexible planning system which leads to developers spending years arguing with planning authorities over what to build, developers should be handed a plan and told to get on with it.

If a developer refuses to develop land which has been granted planning permission for housing, then it should be taken off him, and the land given to someone who will, at a price which will allow them to build a decent amount of affordable housing.

Until now government has been very willing to use compulsory purchase powers to clear out council estates for their demolition. Only using these powers on the poor whilst letting the wealthy sit on empty development sites is cowardly.

Government needs to get back in the business of building homes. By building low-cost homes for rent the government can provide an alternative to the private rental market, and give it some much needed competition.

We need to make sure that buy-to-let is seen as more than just an investment opportunity – it is also a responsibility. Landlords who provide decent homes at a reasonable cost should be encouraged, but those who wish to abuse the desperation of their tenants need to be taken out of the market.

To do this there needs to be better regulation of the rental market, including the introduction of minimum space and maintenance standards for rental homes. Crucially if we want to prioritise home ownership over buy-to-let, then we should not be giving wealthier older people the same deal on finance than the young. One solution could be to cap the amount of lending for second home purchases.

Finally, we need to consider whether there is any value to selling off our housing stock to offshore investors. The UK is attractive to overseas investors because it has a deep idealogical commitment to keeping the door open to money from overseas. The irony of Brexit is that whilst so many complained about immigration and the arrival of foreign people, so deep is the commitment to unregulated capital markets that barely anyone complained about the much more serious foreign money flooding the market for UK homes.

The same can’t be said for the rest of the world. In Australia when Asian buyers started buying up property on mass, leading to an inflation in the housing market, the government intervened to restrict the purchase of homes to people who intended to live in Australia, closing the market to the kind of safe haven speculation that has become the hallmark of the UK property industry.

Finally, if we want to return to the old model of a housing market where housing is bought by people borrowing a sustainable level of money off the back of their income, then some people who have sought to profit off the crisis are going to get burnt – and we just need to accept that.

If we are going to have house prices that are affordable to people borrowing at three or four times their income, then house prices in many places are going to need to be cut in half.
People who bought into a rising market will lose out. Yes, that means offshore buyers might take a loss on their investment, and landowners who paid too much for land and then sat on it will go out of business. Few will cry for them.

But it also means that older people who bought a couple of homes to help fund their retirement will lose out too. Those people who could afford to buy, especially those who the government encouraged to buy though help to buy, will lose out.

There will no doubt be hard cases. Forced sales and fortunes lost. That is the reality of an asset bubble. What we need to do is to make sure that the worst impacts are mitigated.

There is no inevitability to the current housing crisis. There is no need for high prices, poor conditions and overcrowded homes – we can provide the housing we need for our communities. But to do so we need to prioritise the people who need a home most; the people who want to live in one.