As part of Resolution Foundation’s ongoing housing work, leading economist and Intergenerational Commission member Kate Barker and Housing market analyst Neal Hudson write about the impact that boosting housing supply could have on prices and wider housing costs. Link
Recent years have seen growing public and political recognition that there is a crisis in housing. This has led to a widening debate on the causes and potential solutions.
However, within this debate there has been little in the way of a consensus view of what constitutes the current housing crisis and what a “crisis-free” housing system might look like. There seems little clear idea of any measurable goal. The nearest we have as a target to aim at has been a series of aspirational numbers for new-build homes, with limited clarity on what to expect if we were to hit those numbers.
Clarity about what success would look like is essential. Without a framework for what we need and want from housing, our ability to understand and fix it appropriately will be compromised. A lack of clarity also increases the risk of unintended consequences from misguided policy interventions.
The current housing debate is “bedevilled by rival simplifications”. There are several quite often competing explanations for why we have a housing crisis. For many it is our failure to build homes at the same rate as projected household formation. This failure might be assigned to the planning system, the greenbelt, housebuilder business models, the land market, or NIMBYs. For others, the crisis is a result of falling interest rates, rising credit supply, low income growth, wealth and income inequality, tax incentives, or simply our fixation on house price growth. For some, there is no shortage of homes, rather a poor distribution. And for others there isn’t really a housing crisis.
Despite the apparent contradictions in this mix of positions, each of the arguments that support these various views may hold significant elements of truth. Housing is a complex and interconnected system within the economy and society. There is no simple single housing market. There are multiple markets defined by location, property type, tenure, and price. Therefore, there is no simple single housing crisis. Instead we have multiple overlapping issues affecting different parts of the country in different ways and to varying degrees.
There may be factors that influence all housing markets across the UK, indeed across much of the globe. There will be others that impact more locally and within specific housing sectors.
So, for instance, there is growing acceptance by many experts that the cost and availability of credit has been one of the biggest, if not the biggest, drivers of increases in national house prices over the last twenty years. But it is not the only factor. The growth in buy-to-let has contributed to the financialisation of housing, with homes increasingly thought of as an investment rather than a place for people to live. A lack of supply is predominantly an issue for London and its surrounds, but there are localised shortages elsewhere, particularly of specific types or tenure of homes. Planning (including a lack of) and the land market limit the responsiveness of supply to rising demand. Housing is unevenly distributed, mostly across generations but also spatially and within generations. Some areas don’t need a net increase in housing but desperately need existing poor-quality homes improved or replaced. In many areas the biggest issue is low (or negative) income growth and employment insecurity.
All these issues and others play a part in defining “the housing crisis”. Having a framework for what we need and want from housing, combined with an understanding of the complexities and interactions that run through the housing market, is essential to resolving the problems they create.
A misunderstanding of the complexities of housing can be found in one of the most frequently stated explanations for the crisis: a lack of new supply compared with household projections. Unfortunately, this argument is flawed. Household projections are not a measure of housing demand. The effective demand for new housing is determined by the number of people or companies willing and financially able to buy property. Meanwhile new supply only accounts for around 12% of total transactions and probably less of available homes for sale.
Importantly, even if some analysis may suggest there is no shortage of supply, that does not mean there is no need for new supply. Household projections are a statistical construct based on the past, not a direct measure of future housing demand. But they are still important if used appropriately within a framework for what we need and want from housing.
If we are more explicit about the role of household projections in measuring housing need and the assumptions they contain, then the supply versus household projections argument might be recast as a debate on changing household sizes and the consumption of housing (both in terms of space and multiple properties). This then implies that we should be clearer about the minimum acceptable amount of housing people need, while also accounting for what they want. Should younger people still expect to form households at the same rate and size as their parents? The assumptions and projections around future household sizes should be moved from the background, where they are typically only discussed by planners and researchers, to the centre of the debate.
They should be just one part of a framework for success that explicitly states what we need and want from housing (not just in terms of size but also cost, tenure, quality, security, and location) and better defines the minimum we are prepared to accept. That will provide a clearer understanding of where housing is failing to meet those requirements and help set objectives for how to fix it. These could then be applied appropriately across different markets.
If measurement against the framework shows that households are not able to form at an appropriate rate and size relative to what they need, then we probably need to increase supply while possibly encouraging older households to move out of larger homes. If rents are too expensive then we may need to reform the rental sectors and increase supply. If housing quality is poor, then we need to work harder at improving and replacing existing stock. If many areas are struggling due to low (or negative) income growth and employment insecurity, then we probably need to look beyond just housing. It might even question whether we need to rebalance the economy and infrastructure investment away from London and its commuter zone.
Having a framework for success may even highlight which issues we can fix and which we can’t. For example, it looks likely that we are stuck with a low interest rate and hence high house price to income market. Under those conditions, prospective first-time buyers will continue to struggle to raise a deposit and access home-ownership irrespective of how much new supply can be realistically delivered. Rather than trying to return to the relatively short-lived 20th century ideal of mass home-ownership, perhaps we should be focussing our efforts on making renting cheaper, higher quality, and more secure as a long-term home. Increasing new supply would be an important tool in achieving that outcome.
When we have a framework for what success could look like, our ability to understand and fix housing appropriately will be dramatically improved. It would be an important step towards making housing available, affordable, and appropriate for everyone that needs it. It would also be more useful than simply setting a nice round number national target for new homes.
We may be getting better at building more houses but unfortunately we’re not very good at counting them.
Last week the housing minister was citing the latest DCLG New Build statistics as proof that the country is building again. Completions across England had apparently reached 153,000 in the year to June 2017, ‘the highest level since 2008’. On this basis, the minister may be pleasantly surprised and slightly confused when he reads the DCLG’s Net Supply release in November and finds out that housebuilding completions had already reached 155,000 in 2014/15 and are actually much higher .
The housing minister can perhaps be forgiven some excitement over the first release of housebuilding statistics during his tenure. Based on the average tenure of previous housing ministers, he’s probably only got another three or four to look forward to. However, despite some allowance for over-excitement, it is irresponsible for the housing minister to be quoting the New Build statistics as absolute measures of housebuilding as they under-count the number of new homes actually being built.
It is particularly irresponsible because DCLG are well aware that there are issues with the New Build statistics. In the introduction to their New Build statistical release they suggest the New Build figures should only be ‘regarded as a leading indicator of overall housing supply’ and instead the Net Supply release ‘is the primary and most comprehensive measure of housing supply’.
The scale of the under-count is apparent when comparing the New Build data to the more comprehensive Net Supply release. While the Net Supply release includes conversions, changes of use, and demolitions to calculate the net change in dwellings, it also includes a more comprehensive measure of housebuilding.
The latest available Net Supply data for 2015/16 recorded 164,000 housebuilding completions across England compared to only 140,000 completions recorded in the New Build data. That suggests the New Build release is currently missing around 15% of the housebuilding market.
Beyond the widespread confusion created by the publication of different housebuilding numbers, this issue has important consequences for policy makers. Our failure to accurately measure housebuilding and our limited understanding of who is doing the building make it very difficult to accurately assess the success or failure of existing policies and identify new ones that could increase new supply.
The exact reasons for the under-count are not confirmed but it appears to be linked to the falling market share of the largest provider of warranties on new homes. NHBC provide a substantial share of the data used to create the New Build statistics and it’s been widely assumed that they have a market share of around 80%. Based on an assumed market share, the NHBC data is grossed up to provide a measure for the whole market alongside other sources of building control inspection data.
However, recent years have seen a broader range of groups delivering new homes. Volume housebuilders still deliver the majority of new homes but there has been an increase in activity by SME housebuilders, high-density luxury developers, build-to-rent investors, and housing associations. For some of the firms and organisations in these groups, an NHBC warranty may be too expensive or not attractive compared to the alternatives. NHBC’s market share has probably fallen over this period.
A fall in NHBC’s market share is apparently confirmed by the request for a review of its market undertakings from the Competition & Markets Authority (CMA). Although most of the market share data published by the NHBC and the CMA in the review is confidential, there is an interesting finding in the CMA’s provisional decision (paragraph 4.32). Using new home data from nine warranty providers including NHBC, the CMA estimated the NHBC market share at around 70% .
If, instead of grossing up the NHBC data by 80% market share, we use 70% then we would expect the DCLG New Supply data to be around 14% higher (0.8/0.7). That difference would account for nearly all of the shortfall in the New Build completions when compared to the Net Supply housebuilding data. While there may be other factors causing the under-count, it would appear that this market share issue is the most significant factor.
It would be great if we had an accurate and regularly updated measure of housebuilding but it turns out that counting houses is actually quite difficult. The Net Supply data is far from perfect and it’s only released once a year with a substantial delay but it’s the best we currently have. Meanwhile, in Ireland they’ve had the opposite problem with an over-count of new homes. Official completions data uses electricity connections but it turned out that the actual number of new build completions between 2011 and 2015 was 42% lower than the official figures due to a large number of re-connections.
Until we see a substantial re-working of the DCLG’s New Build statistics, it appears the best option is to assess the full range of available indicators that cover both housebuilding and total supply. However, perhaps the biggest frustration is that DCLG are aware of the issues with the New Build statistics yet we still see quarterly political point scoring based on these flawed data. Given the complexities of the housing market, it is only once we move past this short-term politicking that we have any hope of solving the crisis.
Dan Cookson has made an interactive version of the map…
The Housing White Paper is expected this week and although it has been delayed, the leaks and briefings give me some hope that it may have been worth the wait. Perhaps most importantly there are clear signs that the government will look beyond home-ownership. This would mark a significant change from Cameron/Osborne housing policy where increasing home-ownership was the priority. This blog is a quick look back at what was driving the Cameron/Osborne focus on home-ownership.
Many were surprised by the government’s focus on housing immediately following the 2015 general election. However, polling by Ipsos MORI shows that housing had risen up the rankings of ‘Most Important Issues Facing Britain’ in the run up to the general election* and it became a ‘Top 5’ issue in the months following the election. Housing was now a political priority but also a political opportunity.
A Crisis of Home-Ownership
As I wrote in July 2015 (Savills Housing Note PDF), the government’s approach to housing was best viewed as trying to solve a crisis in home-ownership. Social housing and private renting took a back seat as the government prioritised home-ownership. This would appear to be exactly what the public want. Surveys continue to show a majority preference for home-ownership in the UK.Tackling housing with a focus on home-ownership was also a political opportunity. Home-owners are more likely to vote Conservative. Helping younger households access home-ownership could create a substantial political dividend in future general elections.
However, it would appear that the Cameron/Osborne government took that logic a step further. Nick Clegg is reported as saying that they treated housing as a ‘petri dish’ for growing voters while social renting was disliked as ‘it just creates Labour voters’. Pay-to-stay, high value council house sales, and expanded right-to-buy looked set to reduce the size of the social housing sector. Affordable housing delivery fell to ’embarrassing’ levels. Home-owner policies like Starter Homes were expanded and looked set to replace the majority of remaining affordable housing delivery.
A More Balanced Approach
That all changed with the vote to leave the EU. The government’s new approach to housing appears to be more balanced and considered. I’m tentatively hopeful that the White Paper will continue in this direction.
It is inevitable that home-ownership will remain the priority given the current demographic, economic, and housing market profile. Although an over-simplification given the electoral system, an approximate breakdown of voters and non voters by housing tenure shows that winning over home-owners is essential for any political party looking to govern.Although home-ownership will be the priority, the current government appears more focused on increasing overall housing delivery rather than any individual tenure. Polling in 2010 on what tenure of new housing people thought was needed in their local area (rather than what tenure they want) suggested that many are open to range of tenures. The one exception is new private rented homes. This could be a challenge for the build-to-rent sector but may reflect the reputation of buy-to-let landlords rather than the tenure itself.
More recent polling suggests that people are more supportive of new housing development than in the above 2010 based analysis. Even so, local opposition to new housing where it is needed most will still be a challenge. Hopefully the White Paper will offer some solutions to this challenge and others. If not, it will at least provide something for local politicians to blame when planning permission is granted at appeal. *it’s interesting to note the temporary decline in housing’s importance in the months following the launch of Labour’s Lyons Housing Review (which I worked on while on secondment to L&G).
Update 7:11am 6/2: here’s a version of the earlier chart that looks at all potential voters rather than just registered voters.
Every month HM Land Registry publish the latest release of registered sales in their very useful price paid data. With only a month delay, it is tempting to use this data to understand what has happened to transactions in the recent past. However, there can be a time lag in when a sale is registered and this lag can cause misunderstandings.
For example, the chart below shows the latest data for sales registered in December 2016. Only 35% of the sales registered during December actually took place in December. 39% of registered sales took place in November, 8% in October, and 0.2% between 1995 and 2015. This lag in when sales are registered can cause issues when trying to identify recent trends in housing transaction levels. The chart below shows how the total transaction count for recent months changes substantially with each new release of registrations. For example, the first release of sales during October 2016 only contained 39% of the sales now contained within the latest December release. It’s for this reason that the sales data available from the official house price index is two months behind the house price series.This Land Registry Lag can be found across all geographies and price bands. Last year there were a number of press stories about falling sales at the top end of the London market. Unfortunately, some of the analysis behind these articles failed to factor in the lag effect. Although there’s been a significant fall in transactions compared to last year, the trend in sales of £1m+ properties since April 2016 has been broadly flat once the lag effect is considered.
Notes: I have used both the standard and additional price paid data for this analysis so as to include all transactions. The Land Registry definitions are:
- Standard Price Paid includes single residential property sold for full market value
- Additional Price Paid entry including transfers under a power of sale/repossessions, buy-to-lets (where they can be identified by a Mortgage) and transfers to non-private individuals.
The longer-term difference between the HMRC and Land Registry transaction counts in the second chart may be explained by these additional exclusion categories
Foreign buyers of new build homes are a popular focus of blame for the London housing crisis*. Last year, the Mayor of London launched an inquiry into the issue. This should help answer some of the outstanding questions, particularly around occupancy and whether foreign buyers help get more homes built.
However, my biggest concern is the scale, cost, and currency of overseas mortgage debt secured against new build homes, particularly by Asian buyers.
A significant proportion of new build sales since the credit crunch have been to Asian buyers. A Savills report from 2013 suggests they accounted for around 45% of new build sales and were particularly active in the £700-£2,000 per sq. ft. market (see Graph 4). Unfortunately most agents have stopped reporting information on overseas buyers in recent years.
These Asian buyers are welcomed by developers as they are prepared to buy off-plan years before completion, something most mortgage dependent domestic buyers can not do. For many developers, selling a large proportion (50%+) of units off-plan is essential to unlock the finance needed to start construction. Since the recession, sales trips to major Asian cities have become the norm for any new major London residential development.
What appears to have not been questioned is where the money for these purchases was coming from. Most commentators simply pointed to the growing middle classes and wealth generated in Asia. The limited statistics available suggested the buyers were cash only as no UK mortgage was required.
However, anecdotal evidence suggests that many of these buyers have been using local mortgages to fund their purchases. The limited evidence I have suggests that around half of Hong Kong and Singaporean buyers use a local mortgage while the majority of mainland Chinese buyers use one**.
A quick check of Asian lenders (UOB, DBS, OCBC, Maybank, CIMB) suggests that the borrowing terms available are broadly similar to those for actual UK first time buyers in London. The main difference is that the mortgage rate tends to be slightly higher (London Home Loan comparison) and local lenders allow borrowers to have far higher debt multiples. For example, Singaporeans are now limited to only spending 60% of their gross income on total debt repayments.
It is the cost of servicing their debt that is my biggest concern. Average rental yields in the areas of London with high new build supply suggest that many mortgaged buyers may have just been covering their repayments from their net rent. Indeed, some of those buyers with higher loan-to-value mortgages (e.g. 75%) may have needed to supplement their rental income to cover their costs. This would suggest the buyers were focused on capital appreciation.
The depreciation of the pound since the EU referendum has added further risks. An unknown proportion of buyers have local currency mortgages (the best information I’ve got is from this interesting article). It would appear that some owners will now be covering the shortfall in their local currency repayments thanks to much lower rental income.
That raises the question of why we haven’t seen more signs of stress. The biggest unknown is the scale of the issue. I haven’t found any data on the value or volume of overseas lending in London. In theory, these mortgages should be identifiable as first charges on the Land Registry property record but unfortunately this information is not freely available.
This could possibly just be a minor issue. In the context of the whole London housing market, these new build markets are fairly small. However, the danger is that any risks are highly concentrated in both geography and price. This is particularly a risk as many of those schemes sold off-plan back in 2012-14 should now be nearing completion. After years of strong sales and starts, completions are rising (see Figure 3). Meanwhile London house prices are slowing or falling. Those off-plan buyers will now be approaching the point where they have to decide whether to put up the cash or walk away from their deposit.
Another possible explanation for why we haven’t seen more stress is that owners are being bailed out by the higher rental yields achievable on short term lets. Last year I visited a development in Nine Elms and the lobby felt more like a hotel than a residential block. There were significant numbers of people appearing to pick up and drop off keys with suitcases in tow.
*This House of Commons Briefing Paper is a useful summary of the concerns and counter-arguments.
**Mainland Chinese buyers appear to be buying with very high loan-to-values and mortgage rates, to the extent that they are almost definitely subsidising their overseas purchase. That may just be the cost of getting money out of the country.