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Housing supply: the other side of the coin

News

Published: 8 October 2013 | Author: Bernard Clarke

"Housing is a basic human need, which is fundamental to our economic and social well-being. Yet housing provision is often controversial and provokes strong reactions…A weak supply of housing contributes to macroeconomic instability and hinders labour market flexibility, constraining economic growth."

Those words are perhaps even more relevant today than when they were written almost a decade ago by Kate Barker in the Final Report and Recommendations of her Review of Housing Supply. They are a salutary reminder that the supply of homes – and not just the supply of mortgages – is crucial in solving the UK’s long-running housing problems. In this article, we examine the crucial part that the supply of homes must play in achieving a health housing market for the future.

Trends in housing supply

In the period since Kate Barker’s review was published in 2004, the challenges for policymakers have become more acute, with an inadequate number of housing starts and completions depleted even further as a result of the financial crisis. 

When the government published Laying the Foundations: A housing strategy for England in 2011, it estimated that the number of households was growing at a rate of 232,000 a year. Chart One shows, however, that housing construction has consistently failed to keep up with need. After hovering at around 180,000 housing starts a year between 2004 and 2008, the number of new starts plunged to a post-war low in 2009 before recovering more recently to an annual total of around 110,000. 

Critically, there has been no year in the last decade or more in which the rate of construction has met the estimated growth in demand – in the face of huge challenge, we have not met the targets.

Chart One: House-building trends in starts and completions, England, 12 month rolling totals

Chart One House-building trends in starts and completions England12 month rolling totals

Source: DCLG

The shortage of housing supply has helped to drive up prices. Kate Barker estimated that the "weak response of housing supply to demand changes" meant that over the last 30 years real house price growth in the UK had been 2.4 per cent, considerably higher than the European average of 1.1 per cent. She concluded:

"There are issues around the relationship between the private sector as the main deliverer of housing and government’s objectives, which may not always accord with market pressures. There are no easy answers and no disguising that the choices we face are difficult."

The planning and construction conundrum

House-builders continue to point out that the number of planning approvals for new homes is rising, and argue that this provides an early indicator of the construction industry’s potential to increase housing supply. 

The Home Builders Federation’s latest Housing Pipeline report, published in September, said there were almost 78,000 permissions granted in the first six months of the year, a 26% year-on-year increase. But it accepted that the figure was “still well short” of what was needed to meet demand. 

The HBF argued that an increase in the number of permissions since 2011 was "a strong forward indicator of future levels of home-building." However, it remained concerned over conditions attached to many planning consents that the HBF believes are preventing construction work from starting. It said that pre-commencement conditions – those that had to be met before work could start – sometimes totalled more than 100 items and were becoming more numerous and more onerous. They could cause considerable costly delays, and sometimes took years after permission had been granted to meet satisfactorily.

A spokesman for the HBF has said that big developers were committed to increasing supply, but were also warning that skills shortages and other supply chain constraints would affect the ability to increase capacity. The planning system needed to respond, and developers needed access to land as they completed existing sites. Regulatory costs and requirements set by local authorities needed to be managed for there to be a sustainable increase in supply.

Not in my back yard?

Recent rates of construction are much lower than for much of the post-war period. For much of the period between 1950 and 1980, the number of building starts exceeded more than 300,000 a year and, during the 1960s, the total nudged closer to – and in some years even exceeded – 400,000 annually.

But raising housing numbers is only part of the story. It also matters where houses are located and how much space they have. The latest data from the DCLG shows the uneven nature of housing construction across the country. The highest rates of completions were in a band to the north of the London green belt, as well as in Gloucestershire, Wiltshire, Somerset and Hampshire. But construction rates were low in north Lancashire, north Yorkshire and around Birmingham. Even some areas where demand for housing is strong, including parts of London, Oxford and Surrey, experienced some of largest falls in house-building starts.

The last 20 years or so has also seen a sharp decline in the number of publicly-built homes. In the two decades from 1955 onward, almost 150,000 homes were constructed annually by local authorities, nearly matching the rate of construction in the private sector. Since 2010, however, the number of homes built in the public sector has averaged only around 25,000 annually, or around 20% of the total.

In recent years, there has also been a significant increase in the construction of flats, which accounted for half of completions in 2008/09. Although a post-war reduction in average household size – and an increase in the number of people living on their own – has encouraged the provision of more flats, construction rates were also driven by planning restrictions.  In 2008, flats accounted for 19% of England’s housing stock, and their rate of construction had declined to just over 30% of completions by 2012/13.

Political views

Recent pronouncements from each of the main political parties show an awareness of the problems caused by a shortage of provision of housing.

In a speech to the conference of the Chartered Institute of Housing in June, the former housing minister, Mark Prisk, acknowledged that construction rates were failing to keep up with the predicted 230,000 a year growth in the number of households. Part of his solution for filling the shortfall included removing planning constraints and unlocking construction sites, partly through the construction of infrastructure and community facilities. The minister also wants to make more public land available for housing construction and expand the Affordable Homes programme. 

At the Labour Party's recent annual conference, there was a pledge to increase the rate of construction to 200,000 homes a year by 2020. The party also highlighted an initiative under which cities would be allowed to expand beyond their boundaries, with councils able to demand that neighbouring authorities co-operate and drop opposition to new developments. The party also pledged to introduce a "use it or lose it" principle, under which councils would be allowed to buy back or charge developers for failing to build on land with planning permission.

Meanwhile, at the Liberal Democrats' conference, there were pledges to bring 250,000 empty homes back into use with a grant and cheap loan scheme, and introduce a new planning class for second homes that would give communities and councils control over the number of homes given over to holiday-makers.

Conclusion

Over the last three decades or so, the UK has had a deteriorating record in delivering an adequate housing supply, exacerbated by problems in building homes of the right size and in the right numbers, location and tenure. Blame for a worsening problem extends across the policy-making agenda, and there is a need for a cogent, coherent, long-term strategy that rises above party politics.

Blame for the problems caused by the UK’s poor and deteriorating housing supply has also tended to oscillate between planners, developers, the government and lenders. Developers continue to highlight supply-side constraints, including those emerging from the planning system. They do, however, acknowledge an upward trend in the number of consents, and all the big developers are committing to increase supply.

The construction sector also sees the equity loan part of the Help to Buy scheme as a success story, with more than 15,000 reservations in first six months. In implementing the Help to Buy initiative, the government has sought to address the issue of the availability of higher loan-to-value mortgages, and the scheme clearly has the potential to encourage sales and therefore additional new construction.

Problems have been exacerbated by the lack of public housing provision and the increased dependence on private sector construction. Some constraints are caused by the vagaries of different national and local planning regimes, and we need a clearer understanding of demand for, and supply of, housing in different locations. There are also problem caused by lags in planning and the construction sector. 

In the aftermath of the credit crunch, the shortage of mortgage funding contributed to the UK’s housing problems. More recently, the supply of mortgage finance has improved and, going forward, the lending industry needs to consider more fully how funding issues interact with some of the more formidable supply-side constraints

Fundamentally, there is a need for everyone to acknowledge the sheer scale of the challenge. The annual supply of new housing currently adds considerably less than 1% to the housing stock – so even measures with the potential to increase new supply significantly can have only a very small impact in the short term on housing need and costs.