Published: 2 December 2014 | Author: Bernard Clarke
It is now more than a decade since economist Kate Barker, then a member of the Bank of England’s monetary policy committee, published her seminal Review of UK Housing Supply.
Looking back on that work in her newly-published book, Housing: Where’s the Plan?, she says that its key contention – that the UK needed to build homes at a faster rate – was "controversial at the time but has since become widely accepted." In 2003, the year her review of housing supply appeared, there were more than 200,000 housing starts in the UK. Last year, there were fewer than 160,000.
Post-war UK housing construction rates have fluctuated widely. In the 1960s, when the population was growing more slowly than it is today, annual housing construction regularly topped 300,000 and occasionally 400,000 units. But last year’s modest total actually represented a recovery from a low point of fewer 120,000 in 2008-09.
In her new book, Kate Barker widens the focus of her analysis from the supply of housing to encompass demand, funding, planning and government policy, which has not always produced the desired outcome. She does so in a concise and compelling style, setting out her analysis and her views on the way forward in fewer than 100 cogently written pages.
The shortage of housing supply stems partly from planning constraints, but attempts to improve the system have all too often, she argues, added complication and delay, and widened the scope for opposition to development. She implicitly criticises the localism agenda, but does not want a return to the earlier regional planning system. She does, however, argue for stronger direction for planning across local authority boundaries.
Housing – or open space?
Kate Barker puts the case for a more explicit comparison of the benefits of meeting housing demand with the merits of keeping land open, including the Green Belt. But she also argues that financial considerations are not the only ones that matter. New development has "psychological effects," and people value the special features of a place.
It is not only planning regulations that have caused a shortage of housing supply. Construction rates collapsed in 2008-09 and are only capable of recovering slowly from the shake-out of smaller developers and loss of skills. As a result, getting back to the construction levels of a decade ago – when the UK did manage to build around 220,000 homes a year – is likely take a number of years.
The long-running under-supply has, of course, helped to push up property prices. But she argues that the weakness of housing supply actually turned out to be a source of stability in the aftermath of the financial crisis and, along with the prevalence of short-term mortgages, helped ensure that we did not see a bigger housing market shake-out.
Turning to the issue of housing demand, Kate Barker criticises politicians for implementing short-term policies in support of the popular desire for home-ownership. She argues that this is not the best way to use taxpayer’s money in the housing market. Policy has polarized the outcomes between those who are adequately housed and those "trying to gain access to the system."
She acknowledges that people view houses both as a place to live and an investment, and argues that investing in property is rational, particularly as a means of meeting the costs of shelter in old age. The shortage of supply, of course, reinforces investment by pushing up prices. That further incentivises home-ownership – but also widens the gap between those in owner-occupation and those aspiring to it. Meanwhile, investing in an individual house is risky, so:
"the government should set out clearly how much taxpayer support can be expected for those who fall into mortgage arrears, and it should encourage better mortgage payment insurance. More equity finance of home-buying would be welcome, but private initiatives would be preferable to the current government scheme."
Regulation – and taxation
Kate Barker argues that the Bank of England’s new regulatory powers should help avoid future instability, but that the UK remains vulnerable to external shocks. With house prices rising relative to incomes, the household debt/income ratio will rise – and risks associated with this need to be carefully managed.
Mortgage market regulation is primarily aimed at protecting consumers and promoting financial stability, but may also help reduce volatility in the housing market. Such volatility has its own costs in terms of disruption to the supply chain of construction skills and materials, and the impact on small and medium-sized developers.
One of the flaws of the planning system is that it delivers ‘sky high’ benefits to developers. Taxation could help deliver a fairer outcome, yet may introduce complexity, and unintended outcomes. Taxing the benefits of development is difficult because construction sites are themselves different, developers might be tempted to hold back for a more favourable future tax regime, and setting taxes too high could lead to a reduction in the quality of development.
Kate Barker is also concerned about the potential for reforms – and in particular tax reforms – to have adverse effects on existing borrowers and home-owners. Despite that, however, she is sympathetic to the idea of introducing capital gains tax for an owner’s main residence, which might be made easier for voters to accept if payments were rolled up over a lifetime. The dilemma is that taxing capital gains on homes looks to be politically unacceptable, yet without it she believes it will be difficult to deliver fairer outcomes.
Even without capital gains tax on an individual’s main residence, the tax take on UK housing is already high at over 4% of gross domestic product, compared to an average of under 2% in countries that are members of the Organisation for Economic Co-operation and Development. More generally, she recommends a comprehensive range of reforms to the taxation of housing, including:
- an end of ‘slab’ structure of stamp duty;
- the introduction of higher bands of council tax, and an end to the discount for single occupancy;
- the removal of VAT from major household renovations and extensions; and
- the closure of loopholes through which buy-to-let landlords are able to reduce payments of capital gains tax.
Kate Barker sets out a compelling analysis of the problems associated with the UK housing market. Fundamentally, she sees a need for long-term reforms to improve housing supply and encourage development, and a different set of measures to deal with cyclical issues like the management of lending, forbearance, reform of stamp duty and mortgage rescue schemes.
She concludes by setting out an holistic approach for delivering the solutions:
"From time to time there have been ministerial committees with a housing policy focus. Such a group, which would now include the governor of the Bank of England and the chief executive of the Financial Conduct Authority, ought to have permanent existence and some supporting structure.
"Since many of the risks and opportunities in housing ultimately have large implications for public finance, the chancellor of the exchequer would be a natural chair for such a committee. In addition, the ministerial committee should be offered independent public advice by a group of experts in order to ensure that the tensions between the overall goals and the desires…are played out explicitly."
Whether or not readers agree with her analysis of all the problems, she is surely correct on the need for concerted and co-ordinated action to deliver the solutions.
Housing: Where’s the Plan? by Kate Barker is published by the London Publishing Partnership (http://londonpublishingpartnership.co.uk/)