The "housing market collapse" fear is an excuse to avoid planning for housing production

Housing market collapse in Britain has often been threatened by those who remember the credit boom at the end of the 1980s, the "negative equity", repossessions, economic recession, and the slump in construction of the early 1990s. No-one wants a repeat of that bitter experience. It was an awful time, as I remember.

The widely expected collapse of the present housing market that dates from the late 1990s has not materialized, even though property prices have become unaffordable to most people on ordinary incomes. The reason is that in the late 1980s the property market boomed mostly on credit, whereas today there is about £4 trillion of privately owned housing, variously involving £1 trillion of mortgage borrowings, leaving £3 trillion of "equity". The older generations obviously tending to be less burdened with debt than the younger.

Today it is the shortage of housing for a growing population that supports the residential property market, which being a market managed by planning restrictions on where and what people can build, has proven attractive to speculative investors. In 2007, the historic failure to build enough housing and the last decade of property speculation are hard to disentangle. But we can get a sense of the societal need for house building beneath the popular pursuit of speculative fortunes.

£4 trillion is roughly the valuation on the 70% of privately owned homes in Britain. As a crude calculation that would mean that the total of all British households, or about 26 million, are living in property worth about £5.7 trillion. That averages at £219,000 per home. A preposterous average that appears to reflect the current market, and a figure that is set to increase faster than wages are rising.

Let us assume an average 75m2 British home, and a construction cost of £1,200/m2, which is a generous average when ordinary high rise flats can cost up to £1,600/m2 and modest low rise houses often cost as little as £800/m2. To replace all of Britain's housing would require 26 million homes, each one costing an average £90,000 to build, plus the cost of utilities and infrastructure, land, and professional fees with expenses. Let us assume £10,000 per home for utilities and infrastructure, and the total development value would be £2.6 trillion.

Assume too an average build density of 30 homes a hectare, and, accepting the vast range of value in location, assume an average land price of £1.5 million a hectare. That adds £1.3 trillion in the cost of land, priced at an average £50,000 per plot, which is a low figure at current rates. But vastly higher than agricultural values for land that is neither the Best and Most Valued (BMV) farmland, nor ever likely to get planning approval for development in the foreseeable future.

If professional fees with expenses were 10% of the development cost, or £10,000 per home, then another £260 billion would be expended in the full replacement of all British housing stock.

That totals £4.16 trillion to replace the entirety of the British stock, which is currently valued at about £5.7 trillion. If reasonable as an assumption, that might suggest the value of British housing was about 27% over valued. The difference of £1.54 trillion could largely be the premium on prime locations, which then suggests very little over-valuation. Mayfair will not become Hackney overnight. Allowing for pent up housing demand the numbers of homes should be higher, but even if 30 million homes were built afresh that might reasonably cost £4.8 trillion.

Of course Britain is never going to replace the entire housing stock tomorrow. That is impossible. However, to build 26 or 30 million homes at the current rate of 200,000 per annum would take 130 and 150 years respectively. In which time the population will have grown, and household numbers will have increased - possibly faster if households continue to shrink in size. At present household numbers want to increase faster than the 200,000 homes built annually.

If housing production were planned to meet household formation, and additionally aimed to replace 1% of the existing housing stock annually, Britain would need to be building 500,000 homes a year. That is a remote possibility. Unfortunately no such policy ambition exists.

It may be argued that Britain's housing is not as good as new, and should not be valued as such. That is an excellent argument. Britain's existing housing is not good, or large. However there is no desire to account for housing as a depreciating asset being consumed. It is safe to assume that people will continue to make do with dilapidated and ageing homes, mostly valued as though they were within a few simple but laborious repairs of almost being "as new". Combined with the absence of any plan to produce housing to meet household demand and replace the existing stock, that abject acceptance of housing quality and size ensures the property market is unlikely to collapse unless some other factors intervene. The great unknowns exercising the Treasury:

1 Most of the British population is now into property speculation, alongside the professionals. Speculators might see better places than housing to invest in, and pull out of the residential property market, flooding the market with homes for sale. An alternative to this would be that speculators feared a collapse, and pulled out to precipitate the thing they feared. But that might be a temporary panic.

2 The Treasury and the Bank of England might not be able to keep interest rates down, and as a result those trying to pay for the £1 trillion of mortgage debt find it harder to keep up the payments. Repossessions ensue, and too many forced sales with too few new buyers could undermine the property market. On the other hand that might be a bonanza for speculators, who buy up more housing for rent.

3 The affordability gap will widen if house price inflation continues to outstrip the rate of wage increases, and particularly for those on the lowest wages. A downturn in the fortunes of the British economy due to global factors might bring household incomes under severe strain. People will have to look more to the private and public rental sectors. That will better suit speculators, since registered social landlords are already over-subscribed, and simply don't act fast enough to step into the speculative market. RSLs tinker with equity share schemes, often to offset financial risks onto their tenants, but may find that those schemes can turn rotten fast if their tenants get caught in the trap. Perversely too, while RSLs have turned to speculation, and want their tenants to do the same, the speculative house builders are forced to build "affordable" housing as a condition for being granted planning approval to build any of the less-affordable housing that sells well.

A downturn in the fortunes of the British economy due to global factors might precipitate all three scenarios above. But in all three cases much depends on what speculators do - amateur and professional alike.

Whether we build 200,000 or 500,000 homes a year will neither sustain nor collapse the property market. If speculators pull out, or fail to soak up the housing stock to grow the private rental sector when more people can't afford mortgages themselves, a deeper collapse is possible. The market could temporarily overshoot in any correction, so that homes were worth less than their replacement cost.

If that were to happen, the impact would be terrible. The undersupply of new and replacement housing would be expressed differently. Undersupply would not manifest as rising prices, with households vying to secure the available accommodation through their weekly or monthly incomes, while putting up with what they hope will be temporary overcrowding. On the contrary, the over-mortgaged homeowners would see their "asset" lose much of its value just as the economy was slumping, and many of them were losing their jobs and incomes. Mortgage defaults would rise. The undersupply of homes would lead to homelessness and greater overcrowding, alongside a growing number of empty properties that can't be sold to recoup debts.

The really depressing thought is that trillions of pounds have been invested in the housing market without leading to any marked increase in housing supply. If that investment lost value in a market collapse what would have happened? We would have let a once-in-a-generation opportunity to address the problem of housing production pass through our fingers. We would have been worrying about property market collapse, which we cannot control, without doing the one thing we are capable of doing - building homes to live in.

Anyone more interested in having an excellent home to live in now, rather than a worn out and diminutive antique to sell at some future date, knows where priorities should lie. But even a modest campaign to reduce the unnecessary inflation in the speculative British housing market should be planning to increase housing production from 200,000 to 500,000 in the next decade.

That growth in productive capacity takes time and effort, and will be particularly slow and difficult in de-industrialised twenty-first century Britain, more interested in mortage lending than in building new homes to lend against. It took 22 years to raise post-war housing production from 55,400 in 1946 to 413,000 in 1968. Then housing production fell to below 200,000 by 1990 over another 22 years, when planning for production went out of political favour and "home improvement" became the vogue. In the last 17 years production fell to just over 160,000, and is almost back up to the 1990 level of annual output.

If the decision was ever made to get up to 500,000 homes per annum in Britain, it would take a while for the construction industry to rise to that challenge. It would take time to ease the unnecessary inflation in the property market by that means, and housing production is no simple economic instrument with which to tackle house price inflation in the way Kate Barker imagined. More than doubling housing output would not collapse a property market that is far more affected by other imponderables, all well beyond the ability of any government to control.

The alternative to building 500,000 homes a year, or more, is to fail to build more and better homes for people to live in, and still the property market collapses.

Talk of the market collapsing is an excuse to avoid the responsibility to build. British politicians should be ensuring that industry produces enough homes for a growing population to live in. There should be a longer term commitment to housing production; a plan that ignores the ups and downs of a speculative market. Markets never go in a straight line. But to build half a million homes every year takes some degree of certainty, and the most certain thing of all is that housing needs land.

A vastly increased supply of developable land is the only serious option, and we don't need to touch the BMV farmland. We could build on the vast amount of cheaper space doing nothing. To build more homes better and faster in Britain in 2007 it seems to me there are two options, both requiring stronger Building Control, land for development, and strategic planning by central government:

A Dismantle the 1947 Town and Country Planning system, so that freeholders can buy and sell development land, leaving people free to build or not build, requiring government to strategically plan infrastructure through Acts of Parliament, and to operate a separate Building Control system. That requires government to end the denial of development rights, and end the urban containment policy of the last 60 years.

B Retain the 1947 Town and Country Planning system, so that the State reallocates development rights to freeholders through a locally democratic planning approvals process, but one more productively related to the Building Control system, and still requiring government to strategically plan infrastructure through Acts of Parliament. That requires government to take democratic responsibility to streamline the aesthetic and technical approvals system, and identify areas of land for development. To make one approvals system that encourages R&D in architecture and construction, can be called a "pattern book" approach, and is based on the existing means of "type approvals" used by Building Control.

I'm in favour of both, and both could happen simultaneously if done as regional experiments. Provided the aim is to plan for housing production, whatever the speculative property market is more or less busy doing at any time. Sadly, instead, policy is to:

C Retain the 1947 Town and Country Planning system, so that the State reallocates development rights to freeholders based on a "planning gain" negotiation in "partnership", conducted alongside protracted public consultation exercises to encourage "engagement" and ensure "transparency", with ever greater reliance on quangos, appointees, and consultants so that the locally democratic planning approvals process is run down, disconnecting planning further from an underfunded and ageing Building Control system that is expected to ensure higher standards of construction, while government struggles to strategically plan infrastructure through Acts of Parliament.

But hey... how many multiples of your income is your home worth this week?

Ian Abley 23.04.2007

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