1. Ben Read, 'Pundits expecting house price collapse will look like turkeys by next Christmas, unless the pound really fowls up', 28 December 2009, Centre for Economics and Business Research, posted here
2. Ian Abley, 'Predicting the future of British house building', 10 November 2009, posted here
3. HM Treasury, Facing global challenges: Supporting people through difficult times, Pre-Budget Report, Cm 7484, London, The Stationery Office, November 2008, p 94
4. HM Treasury, Securing the recovery: growth and opportunity, Pre-Budget Report, Cm 7747, London, The Stationery Office, 9 December 2009, p 2
5. Brian Green, Pre-Budget Report points to more money for construction but a much bigger fall, Brickonomics, Building, 9 December 2009, posted on www.building.co.uk
6. Joey Gardiner, Capital spending to halve in next four years, Building, 11 December 2009, posted on www.building.co.uk
7. Ian Abley, 'Adam Posen's desperate idea for the Chancellor', 3 December 2009, posted here
8. HM Treasury, Securing the recovery: growth and opportunity, Pre-Budget Report, Cm 7747, London, The Stationery Office, 9 December 2009, p 2
9. Ibid, p 3
10. Ibid, Chart 1.1: Government spending by function, p 12
11. Ibid, p 109
The scramble for housing policy at the start of 2010
The housing market crash expected in 2007 never happened, and as house prices reinflate British politicians are looking for housing policies.
Ben Read of the Centre for Economics and Business Research published his view of the reinflating housing market through to 2012. He considers that average house prices by the end of 2012 will be around 15% higher than they are today. After the event Read ridiculed those who had expected a house price crash based on the evident disconnection of the British housing market from household incomes:
'Some experts would even have us believe that there is some fundamental long term ratio between average incomes and house prices, that virtually rules out every other factor... The same experts have for years been telling us that house prices are set to fall by over 30 per cent, a prediction that gets recycled over and over again, thus getting further and further from being right. Even during this - the housing market crash to end all crashes - prices fell by 22 per cent from peak-to-trough, but now stand just fifteen per cent lower than the end of 2007 peak.' (1)
It appears Read may be talking about England, but the same observation applies to England, Wales and Scotland combined. His view seems to be that the British housing market will recover to 2007 peak average prices by 2012. Depending on which indices the CEBR are looking at, that may mean average British house prices of between £230,000 on the realistic FT index, and £195,000 on the cautious Nationwide index. Rightmove's index has been more volatile than the FT so it may be disregarded, and the CEBR may have access to other indices.
The CEBR are in our view understating the situation. Our view is that by the end of 2012 average British house prices will be between £285,000 and £230,000. The top of that range is a 35% increase on the FT index at the end of 2009 by the end of 2012. (2) The bottom of our scenario more or less equates with the top of the CEBR prediction of a 15% rise.
I would prefer the CEBR to be right. But as Read recognises, '... the dramatic collapse in housebuilding in the last two years will feed through into prices over the next five years.' (1) He doesn't quantify the collapse, but we have. We have also better quantified the 500,000 homes that should be built every year, against the 100,000 that probably will be built for at least the near future that bothers the CEBR. (2)
Unfortunately too, the experience of 2007 to 2009 has not been "the housing market crash to end all crashes". A further housing bubble is forming, and will of course burst at some stage. Perhaps it will burst before 2020, but we see no reason why house building will increase much over that period. House building may decline further. A burst need not be a "crash" then either. As the CEBR recognise, household incomes have disconnected from house prices. A fact that the Treasury ignores when repeating New Labour's housing rhetoric:
'Government is committed to promoting the long-term stability of the housing market and meeting the long term challenge of increasing the housing supply, including through releasing more public sector land for housing, while providing support to homeowners through these difficult times.' (3)
Britain's house builders and the materials manufacturers who supply them had hoped for some support for their collapsing sector of the construction industry in the Treasury's Pre-Budget Report. This was eventually published on 9 December 2009, via a vacuous "microsite" on http://prebudget.treasury.gov.uk. They got little encouragement.
Chancellor of the Exchequer Alistair Darling was all too quick to praise New Labour, claiming that '... the Government has led the international response to the financial crisis mitigating its impact on the global economy.' (4) All Darling's effort in protecting the financial system, and mortgage lenders in particular, has successfully reinflated the housing market. While new house building continues to collapse the price of protecting the financial system has yet to be paid. However Darling avoided any explanation of how he was to cut public expenditure, or raise taxes. 2010 is an election year, and Darling was keeping quiet.
If new house builders and their supply chain felt unloved, it was clear that the construction sector as a whole would face a tough few years as public investment is drawn forward for the election year, and then cut.
The Brickonomics blogger Brian Green recognised that net investment of £45.3bn went into construction in 2008-09, which was more than the £37.7bn estimated in the Budget. 'The 2009-10 figures are £49.5 billion against £43.8 billion and the 2010-11 figures are £39 billion against £36 billion.' (5) This observation also suggested to Joey Gardiner in Building that '... the government is pumping money into construction faster and intends to do so for a year or so more. But the extra money suggests a larger fall when it comes. In 2011-12 public sector net investment drops to £29bn. This then falls to £22bn in 2013/14.' (6) There is a certain cynical resignation in New Labour's dealings with the construction sector, but they are in a real predicament. They could not afford to let the financial system collapse, and their intervention is yet to be paid for.
Darling can't help Britain's construction industry, or house builders in particular. He can't force new house building from the private sector developers, who share his interest in "planning gain". He can't easily afford to pay for very much more new housing through Registered Social Landlords and the negligable public sector. He knows that the failure to build only serves to strengthen his effort to reinflate the housing market. He will not like the political consequences of building so few homes every year, but he would like the housing market to deflate even less. He hoped in 2008 that renewed house price inflation would revive the ability of developers to realise "planning gain", with some of it recovered by government. But those revenues will be reduced.
The idea of "planning gain" is a consequence of a new home costing more than an existing one. Not an obvious state of affairs when a new car or a new pair of trousers always lose value when they are used, unless they have some value other than their utility. Every new home built enters the second-hand home market. If the cost of management from land acquisition through building to sale, the cost of the land, and the cost of constructing that new home is less than sale price into the existing housing market, the developer is seen to have gained by the planning approval. It has become customary for developers to negotiate with local and regional planning departments to pay a share of the value of the benefit of planning approval back to the public body awarding the approvals. This is formalised in a Section 106 agreement, or a "planning obligation" on the part of the developer. Not all agreed obligations are actually fulfilled, of course, because the planned development may not go ahead, but the vast majority do proceed and are honoured.
Adam S. Posen, a senior fellow at the Peter G. Peterson Institute for International Economics, was appointed by Darling to assist the Monetary Policy Committee of the Bank of England. Posen had suggested that the Treasury might raise revenues by a "Capital Gains Tax" on private house sales. While the scope for extracting revenues from "planning gain" in the building of 100,000 new houses a year is diminished, taxing an inflating housing market based in the stock of 26 million existing homes, 70% of which are privately owned, is potentially a large revenue for any government. Such a policy also offers the illusion that government can control house price inflation by stiffening the tax, at a time when near zero interest base rates cannot be instrumentally adjusted without affecting the wider economy. (7) However if Darling liked Posen's policy innovation he said nothing about a "Capital Gains Tax" on private house sales in the Treasury's wordy but contentless Pre-Budget Report. Darling may think the home owning electorate is not ready for such a tax.
A home is not capital. It is a utility. Taxing gains in the inflating housing market will be a confidence trick, it is desperate, but it may win support if handled by a clever enough Chancellor of the Exchequer who has few other choices. We are likely to see a political scramble for housing related policies in the first few months of 2010 as New Labour and the Conservatives get ready for the general election. Along with Posen's idea, there will be other policy innovations that either party might try to make it appear that they take the disconnection of house prices from household incomes seriously. Politicians are genuinely worried.
The denial of development rights in the 1947 Town and Country Planning Act contained the working population of Britain, preventing the building of low cost housing on cheap farmland. The 1947 Town and Country Planning Act promised New Towns and council house building. Greater house building was a contest until the late 1960s, when the British economy could no longer afford to honour the political promise. We have seen a politically charged reduction in housing production since then.
We may be about to experience a new phase in the containment of the workforce, if all parties abandon the attempted expansion of owner occupation. 70% of households in owner occupation is plenty as an electoral majority for any government. There could be a flourish of innovation in rental housing policy using the planning system.
Planning policies to encourage institutional landlords might appeal to The City. Rental housing can be built for a percentage profit on the cost of construction, and the land kept in a Community Land Trust, or new forms of Local Housing Trust, after the first negotiation over "planning gain" to fund infrastructure. The subsequent inflation of property values would accrue to the LHTs. That might have wide appeal, from top of the market developers in posh areas, to self-appointed, unelected, "concerned" groups of local residents. This will be misunderstood as democratic.
Tenure has always been of interest to planners, who fantasise about engineering a social mix. Planning led prescription of tenures will link up with the promotion of uncontroversial housing schemes. Architects will get excited by a plethora of LHT schemes, and professionals will make their fees out of the protracted attempt to make planning ever more "inclusive" and "consensual". Housing Associations might feel a little unloved, or even threatened, but Registered Social Landlords could metamorphose into LHTs too, and go for both public funding and finance from The City. The larger RSLs are already adept at this.
The inflation in the home ownership dominated British housing market will keep rentals high for institutional landlords who will easily compete with the smaller buy-to-let landlords, and the rump of old-fashioned bourgeois-landlords. They will stand well alongside the RSLs, and the increasingly privatised management of bottom of the market council stock. Some politicians with a sentimental attachment to the idea of social housing may prefer a daft attempt to raise council house building to 5000 homes a year, along with the attempt to push RSL production up to around 45,000. It may be rather easier to privately finance institutional landlords, who may be metamorphosed speculative developers. Their new house building will not be in addition to the expansion of publicly financed social housing. It will be instead of expanding that sector.
Public funding can be trimmed to keep the middle class Housing Association incompetents inefficiently producing around 30,000 a year, or less. Institutional landlords can look philanthropic by offering "affordable" rents, and an initial target market of 20,000 homes a year may not be unrealistic. The private house builders will be reduced to building 50,000 luxury eco-homes a year, mostly as architect designed low density developments with a few penthouse type schemes in prime locations. The political pressure will be off capital funding affordable housing, and the negotiation on planning gain can go into infrastructure budgets.
Landowners lucky enough to get planning approval will have been told by RICS members that they should negotiate harder over "planning gain". Land with a chance of planning approval will soar in value. The overall housing market will inflate to the satisfaction of a vast electoral majority.
The next government can then appear to be the enemy of speculators by slapping a Capital Gains Tax on private housing sales. This will allow the Treasury to centrally recover the value of inflation the state has driven into the housing market by the operation of the planning system.
The membership of the Council of Mortgage Lenders will be secure. They can expand the fund of mortgage lending more gradually as average house prices approach between £450,000 to £350,000 before 2020, albeit with some faltering along the way. The scope for upward social mobility will be slight. People will be able to move geographically, but will struggle to trade up to better housing, except by way of inheritance. The environmental mantra will be dont move eco-improve!
The diminution on construction materials in the new build sector will be long term. This will be partially offset with rather more refurbishment and extension work, but it will be a reduction in production overall. Refurbishment has the advantage to government that it is labour intensive, and so will be promoted as Green job creation, but it will be less than politically or economically dynamic. The CML will like the emphasis on refurbishment too, and their members will innovate new ways to fund institutional landlords in parallel to the finance they already extend to the customers of the membership of the Home Builder's Federation. An organisation that will no longer represent commercial house builders committed to building in "volume", but content with the polarised luxury and subsidised markets in "eco-homes".
The alternative is unthinkable for the government. The alternative is to re-establish in 2010 the freedom to build on freehold land denied by the 1947 Town and Country Planning Act. That would collapse the housing market in Britain and seriously threaten the financial system that depends on house price inflation. A prospect rejected by every British politician devoted to advancing the interests of The City, in their elite dependency on the support of the electoral majority of home owners.
Politicians like Darling are genuinely worried. Yet they can do little to make housing "affordable" without threatening the security of mortgage lenders. The Treasury is predictably clear that it wants '... a strong, thriving and responsible financial sector.' (8) While taking '... a leading role on international climate change,' and providing '... domestic support for business investment in low carbon growth.' (9) That means accepting a reduced house building sector in a construction industry that faces cuts in public spending towards the mid-term of the next government. More work in refurbishment of the existing building stock is a poor substitute for contracts to build new developments.
The scramble for housing policy in time for the election is about to begin.
There is a lot more to be cut or taxed in the British economy. Darling has proposed marginal "savings" in the £30 billion Housing and Environment sector, (10) and has barely identified where these are to be made:
'£340 million from improved targeting of regeneration and housing growth funding, concluding the New Deal for Communities programme, prioritising regeneration and growth programmes to maximise value for money as the economy recovers, and saving public money by directly tackling the barriers to housing growth with a reduction in the impact of regulation on house building. The Government, will assess the efficiency and effectiveness across government of interventions to tackle worklessness and promote growth and inclusion in deprived areas, and the institutions that deliver them.' (11)
Watch out for "worklessness". The British suffer from low pay. There is plenty of work around, but household incomes are poor. Housing costs make that predicament acute, and no-one knows that better than Yvette Cooper. She was appointed as Chief Secretary to the Treasury on 24 January 2008 to help Darling tackle the bursting of the housing bubble. Prior to that she was responsible for housing and planning at the Office of the Deputy Prime Minister from 9 May 2005, itself replaced by the Communities and Local Government ministry on 5 May 2006. Yvette was appointed Housing and Planning Minister at the CLG on 28 June 2007, and has attended Cabinet since then. On 5 June 2009 Yvette was reshuffled by Gordon Brown to be the Secretary of State for Work and Pensions. She will be struggling with the simple fact that British household incomes have become disconnected from the cost of housing, and that inflated house prices are a poor substitute for a pension.
Cooper and Darling will be torn, if they survive the election in office. They will talk about cutting back on the many Quangos in the construction sector that serve as a job creation scheme for middle class reformers. But they will face the additional cost of redirecting old and inventing new Quangos to address the supposed worklessness of construction workers.
Whatever the electioneering result the number of new homes built will be around a fifth of the minimum number needed each year, and the CEBR's prediction for house price inflation may be seen to be low.
We may even see a new institutional house building sector enter the graph as the other three continue to decline. Britain's politicians will be on the boards of directors, promoting corporate social responsibility.
Happy New Year
Ian Abley 30.12.2009
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