Thursday, September 27, 2012

Don't Build More Homes

My article was published on the Guardian's website earlier in the week with the slightly unfortuante title "Don't Build More Homes" The point I'm making is not that we shouldn't build more homes. I'm convinced we do need more in the South East and a few other parts of England,  the purpose of the article was to examine why they are not getting built.   In my view the current low house building rates are a symptom, the core problem is affordability. Here is the article:

Am I alone in getting bored with the "build more homes" answer to every question in housing? We hear it daily from politicians, housebuilders, and lobby groups as if it were a mantra. Whatever the housing problem, it seems, the only answer is to build more homes and the way to do it is for government to provide more subsidy to housebuilders. In theology, mantras are not supposed to be questioned, but I think it's time we subjected this one to a bit more scrutiny.

Let me first point out that I'm not saying we don't need more homes; quite clearly we do in some parts of the country. But addressing it by finding new ways to subsidise housebuilders has not only failed (housebuilding has fallen to 100,000 units a year), it is counterproductive.
I've visited three countries in the past couple of years that have had big housebuilding programmes: Spain, Ireland and Portugal. What I saw there saddened me. Not only do their building booms appear to have worsened their economic situation, the new homes they produced appear to be having little social benefit.
It strikes me that the major housing problem in the UK is not supply (technically there is a million house surplus in England), but people's ability to afford housing. Median house prices are more than six times median earnings in England – double what most experts think is sustainable.

Essentially people's wealth has not kept up with house prices. Why? Obviously not enough people have seen their incomes rise, but I'd argue that government policy, introduced with the best of intentions, has made the other side of the equation worse. Subsidies to housebuilders, artificially low interest rates, mortgage rescue, bailing out failing banks and subsidies to social housing have all either helped house prices rise faster than they would have done otherwise, or prevented house prices dropping.

The fallacy with building your way out of the problem is that people still can't afford the houses you build. This is what Spain, Ireland and, to a lesser extent, Portugal found. In fact to get the building boom going in the first place they had to offer builders big tax breaks and subsidies, and then offer further subsidies to help people buy them. There is a large lobby in this country to do the same here. Apart from whether we could afford such an approach, I just don't think it works. Housebuilders following subsidy guidelines in Spain and Ireland built houses that people didn't want and couldn't afford. People didn't buy the houses, even when they were subsidised. They remained empty and now, most galling of all, some of them are even being demolished.

You might argue that it's different in England, but it's happened on a small scale here too. The last government's strategy of brownfield development aligned to subsidy programmes like housing market renewal led to a large amount of inner city flat developments. Much of what was built sold slowly and required government bailouts to prevent whole scale abandonment. Even now there are hundreds of empty flats in town centre developments in places like Ipswich. Places which then, and still, claim to have a housing shortage.

It appears that no politician can face it, but the only answer is to let house prices drop to their natural level in relation to incomes. That would require a less-interventionist approach, ignoring the appeals of the housebuilding lobby and having to deal with the consequences of what would undoubtedly be serious human impact through repossessions for example.But after this had happened house prices would be in balance with incomes and people would buy houses again. This would create the demand that would get builders building again.

2 comments:

  1. An interesting article, but I believe you are wrong on this issue. I can understand it is frustrating to see empty homes when so many people are homeless, but you have to consider why they are empty. Some may not be safe to occupy, others may be going through probate, many houses are empty for a short period before they are sold.

    The fact is we need empty homes to keep the market moving. If anything we do not have enough empty homes.

    House prices in the UK are high because there is a shortage of affordable homes. We also have one the the oldest housing stocks in Europe - and at the current construction rate it is going to take centuries to replace them. We need to build houses and at a much higher rate than at present.

    A bigger issue with homebuilders is we are not building the right type of homes. On average over the last 10 years around 40% of new homes have been flats/apartments. However polls show just 2% of the population want to live in a flat.

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  2. Martin I apologise for taking so long to reply to your comment. I can see your point, but you are confusing long term and short term empty homes. It is of course correct that we need a certain amount of short term vacancy in the system to keep the housing market moving. The actual amount of vacancy needed will vary according to the amount of people who are moving home. In most parts of the UK at the moment it would be tiny. The examples I give in this post are very different they are long term abandonment. If you live in Ipswich and you want a home the town centre flats are not available to you. They are not on the market. Why? because the owner knows they would need to market them at a low price to sell them. They are instead hanging out for the market to improve or for a bail out. In other words the market is being fixed to keep prices high.

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