The likely economic and social imapcts on the UK government's Housing Green Paper

Implications: Homes for the future: more affordable, more sustainable? The UK government’s Housing Green Paper: what are the likely economic and social consequences?

Analysis:

The UK government's Housing Green Paper is very important. The key word in it is sustainability: this can be environmental, social or economic. In this article, I will concentrate on the economic and social aspects.

The housing market is very important to the UK economy: of 22 million dwellings in the UK, 15 million (70%) are owner occupied. Over the last 10 years, we have seen sustained real increases in house prices which have had both positive and negative impacts.

The “feel-good factor” of increasing house prices has had a significant impact on consumer spending. On the other hand, affordability problems for first-time buyers are reaching crisis proportions. Nationally, the ratio of lower quartile house prices to lower quartile incomes (the acknowledged indicator of affordability for first-time buyers) now exceeds 7 and 10 in London. This compares with a national average of 4 10 years ago. Recent work by the National Housing Federation suggests that this trend is likely to continue, and they are forecasting a further 40% increase in house prices by 2012.

Already, 40% of first-time buyers require help from their families to buy their first home: this is usually parents providing large deposits to keep their loan repayments manageable. The recent crisis in the sub prime mortgage lending in the USA illustrates clearly the risks associated with home owners over-extending themselves, and already repossessions (foreclosures) have increased by 30% over the last 12 months.

In addition, affordability is becoming a significant brake on recruitment in the higher value areas of the country, i.e. those where economic growth and recruitment are greatest.

So where's the problem? The rate of house building in the UK has been too low for too long. Despite a relatively low birthrate, the UK population is growing at around 375K per annum, largely as a result of people living longer and in-migration of mainly young, economically active migrants. As a result, household formation is running at 223K per annum. The number of households is projected to rise from 21 million to 26 million over the next 20 years. Almost all of that growth is projected to be single person households.

Against that, house building rates over the last 10 to 15 years have been in the range 130-170k per annum. These rates are adding only 0.8% per annum to the total housing stock of the country, whereas households are increasing at over 1% per annum.

Even the recent rises in interest rates have only slowed down market activity, and have not led to any price falls. With the underlying fundamentals of a stable economy and household formation rates exceeding house building rates, there is little prospect of significant falls even in the short term.

So why is this? Quite simply, not enough land is being brought forward for development. In part, this is the result of a very strong NIMBY culture in the UK, both in terms of redevelopment of existing sites and release of Greenfield land in the countryside. There is a (mistaken) view amongst many commentators that we are running out of land in the UK. Whilst the UK is very urbanized, under 10% of the land area is actually developed. The UK planning system is based to a significant extent on containment of urban areas and protection of the countryside, and this is a major constraint which the government is seeking to overcome. Existing policies have already succeeded to a certain extent, with over 70% of new housing development being on previously developed (brownfield) sites, compared with around 50% 10 years ago. But more needs to be done.

Shortage of land is a very real problem for house builders, not only in terms of maintaining volumes, but also in terms of capital employed: with land values representing up to 60% of gross development values in some areas, this has a real impact on return on capital employed, and makes housebuilders particularly vulnerable to downturns in sales rates.

The Housing Green Paper (the government's policy consultation) seeks to address these issues along the following lines:

• More homes to meet growing demand: a significant increase in land allocations in Regional and Local Plans, to deliver 2m additional homes by 2012 and 3m by 2016.
• Better, more environmentally sustainable homes and better places to live.
• Increased government subsidy to help those who cannot afford market values to rent or sale.
• Improving workforce skills in the development and construction sectors.

This is all good stuff. It will bring supply more into balance with demand, and should lead to improved sustainability and quality of life. But the biggest challenge will be to develop a common purpose and shared vision, through the integration of housing, planning and infrastructure provision, and in particular the funding of infrastructure needed to release new sites. Finally, we mustn't forget that all of these numbers will only increase new house building to 1% per annum addition to the total housing stock of the country. The UK already has the oldest housing stock in Europe, and much of this housing is environmentally very inefficient as well as getting to the end of its life in terms of appropriate standards for the 21st century. Demolition and redevelopment have to be brought into the picture as well.