12 March 2018

Let the market fix the Tories’ housing problem

By Madeline Grant

During the 2015 General Election, Ed Miliband’s flagship pledge to cap energy prices was derided by conservatives as a deranged idea from the 1970s. The then-PM David Cameron accused “Red Ed” of “wanting to live in a Marxist universe”. Yet within two years, the idea had found its way into the Conservative election manifesto, along with plans for a £9 minimum wage that surpassed anything promised by the opposition in 2015.

We saw the repercussions of the misguided strategy to “out-Labour” the Labour Party last week, when the Shadow Business Minister Rebecca Long-Bailey criticised the Conservatives for failing to implement the energy cap sooner. In doing so, she claimed, the Government has cost British households nearly £1,000 in energy costs over the past seven years.

It’s hard to dispute the logic of this. By endorsing price caps in the first place, rather than critiquing the shaky economic logic behind them, the Conservatives opened themselves up to accusations of inaction. You can’t beat Labour at its own game.

And if recent developments are anything to go by, the Conservatives also seem to have accepted a Left-wing diagnosis of the housing crisis and its causes.

Some of the proposals set out in the updated National Planning Policy Framework (NPPF), such as reforms to building heights and plans for new garden towns between Oxford and Cambridge, are reasonable. But much of the narrative is still recycling Left-wing tropes, assigning blame to “greedy” developers and speculators, while ignoring the root causes of the housing crisis.

In her speech last week, the Prime Minister vowed to tackle the practice of “land-banking”: buying up land, and deliberately not using it, to increase profits.

“I want to see planning permissions going to people who are actually going to build houses,” she said, “not just sit on land and watch its value rise.”

Her assertion that developers are “sitting on land” which is ready for development, merely waiting for the land value to appreciate, is tenuous at best. It’s true that developers do engage in land-banking, but this is usually a matter of necessity, not choice.

The complexity of the UK planning system means that even after gaining planning permission, it can still take years to begin work on a new development, with local authority requirements often spinning out the process longer than expected. In this climate, “land-banking” is essential for firms to ensure they can enjoy continuous production, keep staff on their books and plan efficiently. The complex, often unpredictable planning process necessitates several years worth of land in the pipeline to avoid bottlenecks.

As the head of one firm put it, “Tying up capital in land with no houses in it simply isn’t in our financial interest”.

Other recent policies have targeted “rogue landlords” and pledged to examine transactions made by foreign buyers and speculators.

There are some arguments for scrutinising these groups more closely, but blaming “profiteers” for the housing crisis is to target the symptoms of the problem – not the cause – and plays heavily into a Left-wing narrative. Though it is at least a welcome distraction from the government’s own reluctance to tackle the crisis head-on by liberalising the planning system and relaxing Green Belt restrictions.

More than 70 per cent of the cost of building new houses is now the purchase of the land – all deeply exacerbated by our restrictive land use regulations. And yet the PM’s speech last week showed no signs of moderating her party’s insistence on Green Belt protection, despite the evidence that even a mild relaxation of these measures could deliver huge gains. One report from the Adam Smith Institute found that freeing up just 3-4 per cent of Britain’s total Green Belt land would enable 1 million homes to be built around London.

You don’t have to be an economist to get that the problem is largely one of supply and demand. Practically all the dysfunctionalities we see in the housing market are, in one way or another, manifestations of this supply-side issue. In the social sector, this means lengthy waiting lists for social housing; in the private rental sector, soaring rents and “rogue landlords”. Would-be homeowners, meanwhile, struggle to access housing finance and raise capital for deposits. All these problems derive from a fundamental lack of supply.

Last year’s Housing White Paper pledged to put “affordable housing” at its heart, and previous schemes like Right to Buy have targeted specific “needy” groups. But these too have played into a dirigiste narrative which has little faith in the market to deliver housing. For there is arguably no specific shortage of housing in any one area, but an overall shortage of affordable housing across all tenures. To fix this, we don’t need separate policy measures for every subsector, but an overall increase in housing supply. In a less restrictive climate, this could easily be achieved without government intervention.

Contrary to common belief, Britain has one of the highest rates of social housing in Europe (only the Netherlands and Austria, proportionally, have more than us). On the continent, private sector housebuilding is very much the norm – and it used to be the norm here in Britain. In 1934-35, before the introduction of Green Belt restrictions, the number of houses built annually by the UK private sector hit close to 300,000, with a much smaller population.

I don’t envy the Conservatives the task ahead of them. Their survival depends on older voters in the Green Belt whose properties (and the continual appreciation in value of their properties) are, effectively, their pension fund. These same protections have, simultaneously, rendered it impossible for the vast majority of young people to own their own homes.

Far more than energy bills, or even Europe, getting housing right is an existential matter for the Conservatives. But even a mild embrace of liberalisation and market forces could solve many of their problems.

Madeline Grant is Digital Officer of the Institute for Economic Affairs.