Housing – or rather the lack of it – continues to dominate the domestic political agenda. With house prices rising faster than wages and few new ones being built, it is one of the five most important issues facing voters in Britain today – more important than education and crime. The only things deemed more important are Brexit, immigration, the NHS and the economy.
Naturally, people need somewhere affordable to live, work and rest. But our dysfunctional housing market is failing to respond to this basic human need. While we are more willing than ever to have new homes built in our local area, strict planning laws have forced up the price of land and so any new developments are built cheek by jowl. This new stock is best described as rabbit hutches built on postage stamps. No wonder people prefer to buy second hand rather than new.
The social consequences of worsening affordability are significant. As Theresa May said last year “unless we deal with the housing deficit… houses prices will keep on rising. Young people will find it even harder to afford their own home.”
The economic consequences of the Government failing to meet its target of building one million new houses by 2020 are equally miserable. By tying up significant sums in unproductive assets, high house prices contribute to the UK’s low productivity, distorting the labour market and forcing workers to waste time community. Indeed, if we were to scrap commuting altogether, the UK economy would see a boost worth £12 billion a year.
So to have any impact, the Government’s Housing White Paper, due out any day, must be inspired by a grand vision, not simply consist of a package of reforms. It needs to have at its heart as bold a vision as 1979’s Right to Buy White Paper.
We outline such a vision in our new Pointmaker for the Centre for Policy Studies. Our approach seeks to capitalise on a consensual initiative to provide housing and linked infrastructure, drawing on a variety of stakeholders, namely landowners, developers, builders, local authorities, funding financial institutions, civil society and local residents.
Since all these stakeholders have disparate interests and priorities, a strategy is needed to align them. We think Pink Planning will do exactly that, so called because it dilutes much of the red tape that has hampered the recent development of attractive new communities, it offers a streamlined approach to get things done. The creation of a range of Pink Zones across the country could be the most expedient way to deliver places for people to live and work.
Integral to Pink Planning is a mechanism known as a special purpose vehicle (SPV) which is used to bring together all the interests necessary to found and build new communities. The SPV enables the involved parties to win initial permission from central government to do so.
The distinctive aspects of the Pink Planning approach are threefold:
1. Community co-operation is incentivised, thereby reducing adversarial conflict;
2. Planning permission procedure is streamlined;
3. The range of the developer’s contributions and involvement beyond infrastructure are expanded to include employment growth and other factors that supply residents’ wider needs, and which make the developed communities attractive places to live and work.
Such a concerted approach would reduce the risk and uncertainty inherent in the current planning system.
It would also capitalise on the increasing willingness of institutional capital to invest in long-term housing and infrastructure assets – not least because other forms of investment have shown such relatively modest returns in recent years.
Hermes Investment Management, for example, the primary manager of the BT Pension Scheme and a major institutional asset manager with £21 billion assets under management, has already publicly stated its commitment to the idea of building more new communities.
Legal & General PLC, Britain’s largest institutional shareholder, has done likewise. Indeed, Legal & General is now cooperating with PGGM, a Dutch pension fund manager, to construct a total of 3,000 apartments across the UK as part of a £600 million “build-to-rent” initiative.
Paul Stanworth, the managing director of Legal & General Capital (LGC), the insurer’s main investment division, stresses: “The UK rental market, compared to the US and Europe, is dysfunctional, with ever increasing rents and increasingly poor accommodation. For this to change”, he adds, “and renting to become more affordable, we need to invest in the ‘new’, and build new homes to rent, and just stop inflating the prices of old housing stock.”
Furthermore, the Bank of England, as the industry regulator, has noticed a marked increase in investment from major insurers into the infrastructure and property sector, encouraged by the ability to employ matching adjustment provisions to offset the regulatory constraints imposed on EU insurers by Solvency II.
Solvency II seeks to identify and dictate how much capital insurers need to set aside to cover the perceived level of risk. But while this may appear a laudable objective, in practice, it has inadvertently blocked a substantial source of capital for urgently needed infrastructure and housing.
Brexit provides the perfect opportunity to rethink this stultifying regulation. And in our Pointmaker, we recommend that Solvency II should, be reviewed and replaced by a robust regulatory regime which encourages institutional investment into infrastructure and housing rather than curbing such initiatives.
Indeed, far more could be done to encourage institutional funding for new housing and infrastructure. As one leading actuary advising numerous large pension funds told us, “finding deals and executing on them is difficult unless you are a large pension scheme with some in-house expertise”.
With this in mind, we propose that local government pension scheme assets – currently valued at £214 billion – could also be used to seed an infrastructure-focused sovereign wealth fund, some of which could be used to fund new housing projects, both private and social – where these have commercial returns.
Added to all this, the last quarter of a century has witnessed a dramatic reduction in the construction of purpose built local authority housing and a massive exodus of smaller firms from the sector. Whereas there were more than 12,200 such firms in 1988, there are now only 2,400. The house building market in Britain is dominated by a clutch of major firms who tend to build what they believe people will accept. This needs to change.
The Pink Planning approach would simplify and streamline the house building system and revive our construction sector by simply generating many more opportunities to build. This would also trigger new ways of constructing homes and places of business. It could also encourage some much needed innovation in building techniques, which have hardly changed in Britain in the last half century.
Adopting these reforms might lead to many more people wanting to buy brand new homes in vibrant new communities, rather than settling for second-hand ones. And it would help the Government correct its abysmal record for housebuilding. We think it’s a vision worth pursuing.
‘Housing: now is the time to seize the opportunity’, by Keith Boyfield and Daniel Greenberg, is published by the Centre for Policy Studies