A recent report’s finding that the UK doesn’t need more housing supply is challenging long-held assumptions

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Source: Ewelina Wachala

In January 2017, Sajid Javid stated clearly: ‘This country doesn’t have enough homes’

It’s time to forget everything you thought you knew about the UK housing crisis.

In January 2017, then communities secretary Sajid Javid used a foreword to the Housing White Paper to set out in plain English what was wrong with UK housing. “This country doesn’t have enough homes,” he opined, and, in case you were in any doubt, “That’s not a personal opinion … it’s a simple statement of fact.”

He went on to say the failure of housebuilding to keep up with the growth in households had caused soaring prices that had “slammed the door of the housing market in the face of a whole generation.”

While you may have objected at the time to the cookie-cutter politician-on-a-soap-box writing style, you’d be forgiven for thinking the substance of it was uncontroversial. Well, you’d be wrong.

Since at least 2010 a select band of economists and academics have been persistently making the case that, contrary to what most in the industry believe, there is no shortage of homes in the country. And – more controversially – that the cost of housing hasn’t significantly risen in real terms.

The latest salvo in this battle to destroy the intellectual rationale behind housebuilding growth came last week with the publication by the Tony Blair Institute of a 48-page report by its executive director, Iain Mulheirn, asking whether more supply was the answer to the UK’s housing crisis. To which his strong conclusion is a firm no.

But now for the most astonishing part of all: Not only is Mulheirn not alone in his thinking, it’s actually now hard to find serious thinkers about UK housing who completely reject his case. So, what is the evidence behind this seemingly iconoclastic view? And does this spell the end for the government’s 300,000-a-year housing ambition?

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Source: Duncan Andison

Right-wing economist Andrew Lilico has called the housing crisis a ‘myth’

No shortage

Mulheirn’s analysis is based upon analysis of publicly available information, from reputable (or at least scrutinisable) sources (for more details, see box below).

His argument, and that of others, can be summarised thus: there is no general shortage of housing in the UK, and broadly the cost of housing hasn’t outpaced earnings growth. While big house price increases have, clearly, pushed prices way above norms, this is simply a reflection of low interest rates, which have kept the day-today cost of mortgages in line with historic norms. While there are clearly affordability problems for some – particularly the young – these are caused by low earnings growth and cuts to housing benefit this group has endured in recent years, and the big deposits lenders currently require on mortgages.

Crucially, however, because these localised affordability problems aren’t, the argument goes, caused by a general supply shortage, neither will they be solved by building many more homes. Which on the face of it undermines the central pillar upon which government housing and planning policy, all pointing toward a 300,000-home-a-year building target, rests.

And he has the support from some unlikely areas. Not only do right-wing economists such as Andrew Lilico (former chief economist at the Policy Exchange think tank) have the same take, some left of centre thinkers, such as Ann Pettifor, director of institute Policy Research in Macroeconomics, are now making the same argument.

Lilico, who as far back as 2012 wrote that the notion of a housing shortage was a “myth”, argues that those who continue to believe there’s a shortage are “simply refusing to look at the data.” The whole thing, he says, is an illusion based on the staggering face value prices of homes created by historically low interest rates. “When interest rates return to 4-5%, all this issue will vanish like April snow,” he says.

When interest rates return to 4-5%, all this [housing crisis] will vanish like April snow

Andrew Lilico, Policy Exchange

Likewise, Pettifor last year wrote that “building more homes will not solve the housing crisis”, though she points the finger at a speculative bubble as much as low interest rates for house price growth. Moreover, the Redfern Review of housing conducted for the Labour Party back in 2016 concluded that blaming low overall supply for high house prices was “misleading”, and that the main drivers were instead rising income and the falling cost of capital. It also found that, like Mulheirn, “biggest housing issue for young people is not the ongoing cost of home ownership” but instead the high deposits lenders were requiring for them to access the market.

Even the likes of Toby Lloyd, the former housing adviser to Theresa May who is a big advocate of building more homes, says that Mulheirn is “90% right”. Likewise, Christine Whitehead, emeritus professor of housing economics at the London School of Economics, says she accepts that: “The story is more nuanced than the government makes it sound – and at some level it’s more about affordability than numbers.”

Even David O’Leary, policy director at the Home Builders Federation, says that there is little direct evidence to support the government’s 300,000-home-a-year target.

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Source: Nick Xiao

Regional imbalances in supply and demand have been argued to play a significant role in high housing costs

Useless

That’s not to say there is wholesale support for all parts of the Mulheirn/Lilico argument – and still less for what actions should be taken in response. Many pick holes in the detail – arguing the data on which he bases his conclusion about housing costs are weak, and that regional imbalances in supply and demand, such as in London, are still playing a significant role in very high housing costs.

Most still accept the case, made from the Barker Review onwards, that over time consistent delivery of high numbers of homes will act to moderate house price growth. “The best way out of the affordability crisis,” says the HBF’s O’Leary, “is to build enough that house price inflation slows.”

In particular, many object to the cast iron certainty with which Mulheirn’s conclusions are presented, given conflicting and limited data. Neal Hudson, founder of consultant Resi Analyst, says: “A combination of data sources suggest there is a supply crisis in and around London. But the problem here is the lack of decent information, particularly on private rents, which makes it very hard to definitively draw conclusions.”

The problem here is the lack of decent information, particularly on private rents, which makes it very hard to definitively draw conclusions

Neal Hudson, Resi Analyst

Some make the case that Mulheirn’s analysis effectively misses the point – which is that the housing crisis is about the difficulty of large groups in the population in being able to access housing, rather than whether costs on average are reasonable. The government’s Housing White Paper pointed out that first-time buyers today would have to save 5% of their income for 24 years for an average-sized deposit, compared with just three years in the 1990s. Home ownership among 20-34-year-olds has fallen from 59% in the 2000s to 37% today – none of which data Mulheirn and his supporters dispute.

The reality is that for housing academics, the idea of a generalised shortage of homes compared with households has never been a shibboleth. Economists will tell you that what matters isn’t crude numbers of households vs homes: the market is instead defined by what’s called “effective demand” – the number of households with the requisite income to purchase. Given generally growing prosperity, you’d expect more people to buy second homes, and for an ever-bigger surplus of stock – but that wouldn’t mean there were no shortages for those at the bottom.

The LSE’s Whitehead says that comparing growth in dwellings with growth in households – which both government and Mulheirn do – is “useless.” This is because fewer homes leads to fewer households being formed – any argument based on this is essentially circular. The result of less building is simply “more concealed households, sharing, more living with Mum and Dad: the changes here are phenomenal.”

The affordability problem is exacerbated by inequality. “Housing demand is about incomes, so if incomes rise differentially,” says Whitehead, “the richer buy more, most obviously by not moving down, but also buying second and rental homes versus poorer households who can’t outbid them.”

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Source: stocker1970

Former special adviser Toby Lloyd has called Mulheirn’s central conclusion ‘fundamentally unhelpful’

Toxic

But beyond all these points, by far the biggest criticism of Mulheirn’s analysis boils down to the fact that, for people that want to make a difference in housing, it’s bad politics. Former special adviser Toby Lloyd says: “While Mulheirn may be right that there are technically enough bedrooms in the country, the solutions that perspective takes you toward are fundamentally unhelpful.”

The logic of Mulheirn’s analysis, Lloyd says, is that what affordability problems there are should best be tackled by either huge demand-side measures that reduced the desirability of housing as an asset, such as by taxing homes more, or by building large numbers of affordable homes. But building affordable homes is only affordable for the government if they are cross-subsidised by the construction of lots of private sector ones.

“The reality is that if we want to tackle housing problems, even though we know building more is an imperfect mechanism, all the other alternatives – like taxing housing wealth or socialising the private rented sector – are even more politically toxic,” Lloyd says. “Building more is currently the least bad option we have, and this argument [against more supply] risks blowing a huge hole in the one thing that everyone can agree will help.”

Building more is currently the least bad option we have, and this argument [against more supply] risks blowing a huge hole in the one thing that everyone can agree will help

Toby Lloyd, former special adviser

Mulheirn himself talks in general terms about altering tax and spend incentives around home ownership, and building more affordable homes and repairing housing benefit cuts. But many fear the only message anti-development campaigners will take from him is that the UK can happily stop building. Resi Analyst’s Hudson says: “He’s so bullish, the danger is people will jump on his words to prove that no homes at all are needed.”

But however inconvenient, the arguments of the likes of Mulheirn do serve to highlight the lack of any real clarity about what housing policy is designed to do. Is it about trying to bring prices down? Or about housing those with no decent options? Or about giving people a financial stake, which (as the theory traditionally goes) helps turn them into Conservative voters? Lloyd says successive governments are “desperate” to avoid saying they want to bring prices down, while implying they will make it cheaper for those not on the ladder. Hudson agrees. “What is the end state we’re looking to get to?” he says. “What is the optimum amount of housing and availability? Inevitably, there will be no one single view.”

Politicians, it appears, are staying vague on this to keep as many people on board as possible. Building homes may not be a silver bullet, but it is better than nothing and there are, it appears, few other options on the table.

 

What’s the evidence? The case for no housing crisis

Assertion 1: There is no national-level shortage of housing

For: Mulheirn cites “official data” to conclude that there is a surplus of homes above households, and, moreover, that this surplus has grown since 1996 from 660,000 homes to more than 1.1 million. He bases this on Labour Force Survey data, rejecting official household projections, which he says “have for many years significantly overestimated the rate of household formation”. His case is backed by economist and former director of right-leaning think tank Policy Exchange, Andrew Lilico, who describes the idea of a shortage as a “myth” founded on 1991 census-based projections, published in 2000, which were later proved to be inaccurate.

Against: Household projections did for years show housebuilding levels falling short of net additions – the communities department’s 2014-based household projections predicted 300,000 more households would be created than homes between 2006 and 2017. However, since the job of producing projections was taken on by the ONS, this disparity has fallen markedly – the latest 2016-based projections predict just 28,000 more households than homes were created in the same period. However, those who argue there is a shortage of housing say even these figures ignore “concealed households” – ones which can’t form because people are unable to find anywhere to live. According to Labour Force Survey data quoted by the Greater London Authority’s housing research manager James Gleeson, the number of concealed households rose by 50% between 1996 and 2016, to 2.45 million.

Assertion 2: The cost of housing hasn’t outpaced earnings

For: Mulheirn reaches this conclusion by considering the day-to-cost of housing services – effectively the rent or mortgage paid by occupiers – rather than the headline price of a home to buy. He says that Office for National Statistics and Department for Work and Pensions data show that for both home owners and renters, costs, supported by low interest rates in recent years, have risen more slowly than median household incomes since 1996. Where housing costs have risen by less than 30%, median incomes have grown by nearly 50%. While he accepts costs have risen more quickly in London, even here, he says, they have not outpaced median income growth.

Against: The principle argument against this is around the cost of rented housing (data on the monthly cost of buying a home is relatively uncontroversial, and indeed suggest costs on average have not outpaced inflation, because of low interest rates). The main problem is that reliable data on rents only runs from 2005, and therefore doesn’t give any sense of how quickly rents rose before then. In general, Mulheirn’s analysis ignores the level of rents, and only looks at the growth. University of Reading professor, Geoff Meen says, in his peer review of Mulheirn’s paper, that while rents were 28% of median income across the UK in 2017, they were a staggering 50% in London. “The point is”, he says, “that even if the growth rate in rents is no more than the general rate of inflation, the level will still be considered unaffordable by large parts of the population”. For buying homes, this analysis of course does not include the impact of the requirement for large deposits (considered by Mulheirn elsewhere).

Assertion 3: High house prices are due to lending activity

For: Mulheirn states that the decline in mortgage interest rates, from an average of 8% in the 1990s to around 2% now, is the primary driver of high house prices – allowing the headline cost of a home to boom without putting the monthly cost out of reach. In particular, he cites the house price crash following the credit crunch (a period in which mortgage lending plummeted and the size of necessary deposit hugely increased) as evidence of the price being primarily driven by mortgage activity. This period also saw a crash in housebuilding activity.

Against: Few dispute the centrality of mortgage lending and interest rates in determining prices; however, many make the argument that it should be seen as one factor among others. Heriot-Watt University professor Glen Bramley, in his peer review of Mulheirn’s study, says that “by far the dominant factor alongside low interest rates” are buyers’ expectations of future price growth. In addition, the Redfern Review concluded that growing the housing stock by 1% would reduce house prices by 1.8%, and vice versa, meaning that, over the long term, housing supply is a contributory factor to prices. Bramley contends new home construction has an additional effect from allowing the construction of more affordable homes.

 

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