Sir Winston Churchill: “Unearned increments in land are not the only form of unearned or undeserved profit, but they are the principal form of unearned increment, and they are derived from processes which are not merely not beneficial, but positively detrimental to the general public”.
Why Housing and Community Amenities Spending Matters
Housing and community spending has come under intense pressure but in 2015 it was £10.9 billion, equivalent to 1.5% of total Government spending.
Housing and Community Amenities Spending, 2010-11 to 2014-15 (£ Million)
Source: HM Treasury
One in six people in the UK live in social houses or flats. This is high compared with most European countries. Therefore, spending was slightly above European averages but has now fallen to the EU average.
International Benchmarks of Public Spending on Housing, 2014 (% of GDP and % of Total Government Spend)
Housing development is the major spending area:
Breakdown of Housing and Community Amenities Spending, 2014-15 (£ billion)
Source: HM Treasury
It is possible to place this breakdown in an international context:
International Breakdown of Housing and Community Amenities Spending, 2014 (% of Total Public Spending)
The UK is a strong spender on housing development but a low spender on community development.
Government spending on housing only concerns social housing. However, the problems of the housing sector are much wider. The house building industry has consistently failed to meet demand. This has created a serious housing shortage. This is the cause of house price inflation, which in turn prevents many first time buyers from entering home ownership. Between 1970 and 2014 housing completions have declined by a significant 63%. Over the same period the UK population has grown by 15%. The housing shortage has increased because of social changes including a trend towards single households and divorce.
House price inflation has spiralled out of control. It is a direct result of a shortage of houses and low levels of construction. The gap between retail price inflation and housing prices speeds up as the shortage of housing increases:
The Effect of the Lack of House Building on House Prices in England, 1946-2014 (Number of Completions and £s)
Source: Office for National Statistics
Various estimates of the housing shortage in the UK exist. In 2004 a Government commissioned report identified that 210,000 completions each year were needed to restrict house price inflation to 1.8% or 260,000 each year to keep house price inflation to 1.1%. Since then the average number of new completions has been 115,000 a year by the private industry. So to now target the 1.8% house price inflation level the shortfall in the decade has grown to about 1 million. During that time population and social pressures have increased the demand. Back in 2004 the forecast was for 179,000 households to be formed each year up to 2011. The ONS is now predicting 221,000 a year up to 2021. House building is not meeting this level. In the 12 months to the end of March 2015, some 125,110 homes were completed, up 11% from the previous year. This remains 29% below the 2007 housing market peak.
The House Building Federation estimates that to reduce the long-term trend in house price inflation to 1.8% now needs 260,000 houses to be built each year. This is the same figure already identified by the government report more than a decade ago. Despite what political parties claim, they themselves do not build houses since there is no nationalised building company. However, local Governments, through planning authorities can influence the ability of the private housing industry to build houses in an area.
To place house price inflation into context, the Confederation of British Industry suggests that it takes £4 billion out of consumers’ spending power. This includes £3.2 billion through housing related costs and £770 million in transport related costs.
Trend in Housing and Community Amenities Spending, 2010-11 to 2014-15 (£ Million)
Source: HM Treasury
There are a reported 650,000 empty houses in the UK. Many of these need large repairs.
Home ownership levels in the UK no longer remain high by European comparison:
International Benchmarks of Home Ownership Levels, 2014 (%)
The proportional level of home ownership in the UK has fallen after the financial crisis. There has been a rise in private rental. In 2014 throughout the UK, owner occupation fell to 63.1% (compared with almost 68% before the financial crisis):
Trends in UK Home Ownership, 2000-2014 (000 Dwellings)
Source: Office for National Statistics
Few people in the UK would argue there is enough house building. This is leading not only to out of control house price inflation, but it feeds high private rental levels. This is unsustainable to workers on low wages and it is harmful to government finance (and therefore tax) because it increases the cost of subsidising housing for the poor.
UK house building has shown a long-term, as well as short-term, inadequacy compared with other European countries. It is not a new problem, yet consecutive Governments have failed to act.
Housing Completions in European Countries, 1975-2014 and 2010-2014 (Completions per 1,000 population)
The extent of the market failure is obvious when the housing benefit bills of the six countries are compared. The data shows the UK redistributes significantly more tax than all other European countries, costing the UK 1.4% of GDP. To show just how ridiculous this is, it is nearly 10 times that of Germany.Housing Benefit as a Percentage of GDP in Europe, 2005-2014 (%)Source: Policy Network
Forward Thinking Housing and Community Amenities Policies
The Governments have used vote winning policies such as the Right to Buy. This has taken publicly owned housing into private ownership at rewarding rates to the buyer, without using the funds to renew the public housing stock. The Right to Buy policy has been a £40 billion privatisation. The money has been spent on further vote winning tax subsidies. It now leaves the UK with a yearly bill in the form of housing subsidies. It is a near-perfect example of the disastrous effects of short-term actions by Governments. It leaves thousands without homes, has fuelled house price inflation still further and has contributed to rental price increases.
One major policy supported by Forward Thinking will have a major impact on this unacceptable, and frankly irresponsible, policy: Introducing of a Land Value Tax as a primary tax income source. One of the many benefits of this tax (long proposed by many economists, and both left and right wing politicians) is it will encourage better land use. It will stimulate development of new properties.
Land Value Tax is not the only way to change the lack of housing. There are alternatives such as the German method. A Land Value Tax will quickly provide the incentive for housing development, and is therefore the one supported by Forward Thinking.
Germany’s housing market is far more efficient than Britain’s. It uses minimal government redistribution simply because the supply of houses can keep up with demand. In Britain, part of the market failure is because it is far more profitable to invest in existing housing assets and land than it is to build new houses. Examples of this include buy-to-let investments. The shortage is also a result that people can buy land and leave it undeveloped. Reportedly despite the number of plots with planning permission having doubled in London in the last decade, construction levels have remained flat.
The higher profit of investing in existing property rather than building will change with a Land Value Tax.
The price of land for house building is central to the efficiency of the housing market and for stimulating building and capital investment. Many housing policy commentators have argued there is a need for looser planning laws. These can include the ability to build on green belt land to bring down land prices, but this only addresses a part of the issue. An amendment to the 1961 Land Compensation Act allowing large-scale land buying by regional authorities closer to the use value will help. They also need to use of their own land in dedicated housing zones.
For decades after World War Two the UK used to build more than 300,000 new homes a year. Now it is managing about half that. A decade ago, the Barker Review of Housing Supply noted that about 250,000 homes needed to be built every year to prevent spiralling house prices and a shortage of affordable homes. That target has been consistently missed, the closest the UK came was in 2006-07 when 219,000 homes were built. In 2012-13, the UK hit a postwar low of just 135,500 homes, much of which was due to the financial crisis.
In May 2014, Mark Carney, the governor of the Bank of England, complained that house building in the UK was half that of his native Canada, despite the UK having a population twice the size. This causes huge house price inflation especially in London, the South East and some other parts of the country. Some 95% of house builders surveyed in 2014 believed the target to build 200,000 new homes a year by 2016 was unachievable. Planning and local opposition to building were two of the main reasons cited. The Home Builders Federation identifies that despite recent changes started in 2012 planning is “still far too slow, bureaucratic and expensive”.
Lord Matthew Taylor has advised, but largely been ignored by, both the Labour and Coalition Government on planning policy. He wrote a report showing that over the next 20 years there is a need to build 240,000 new homes each year in England alone. He also shows that a further 60,000 are needed to address the backlog that has arisen since 1997. The report suggests a major change in planning policy. It puts forward the idea that if each council were to provide planning permission for a 3,000 new home development (in so-called Garden Villages) then the backlog could be overcome in just ten years. This assumes that we have the necessary labour force trained with the correct skills, which the paltry current house construction levels are already challenging.
The Lord Matthew Taylor report calls for a radical new approach based on amending the New Towns Act to create financially viable new garden villages:
- Allow regional authorities to use the New towns Act to identify sites for new small market towns and villages typically consisting of up to 5,000 homes as part of their Local Plans
- Allow regional authorities to pay fair compensation to homeowners and landowners affected by the development at a flat rate of 150% of market value at the existing use
- Ring-fence the resulting land value uplift for the new community to provide for its infrastructure and amenities
- Make plots available to competing providers, including self-build and smaller builders, responding to market demand
- Rule out planning by appeal around existing towns and villages for local authorities
The Government (both central and local) should release land it owns for housing developments. It needs to simplify planning. The most effective method of improving land use, and stimulating construction levels is to make sure the Land Value Tax is high enough to be effective. In the long-term, regionalising the True Living Wage to reflect local conditions will further reduce the unsustainable growth of areas such as London.
A further anomaly in housing use includes the limits on the number of months many second homes (so-called mobiles, statics and lodges) can be used. These limits should change to encourage owners who wish, to live full-time in the ‘second home’. This will free up their first home for other occupants.
The UK has a large social housing network by European comparison. This would not be necessary if the private industry built enough houses to rent at affordable prices. This must be the long-term objective of Government, but there remain concerns over the capacity of the industry to meet the increased construction level with both material and labour shortages likely to arise. The skill shortage needs educational reform to ensure the right skills are available.
England’s 1,500 housing associations have multiple rules which prevent them from choosing their own social tenants. This means some of the most antisocial tenants are “dumped” on housing associations who can do nothing about it. This, as well as other controls, limits the association’s income which stops them raising and spending an estimated extra £1 billion a year on developing or buying new affordable homes.
Policy Exchange suggests housing associations should be able to “opt-out” of their Government grant which binds them to these rules. These‘Grant-Free Housing Associations’ would buy out their grant at a discounted cost to remove the restrictions. Paying off the Government grant would raise significant cash for the Treasury. The report shows the sales earnings and debt interest savings could raise more than £300 million a year by the end of the next Parliament. This rises to £550 million a year within 30 years.
The paper makes several recommendations for the grant-free housing associations including:
- Allowing them to sell expensive social homes to fund building a greater number of new affordable homes without having to get permission from the Homes and Communities Agency
- Extending the Help to Buy scheme for new homes beyond 2020 for housing associations to allow them to build more market homes for sale. It argues the profits could cross-subsidise affordable homes, Forward Thinking argues this is a necessary development
- Allowing them to set their own rent policy. Rather than having several different rents for similar properties occupied by similar households, as dictated by Government, grant-free associations could set a single rationalised rent or cheaper rents to reward good tenant behaviour
- Free Housing Associations could then be free to double the number of new homes built every year from 50,000 to 100,000. Currently housing associations build 45,000 affordable homes and 5,000 private homes every year. The paper expects that number to increase to 60,000 affordable homes and 40,000 private homes if they had more freedom from the regulator, the Homes and Communities Agency (HCA) and local authorities
The report predicts the housing waiting list would fall from its current 1.7 million households because of these changes.
Refurbishing existing empty houses to either make them habitable, or if this is uneconomic, demolished and replaced is a priority. Other new planning permissions would be conditional on contributing to the refurbishment costs. Inevitably this would increase the cost of a new house, so to compensate first time buyers, a part of this planning permission levy would be used to guarantee mortgages for first time buyers. A further problem exists in that new permissions may not be in the area as the empty properties. This would be solved by using a regional revenue reserve (rather than council specific). When the refurbishment properties are finished in the region, then the funding would move to fund new social housing.
By financially encouraging companies to pay a True Living Wage, and reflecting the living wage as a correct local cost, there will be active encouragement for companies to set up in areas other than London. This will contribute to regenerating areas where currently unoccupied housing exists.
There are also huge myths about how much of the UK that has been urbanised and the green belt. There is a need to reassess the green belt policies:
- England is not covered in concrete, only 10.6% of England has been built on. Across the UK as a whole, it’s as low as 6.8%. These figures include areas such as parks, gardens, allotments and sports pitches. When these are excluded only 2.27% of England has been built on. The green belt, meanwhile, covers 12% of England
- The only role of the green belt is to stop urban sprawls (cities growing into each other). Green belt land has no inherent ecological or agricultural value, nor is it chosen because it has natural beauty or protected wildlife. Much of it is poor-quality scrubland or used for intensive farming, and defined as green belt purely to stop cities from growing. Most green belt land is not accessible to the public since it is owned privately
- The green belt has not stopped growth; it has just pushed it further out into rural areas that are not defined as green belt. Towns and cities grow by developing beyond their green belts and creating what we have come to term a commuter belt. The London commuter belt now arguably stretches from the Isle of Wight to Yorkshire. Many occupiers of new houses built beyond green belts just commute further to work. This creates more traffic and pollution. The pressure to develop homes within city boundaries also leads to building on more common urban areas, such as parks and playgrounds
- The green belt increases social inequality by acting as a wall that confines urban dwellers at increasingly higher densities. Professor Paul Cheshire of the London School of Economics described it as “a very British form of discriminatory zoning, keeping the urban unwashed out of the home counties – and, of course, helping to turn houses into investment assets instead of places to live”
- England has a severe housing crisis and the greatest need for homes is in London and the South-East, the area that also has the most green belt land. Greater London contains 35,000 hectares (86,450 acres) of green belt land and there are another 75,000 hectares within the M25 area. Building on just on just 25% of that land would provide more than a million homes which is enough to meet London’s needs for generations to come
- The green belt constricts supply and forces land and house prices to rise. Cities surrounded by the green belt such as Oxford, London and Cambridge have some of the most expensive homes in the country. This denies decent homes to people on low- and middle-incomes and forces people into long commutes
In the UK there has been a major acceptance of house ownership to the point where rental has become ignored. There is a need to change this by improving the quality and security to tenants. In Germany for example, only 43% of people own their own home. This is not seen as a social issue, whereas it has tended to be in the UK. The situation in Germany is explained by economic and social conditions created after the second world war. Home ownership has not remained low to this day for economic reasons, but because of social acceptance. It is not the only country with much higher levels of rental properties than the UK. There are many others in strong and prosperous nations such as Switzerland (even higher than Germany at 61.6% in 2004), Denmark, Austria, France, the Netherlands and Finland. Interestingly Denmark is a country that has adopted a Land Value Tax.
One of the first reasons for the much higher role of rental in Germany is because of a different house building policy after the war. Then there were 2.25 million homes that had been destroyed and a further 2 million damaged. A rapid development came out of need. The housing crisis in the UK, while not yet as severe as at that appalling time, is increasingly approaching such crisis levels. Rather than military bombs, the damage has been caused by the bombshells of successive Government policy.
In the UK, when the Government gave subsidies to encourage house building after the war, only public sector entities, local Governments, and nonprofit developers were eligible for them. That squeezed the private industry out of the rental market. In Germany, public policy involved striking a sensitive balance between uncontrolled rapid growth and heavy-handed intervention. Britain also imposed strict rent and construction cost caps on developers of public housing. Under those constraints, building quality suffered. The difference between publicly and privately financed construction became so large that rental housing, which was largely publicly financed, gained a stigma in the UK.
Germany also loosened rental caps sooner than many other countries. By contrast in the UK, stricter control on rented housing stretched well into the 1980s, pushing landlords to cut back on maintenance and driving the quality of housing down still further. The main difference now between German and UK renting of properties is that in Germany the market is strongly regulated. House prices rise much slower in Germany where there is a greater balance between demand and supply.
The construction industry also needs to use more eco-friendly materials. One such product is straw bales, which have excellent insulation properties. Use of straw can cut fuel bills by up to 90%. The raw material has huge advantages over conventional products, is plentiful, locally available and cheap.
Straw from crops such as wheat, barley, oats and oilseed rape is used as biomass for second-generation biofuel production. Currently the UK produces around 12 million tonnes of straw. Some is used for animal bedding, mushroom compost and energy generation, there still exists a vast surplus. It leaves a surplus of 4 million tonnes which is wasted.
That surplus is enough to build 250,000 houses a year. Building regulations need to be more demanding, and redefined to provide financial incentives for builders using more innovative products such as straw. This will help these materials become mainstream. The benefits are widespread:
- the house occupier has reduced fuel bills
- the country has reduced fuel needs
- the environment has reduced carbon emissions
- the carbon footprint is low as materials are local
- it uses material that is currently wasted
An industry has developed that offers households free solar panels for roofs. It gives the occupier some free electricity. The investment is financed by using the excess electricity produced to sell back into the grid.
Social housing contains some of the most likely people to both suffer from fuel poverty and benefit from the free electricity during the day. They are also more likely to be paying higher prices for fuel on prepay meters. There is a clear case for the retrospective installation of solar roof panels in social housing so reducing fuel poverty. At the same time the excess electricity that is sold back to the grid can be used an income for the housing association or other house owner.
The energy regulator must also examine why prepay meters are on higher tariffs than fuel supplied through monthly standing order or quarterly payment. This is a supplier abuse since the meters are almost always restricted to the most vulnerable individuals and the cost to the supplier of servicing them is lower than other meters.