Rebuilding the housing economy

The UK’s chronic housing shortage can be found in all parts of the country and cuts across all forms of tenure. We obsess about the London market and the first-time buyer, but we fail to innovate, to think of new solutions or to disrupt a seriously dysfunctional market.

Shelter has identified, for example, that around one in forty renting households in places as diverse as Peterborough, Bolton, Birmingham and Tameside are at risk of eviction. Even where house prices are cheap by London standards, renting is insufficiently affordable and accommodation can be of poor quality.

The UK is unusual if not unique in Europe for not having a rental sector that operates at scale. Council housing was sold off and not replaced after 1979, with the result that the market polarised between Housing Associations and other social providers with finite resources, and a growing cottage industry of buy-to-let landlords. Not all of these operate to high standards: if not actually Rachman, then certainly Rigsby.

Growing home ownership meant that the plight of renters over time became a second-order political issue – but owner-occupation has now fallen to 63%, its lowest level for 29 years –and the rental sector is straining to take up the strain. After a last-minute dash for buy-to-let mortgages in April ahead of Stamp Duty changes, the attractions of becoming a landlord are fading due to high transaction costs.

Institutions can take some of the strain in providing quality homes for rent. Germany and Holland are great examples: long-term institutions invest in scale in build-to-rent because they know that predictable rental incomes (inflation with a cap or collar) are ideal for paying their pension obligations. It’s a model Legal & General is bringing to the UK, with an initial £600m partnership with the Dutch pension fund PGGM, creating new homes for rent for example in Walthamstow (London), Salford (Manchester) and Bath.

It’s not just the rental sector that lacks supply. The basic economics of housing in the UK doesn’t work. There is no other market where supply and demand are so mismatched, but no-one has stepped in to address production. Modular housing construction can be part of the solution. We can use modern technology to manufacture homes off-site at industrial scale – delivering large numbers at pace. Legal & General’s new factory in Yorkshire, for example will be able to produce 3,000 houses annually.

In the UK we look at home-ownership through the wrong end of the telescope. Unlike any other product, housing is disconnected from the price points at which purchasers can transact. This is at the heart of the affordability problem. We are good at building million-pound apartments in central London for non-resident purchasers. But we don’t have a local offer at £99,999, £199,999 and so on.

The constraint is not the cost of building – if modern, modular techniques are used. More often it is the cost of land, and again we have been stunningly unimaginative. Building at greater density does not mean reducing quality of life for residents: Paris and New York have twice the density of London. Many of our 1960’s towns now need economic regeneration as they are inappropriate for modern living and modern business. Again Legal & General are taking action: our regeneration of Bracknell recognises that we need to bring people back into town centres.

And not just for first-time buyers. We need more specialist housing. A third of retired people want to right-size into suitable accommodation close to family, friends and facilities. The over 60’s own £1.3 trillion of housing equity, yet only 2% of new building is for older people. Better choice, again at the right price points, would allow people to make housing decisions that make financial sense – allowing them to improve retirement income – and which are also positive in terms of lifestyle. And it would free-up family homes for those with families. This is another initiative Legal & General experts are working on.

Ultimately the provision of housing is about inter-generational and intra-generational fairness. Baby-boomers have enjoyed a huge house-price windfall. We shouldn’t be pricing out our children through a combination of land-restricting Nimbyism, constraining supply and by clinging to outdated building techniques. The Bank of Mum and Dad provided £5bn of support for house-purchases last year, but what of those young people who don’t have parents who can fund them?

That is why we need a radical increase in decent-quality, suitably-priced homes for people to own and to rent. Post-War politicians, like Nye Bevan and Harold Macmillan, operating in an age of real austerity, managed to create 300,000 or 400,000 new homes per year: we should be ashamed of our 125,000 today.