The evident discrepencies between housing supply and homeownership

Over the past two decades in Britain, the words building and Barker have become almost synonymous but what does she think government can do to fix the housing crisis today?

Back in 2004 the former Bank of England economist Dame Kate Barker was commissioned by the Labour government to review the supply of housing in Britain. She concluded that the country needed to build 240,000 new homes a year, every year, to keep a lid on house prices.

It is a number that has been quoted in nearly every article written about UK housing and mentioned by almost every housing minister, prime minister and his or her critics since. It has also been fundamental in setting a benchmark for all governments in power since 2004, with all bar David Cameron’s setting building targets of at least 200,000 homes a year. It should be noted that all governments, including David Cameron’s, have persistently failed to meet that target.

Fast forward 12 years and Barker has been asked to give her expertise again, this time to the latest Labour-backed review into housing headed up by Pete Redfern, chief executive of the house builder Taylor Wimpey. This review, published in November 2016, did not focus on the supply of homes but rather on their accessibility to buyers.

It found that home ownership in England had fallen from 70.9 per cent in 2003 to 63.6 per cent today, with a dramatic drop from 58.6 per cent to 36.7 per cent among those aged between 25 and 34. The report’s authors concluded the culprits for falling homeownership rates weren’t a lack of sufficient supply but a fall in real incomes for would-be first-time buyers coupled with a crackdown on mortgage lending in the aftermath of the financial crisis. Indeed, research by valuations firm Hometrack found at the end of the year that the average Londoner now needs a massive 14 times their annual salary to pay the average house price in the capital. This affordability crisis isn’t contained to London either – Cambridge and Oxford also have double digit price to earnings ratios. While across the UK as a whole, people now need on average six-and-a-half times their annual salary to buy their own home.

Barker and the Redfern review focused on this growing affordability crisis and claimed that increasing housing supply ‘does not directly improve the home ownership rate’ and cannot therefore be the only answer to Britain’s housing crisis.

They were slammed by various consumer groups for sidestepping the building issue. Housing charity Shelter said a ‘drastic shortage’ of affordable homes was the biggest factor driving our housing crisis while mortgage lender Aldermore actually accused the review of ‘bypassing’ the role that decades of housing undersupply has had on prices, which have risen 270 per cent since 1997. As if to pile on the pressure, Gavin Barwell, the current housing minister, recently highlighted the link between supply and prices, suggesting that if we keep building at the current rate then by 2025 the house of the average owner occupier in the South East will increase in value by £1,000 a week. In a few years’ time, the homes of many people in counties like Kent and Hampshire will make more money than the people who live in them.

Housing is clearly a highly emotive subject for Britons – but it’s important not to muddle up the component parts of the housing market and their roles. Housing supply and homeownership are two quite separate things: the former completely ignores tenure while the latter is concerned solely with that. This is an important consideration and one that the Redfern Review did seek to address – it posed the question, is homeownership the right tenure for everyone and shouldn’t we consider how the private rented sector fits into the picture?

‘In reality, it’s not unusual to have periods where people’s homes rise more in value than their incomes; it’s more important to understand the relationship between prices and supply and this has to be looked at long-term,’ Barker says. ‘In my 2004 review, I argued that 50,000 new homes per year would affect price inflation at a rate of 0.7 per cent. There has arguably been quite good supply of new homes in recent years. Much more important is the fact that the growth in people’s incomes hasn’t kept pace. It’s very easy to talk about supply and it is very important – but it shouldn’t be exaggerated.’

It does however seem to be flavour of the month with Theresa May’s government returning to top down house building targets after Cameron abandoned them in 2010. May’s government has said it hopes to build 200,000 a year in England; to put that into context, just 139,030 were completed in the year to June 2016, according to the Office for National Statistics. Housing policy as it stands seems determined to address this: in a bid to boost building, Chancellor of the Exchequer Philip Hammond promised in November’s Autumn Statement that £2.3 billion would be spent on a new Housing Infrastructure Fund to pay for projects such as roads and water connections to support the construction of up to 100,000 new homes by 2021. On top of that, £1.4 billion will be made available in the form of grants to housing associations to provide 40,000 new affordable homes, including some for shared ownership and some for affordable rent. Another £1.7 billion will be used to speed up the construction of new homes on public sector land.

That’s all very well but Barker refers back to the Redfern proposal that a cross-party, independent housing commission is needed if the country is to get a truly strategic long-term view.

‘Something that has really frustrated me is the obvious lack of co-ordination on housing policy between the major government departments, the Bank of England and the Treasury – it’s very clear that we could do with a more strategic overview,’ she says. ‘I think it’s been very unclear what government actually wants to achieve with its housing policy. The previous government seems very keen on home ownership but with little consideration of what that means in terms of increasing household debt, and the implication that has for wider financial stability at the other end. Government has to ask itself what the trade-off between these things is,’ she adds. ‘The lack of co-ordination and clear understanding and agreement of this remains a real issue.’ So what would she do? Funding purchase is the real problem facing first-time buyers, she argues, their incomes have not kept pace with house price inflation.

‘The question that poses, is why the housing market hasn’t adjusted to that?’ she says. ‘There are several possible reasons: some of it comes down to supply not being sufficient; we have also seen housing schemes aimed at topping up prices through encouraging homeownership; and undoubtedly the number of buy-to-let landlords purchasing properties has offset some of the demand from first-time buyers. For that reason the stamp duty surcharge on buy-to-let seems pretty sensible because it will have the effect of stemming the flow of demand. I think tapering the tax relief on mortgage interest for landlords is more concerning in that in that this is likely to affect tenants through higher rents’.

‘A more meaningful way to support first-time buyers into homeownership given this context would be through rent to buy,’ she says. ‘I suspect that we will see a much stronger move into this type of approach by the government. It doesn’t necessarily expose people to so much up front risk.’

And if she had one overriding message to MPs? ‘It’s very boring but it has to be build more housing for social rent,’ she says matter-of-factly. ‘There are lots of things the government can do to encourage local authorities to use their ability to borrow to fund building. Local authorities currently have not a single duty of care to house the homeless – that is pretty appalling for this country really. And it’s hard to see how to address this unless the supply of social housing is addressed.

‘Local authorities should be encouraged to raise funding through issuing bonds which would be partially underwritten by the government. That has been proven to be successful in the past and would work again.’