The Institute of Economic Affairs (IEA) has stated in a briefing that the government’s failure to tackle the housing crisis is due to its unwillingness to confront the root cause of the problem and organised ‘Nimbyism’. It went on to say that “this is a short sighted strategy considering rising housing costs cause more widespread discontent than Nimby interest groups in the long term”.
Having read the IEA briefing paper, I note that there was no attempt to tackle the issue of Nimbyism or its causes. A glaring omission which I hope the IEA can address at some point.
The IEA argues that the government’s aim should be to improve affordability across the board – including all types of tenure – instead of capitulating to interest groups who do not want houses built near them. “We do not need separate policy measures for this subsector or that subsector of the housing market, but a general increase in housing supply”
I whole heartedly agree with that sentiment. Large development companies that bank land and then not build out do have a part to play in this saga, although the briefing does not explicitly blame them, but the antiquated planning system that “constrains the supply of land and has done so over a long period”!
Housing costs in the UK are now among the highest in the world, with average house prices increasing four and a half fold since 1970 after inflation. No other OECD country’s experience comes close. A similar story can be told when looking at median multiples – the ratio of median house prices to median annual incomes. Normal median multiples in developed countries are between 2 and 3; now in most English regions median multiples are around 5, with much of the South above 6.
Manifestations of lack of housing supply
- In the social sector -> longer waiting lists
- In the private rental sector -> soaring rents and higher numbers of “rogue” landlords
- For would be home owners -> difficulty raising finance and access housing finance
This briefing explains how we have come to have such an extreme housing crisis and suggests how best the government can rectify the market.
Problems with the housing market
- The UK’s housing stock is not just inadequate in total, but much of it is also in the ‘wrong place’, because what little development we have is skewed towards those parts of the country that are least affected by the crisis & demand is lowest
- There is no specific shortage of social housing, or private rented accommodation, or homes for first-time buyers, but an overall shortage of inexpensive housing of all types. Whichever tenure you consider, the cause of rising house prices is always the same: demand vastly outstrips supply
- Government interventions such as the Help to Buy scheme, changes to inheritance tax and higher tax for buy-to-let landlords are all a step in the wrong direction
- Greenbelts are outdated and conceptually wrong as protecting land should be selective –proximity of a plot of land to for example London or Oxford, is not in itself a valid reason for a presumption against development
- Focusing on boosting home ownership should not be a policy aim in its own right as this fails to address the overall lack of supply problem – increasing the overall housing stock should be the aim in order to improve affordability across the spectrum of different housing types.
Government Solutions To Date and Their Effect
- Help to Buy Scheme – pushed up house prices
- Inheritance Tax – introduces more market distortions and inflates demand
- Higher Tax for Buy-to-Let Landlords – additional tax burden on landlords as cost of servicing mortgage is a business cost like any other and tax system should treat it as such
- Changes to Stamp Duty – abolished cliff edges is step in right direction. Taxing housing transactions reduces labour mobility and impedes downsizing
- Greenbelts – outdated. Protecting land from development should be done in selective manner on basis of environmental and amenity value of the land
According to the IEA, all of these measures are steps in the wrong direction. Shelter claims prices went up by £8000 (March 2016), so its probably higher by now.
The introduction of Section 24 of the Finance Act 2015 by the then Chancellor George Osborne, taxing mortgage interest (cost of holding the business asset) will mean landlords paying tax on turnover, including money paid as loan interest to Mortgage Lenders, not on actual profit. As private landlords usually have high mortgages of about 85% of property value, the cost of the finance is the highest outgoing cost of running their lettings business. The only way to recoup the resulting loss is to increase rents, which does the exact opposite of making renting more affordable.
Suggested Solutions
- Sensible tax changes would strengthen incentives to permit development by ensuring that local authorities gain from it
- For example, introducing a local income tax where local authorities set the rate and retain the revenue.
- Attracting residents would then become a way for local authorities to increase the local tax base and permitting development would be a relatively easy and straightforward way to attract residents
- The government could also replace council tax with a local Land Value Tax
The briefing concluded by saying that It has become a cliche to point out that everybody agrees in principle that the UK needs more housing but that nobody wants those houses near them. But this is where political leadeship is required. Repeating that cliche like an unfortunate fact of life that nothing can be done about, is not enough. Public attitudes to housing are not immutable, and resistance to development can be overcome – but not if it never publicly challenged.
This is where I feel it stopped prematurely!
Lack or shortage of Infrastructure
The issue of appropriate Infrastructure was not even mentioned – at all – not once!! I am talking about roads, transport, educational facilities, doctor’s surgery, drainage and sewerage systems, shopping and leisure facilities, and the like.
The planning system is very weak when it comes to ensuring that these facilities are in place prior or during construction of new developments. Therefore, when existing stretched infrastructure is made to take additional users, it breaks and its residents that bear the brunt as their quality of life deteriorates rapidly – especially when big developments are built.
As we have found in South Cambridgeshire where demand continues to outstrip supply, these are real issues that we grapple with, usually with Highways, Bus companies and Anglian Water. Issues that the Cambridgeshire County Council should be proactively ensuring are dealt with in an appropriate and timely manner, but which experience shows has not been the case! So when the so-called interest groups protest new developments, it is up to the Local Governments to take steps not only to talk about mitigating those areas of concern, but actually putting those measures in place in a timely way. The more confidence the public have that the Local Authority is working for them on these matters, the less objections there will be to planning applications.
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Original article here.