12 Jun 2007

The Affordability Debate

I have recently been sounding off about house prices. Or the affordability issue, as the great and the good like to refer to it. My contention is that we can no longer build our way out of this problem because a) any new homes will just fill up with migrants from all over the world because everyone wants to come and live and work in the South-East and b) the climate change issue is more important and, until this is solved, it is foolish to embark on large building programmes, however climate-friendly. We should, instead, be concentrating on upgrading what we have already built.

What I have avoided to date is discussing what else could be done about the affordability issue. This is because I haven’t given it a moment’s thought, although somewhere in the back of my mind I am aware that it’s easy for a baby-boomer like me, owning unmortgaged property, to be complacent about it all. On the other hand, our three sons are, or soon will be, at the sharp end of the problem and it would be nice to think that they can house themselves without having to wait for both their parents to drop dead, and then for them to fight over what’s left after the government has had its fill.

There was a fine article about these very issues in yesterday’s Evening Standard by Andrew Gilligan entitled Yes, we can solve our housing shortage. In it, Gilligan suggests that, instead of trying to increase the supply of new homes, it is time now to start dampening the demand. Gilligan started by pointing out that two thirds of new homes built last year in London were sold to investors, a somewhat staggering statistic. He elaborated, and I think I agree with him, that housing has become an investment asset class, decoupled from the normal rules of supply and demand, and that the London market in particular is being driven ever higher by speculation. Those that have property have become wealthy beyond their wildest dreams and now have the wherewithal to purchase second, third and fourth homes, whereas those without property have become locked out, unless they earn top dollar.

Gilligan makes two specific suggestions:

1) that we should insist that the buyers of at least some of our new properties should actually live in them and
2) we should clamp down on tax breaks that buy-to-let landlords now enjoy.

It sounds like a plausible enough platform. But actually I don’t think he has gone far enough. I am struggling to think of buy-to-let tax breaks. I don’t think there are any, unlike the family home, which enjoys the status of a mini-tax haven, thanks to the miracle of Principal Private Residence Relief. And as for insisting that people actually live in the homes they buy, well this is already happening to some extent with the many affordable and shared ownership housing schemes around.

On the other hand, even if the detail is a little wonky, I think Gilligan is onto something. If you made the tax and incentive signals strong enough, I am sure you could dampen down property speculation. It’s not as though demand management has completely gone out of fashion: indeed it’s having a mini revival politically with the introduction of the London Congestion Charge, proposals afoot for nationwide road pricing and tentative discussions about carbon rationing. Why not add housing to the list? It’s a nearly finite commodity, and it’s being allocated according to wealth, not need. Ideal material for vouchers or a rationing system of some description.

But how might it work? Imagine every year each adult would be granted a notional housing footprint, say around 50 sq m each, about the size of a one or two bedroomed flat. If you didn’t own property, you could then sell your housing entitlement: if you wanted to own more than this, you would have to buy it from those who were selling. A market would be established, rather like the carbon trading exchanges, where allowances could be bought and sold. The more distorted the balance between the haves and the have-nots became, the higher the value of the entitlements would be. Such a scheme would aim to greatly reduce the attractiveness of owning property purely as an investment. In effect, it becomes a distributive tax, just as how people envisage carbon rationing as working.

Sure, it would be complex to set up and probably involve about two zillion civil servants to police. It might have all kinds of unanticipated side-effects. Incentive schemes often do. I know, I know. But it’s a start. And it has to have a better chance of succeeding than the total non-policy that the government is currently putting forward.

Has anybody else got any other ideas?


  1. AnonymousJune 13, 2007


    You've missed the point that Martin Pawley understood only too well in his "Home Ownership" of 1978, published by Architectural Press.

    By the 1970s the housing market in Britain was about the trade in the existing stock, and not about the demand for and supply of new housing. You are honest enough to recognise that it is your generation that is now taking the market in the mass of existing housing to new heights of speculation. But that is just a symptom of the fact that the housing market is an antiques market, topped up with a few eco-homes every year.

    What Pawley understood too was that the state had intervened in 1947 to nationalise land use, not land itself. The aim then was to reconstruct Britain and build the welfare state, but by the 1970s, because that job had been exhausted politically and economically, the result was to turn the housing market away from supply of new to the trade of existing. Instead of the old homes depreciating because there were better being built, the effort turned to “home improvement”, new construction declined, builders built fewer new homes and sold them for more, and the market became a source of popular speculation, soaking up money that could not find a more lucrative or less risky outlet. The symptom was the popularity of the speculation that comes with the tenure of home ownership, which has reached an extreme case today in Britain, but the cause was the post-war compromise on freehold rights.

    You then want to further institutionalise the trade in existing housing. Worse, you want to institutionalise that trade as if living accommodation were limited and needed to be rationed.

    That then leads you on to see population growth as a problem, and specifically blame immigrants in a private sector version of Margaret Hodge’s New Labour racism. That can only lead to social division.

    Arguments over more or less land for new housing are not going to get us anywhere, because even supplying land for 500,000 homes a year, projected into the future, cannot overcome the fact that we are not free to build on agricultural land. The market in what exists is based on there not being that pre-alternative of building on farmland. If we did have the choice to build on farmland, already developed land could not inflate in price.

    So stop your racist decent into a baby boomer led system of spatial rationing, justified as sustainable, but at base another support of the property market your children can’t get into without you dying. Realise that freedom of movement and freedom to build, while different freedoms, are the only way forward for your generation and your children IF YOU WANT TO AVOID SOCIAL DIVISION.

    But maybe you don't

    Maybe you are Margaret Hodge in self-build drag.

  2. Well thankyou Ian. You ranting is even worse than mine!

    The funny thing is I don't really disagree with your prognosis of the problem, the nationalisation of land use back in 1947. Where I differ now is in the solution. We can't set the clock back to 1947 as the world is now a very different place.

    The question is what are you hoping to achieve now by having a mass housebuilding programme? Where will it get us? Are you looking to solve the affordability crisis? It won't. Even if all planning controls were abolished tomorrow, it wouldn't stop house prices rising. It might have done in the 1950s and 60s, but not anymore because there is a huge pool of people from all over the world who would like to come and live in these new homes. That's not racist - it's realistic and your head would need to be stuck quite a long way up your arse not to be able to see that. If you built a million new homes a year, all it would do is to increase the population by two or three million. If that's what you want, fine. But I don't think it is what you want.

    So i think before you roll out your audacious programme for new cities, you need to take a long hard look at just what you are hoping to achieve. There is no point building just for the sake of it. The only way your increased supply would ever have any effect on house prices would be if you introduced really severe immigration controls and stopped the flow of migrants into the UK.

    Which would leave you looking a lot more like Margaret Hodge in drag than me. Although personally, I think you'd look better in that little off-the-hip number that Yvette Cooper was wearing on Monday.

  3. AnonymousJune 13, 2007


    My arse is too big for that little off-the-hip number, but not big enough to insert head into.

    Stop worrying that your children might want to bump you off so that they can get on the housing ladder before immigrants buy up the little bits of Britain we're still allowed to build on.

    Have a look at www.audacity.org\IA-23-04-07.htm

    The "housing market collapse" fear is an excuse to avoid planning for housing production.

    The point is that the market could collapse anyway, and we still not build new homes. The point Martin Pawley made - and you should read it - is that new house building hardly changes the market in existing housing. I think he was right in 1978, and remains so. building hundreds of thousands of homes will not have the simple effect of making housing affordable because the value is not in the cost/m2 of construction.

    At audacity we have argued for 500,000 new homes a year just to meet household growth (240,000) and just to replace the worst existing stock at a rate of 1% per year (260,000) We have not said that would collapse the property market, or even "correct" it.

    We have been trying to argue that it is the denial of development rights since 1947 - still underpinning land use planning today - that means the cost of land WITH PLANNING APPROVAL is maintained substantially above agricultural land prices.

    So it is only when people have the freedom to build on agricultural land that the property market will return to a situation where the cost of the construction is more than the land. That can be done either through complete abandonment of the 1947 nationalisation of development rights, or by an extensive system of pattern book planning applicable to vast areas of Britain's farmland.

    So calling for the building of at least half a million homes a year, and demanding the freedom to build on farmland are two aims of audacity. These are not, as you imagine, antithetical to wanting population growth and an end to immigration controls.

    More people, building more homes, on more land, will be a better future than the opposite.

    That will not be a turning back of any clock, but a way forward from the New Labour promises of less freedom of movement, less housing that people can afford on low wages, and less space to live in.

    Have a read of Pawley's Home Ownership and then come back.



  4. Ian,

    >So calling for the building of at least half a million homes a year, and demanding the freedom to build on farmland are two aims of Audacity.

    I would have been a fully paid up member up until quite recently. Not sure where my epiphany occurred but, to quote JM Keynes, "When the facts change, I change my mind." And the facts have changed. The problem you address is still there, for sure, but your solution is now counter productive. A 30 year build-fest to write the wrongs of 1947 is about as relevant as a campaign to save the British car industry.

  5. AnonymousJune 18, 2007

    " I am struggling to think of buy-to-let tax breaks. I don’t think there are any, unlike the family home, which enjoys the status of a mini-tax haven, thanks to the miracle of Principle Private Residence Relief."

    Presumably, tax relief via deductible mortgage repayments?

  6. Ben,

    It's a fair point but tax relief is not the same thing as a tax break. Tax relief on business finance is a given, throughout the business world: finance costs are treated as just ANOther business cost.

    That's not to say that tax relief on buy-to-lets could not or should not be removed, but that would doubly penalise the buy-to-letters because they would still be expected to pay tax on their letting profits, as well as CGT on any sales.

    The logic behind removing tax relief on mortgages for your main home was that you pay not tax on it. MIRA was a tax break to encourage home ownership and make mortgages cheaper than the market rate.

  7. Tax land based on its economic usefulness, whether it has buildings on it or not, the same would be paid.

    Houses depreciate, land appreciates. Limited supply of land.

    However, in my view, land prices (especially important for self-build) have suffered from speculation.

    House prices have also risen, but probably at a lower rate.

    Rents have barely risen, and in some areas they have fallen over the last 10 years.

    So, is this worry about affordability only temporary?

    I hope so, I want to provide a house for my newly acquired family (girlfriend has 2 kids, going through bad divorce).

    Ideally I would buy a great bit of land on the edge of a village near Northampton, and self build a wonderful, individual eco house.

    Land prices and hoarding (speculation) prevent this for the moment, I hope for a crash. Land prices are historically more volatile than houses, I believe.

    For my own benefit, I've come up with a way to value land - might be rubbish - views welcome...

    MaxLandPrice = (MarketPriceOfHouse * .8) - (buildCost*1.15)

    (.8 is profit/risk [100%-20%], 1.15 is cost with 10-20% risk added in)

  8. AnonymousJune 29, 2007

    The simplest way of tackling the problem would be for the owners of buildings, whether single family homes or multiple occupancy to pay the council tax, and double it for those who own more than one building or flat. Eliminate the exemptions to just one, estate undergoing probate. Everyone enjoys the 'benefits' or civilization, so everyone pays, but the owner pays. Incorporate it into the rent. When the buy-to-let crowd got tired of collecting tax for the council, they'd sell. No exemptions if it is empty either. I am fed up with the extortionate cost of housing in this country.