Homing instincts

By John Perry

1 April 2011

With almost 2 million English households in housing need, what direction of travel should the coalition take to help close the gap? A range of government policies seem to be flying in the face of the latest evidence

The coalition government has developed a reputation for acting on instinct rather than on evidence. Perhaps that is not always a fault. We had a lot of ‘evidence-based’ policies from Labour; sometimes they worked no better than ones made on a whim. But in housing we are seeing changes that, in combination, amount to one of the coalition’s biggest shake-ups in service provision.

Not only was housing hit particularly hard in ­October’s Comprehensive Spending Review – as attested to in these pages by the Institute for Fiscal Studies – but a heap of targets set by Labour has been jettisoned, and the ­monitoring mechanisms have gone with them. 

As coalition housing policies change across the board, they will arguably be judged mainly for their impact on people’s housing opportunities. This is because not only are there a lot of people in housing need, but the mechanisms for meeting those needs are being radically altered. How big a problem is there and will the ­coalition’s proposals address it? 

Let’s start with an irony. In November, the coalition quietly published the most comprehensive assessment for some time of housing need and how it is likely to change. Estimating housing need, commissioned by the previous government, assesses not only the current housing shortage and how it might change over the next decade, but the effects different policy measures might have on reducing it. The report reveals that almost

2 million households in England are in some category of housing need. As the chart overleaf shows, in just five years – between 2004 and 2009 – the level of need grew from 6% to 9% of all households.

If you were looking to create evidence-based policy, you couldn’t have a better basis than this report. Needless to say though, there is no sign at all of it influencing policy, at least judging by recent ministerial speeches and announcements.

Why is housing need so high? First of all, of course, ­private builders have cut their output sharply since the 2007 credit crunch and this has only partly been offset by steady growth (from a low base) in the social sector. Lettings by social landlords to new tenants have been falling steadily for a decade, although the decline has ‘bottomed out’ as more new units have come on stream. The private rented sector continues the steady growth it has enjoyed for the past ten years – 3 million households now rent privately compared with 2 million in 2000. But many of those in poorer quality rented properties still show as being in need.

Affordability is another major issue, whose nature is changing. Private rents have remained relatively affordable compared with average incomes. House prices became more and more unaffordable in the period up to 2007, but since then the affordability gap has closed somewhat. The main barrier facing first-time buyers is the need to find much bigger deposits: 100% mortgages are a thing of the past.

Potential entrants to the market now divide into two groups. First in the queue are those who can get help from the ‘bank of mum and dad’.  The number of such buyers who are under 30 years old is almost the same now (at 80,700) than before the credit crunch (80,200). Then there are the rest, who have to save the deposit themselves. Typically they now have to wait until they are 36 before they can buy. Professor Steve Wilcox, joint editor of the UK Housing Review 2010/11, estimates that, compared with 2006, 100,000 fewer potential buyers are now entering the market each year, prevented from doing so because they lack the required deposit.

The other side of the equation is housing demand. Household growth tends to be limited by the supply of homes, of course, resulting in a build-up of unmet need. As the chart shows, most of this is made up of sharing, overcrowded and otherwise ‘concealed’ households. The remainder is due to affordability problems, mortgage payment difficulties, or houses being unsuitable (for example, for disabled people).

Estimating housing need suggests rather optimistically that need will fall slowly over the next ten years, as access to homeownership improves and private housebuilding picks up. But even if this proves correct, there will still be more households in need in 2021 than there were in 2004.

That raises the question of whether government policy will improve housing supply. Ministers say they want to ‘build more of the homes that people want in the places they want to live’. They appear to pin their hopes for the private market on a combination of sound ­economic measures and changes to planning and ­housing policy.

The biggest unknown is whether there will be a ­double-dip recession.  But leaving this aside, there are still big problems facing the private market: public sector cuts and job losses; household budgets hit by increases in VAT and food and fuel prices; and the general caution that is leading people to pay off their mortgages rather than borrow more. While the market is sluggish and house prices remain below their 2007 peak, there is little incentive to build new homes that might never be sold.

The government is famously spurning ‘top-down’ ­policies. So house building targets and regional planning mechanisms are out. In their place are: the New Homes Bonus, which gives communities a financial incentive to agree to new house-building; the Community Right to Build, which will allow local people and communities across England to decide what new homes, shops, businesses and facilities to build and where; and a much less restrictive planning regime. One forecast is that the New Homes Bonus might produce 14,000 extra new homes per year.

At the same time, there have been dire predictions of cancelled housing schemes by planning authorities. For example, last November consultancy Tetlow King told the Commons communities and local government select committee that local targets had been cut in total by 182,000 homes, despite the promise of the New Homes Bonus.

And now the government seems to have started to worry about the housing market. While housing minister Grant Shapps has called for house-price stability, he also organised a ‘summit’ in February to consider the barriers facing first-time buyers. In truth, the drop in their numbers is so big it seems unlikely that government policy measures can achieve more than marginal changes.

While the private rented sector continues to grow, government policy towards it has so far been largely hands off, although this is about to change. When the new rules for Housing Benefit start to take effect in stages from this April, half of the 1 million benefit recipients in the private sector are forecast to have their benefit cut by £10 per week or more. The government says that landlords will adjust rents downwards in response, but it is anyone’s guess whether this will happen. The demand for lettings from those above the benefit thresholds is high and many people are no longer able to buy as an alternative to renting. Furthermore, government plans to increase the pressure on private renting by allowing councils to put households formally accepted as ‘homeless’ into the sector, instead of offering them social lettings.

Social housing has been doing well in recent years, with better-quality stock overall and its modest output recently boosted by some new council housing, the first for a long time in most places. While new lettings have not increased, they have at least stabilised and sales under the right to buy scheme have fallen sharply. More of the lettings now go to traditional ‘waiting list’ cases because fewer households are being accepted as homeless.  Measures of landlord performance and of tenant satisfaction all show steady improvement. Labour also promised a complete overhaul of council housing finance, and the coalition is going ahead with it from April 2012 – although the deal will provide little ­headroom for any new house building.

In fact, because of the investment cuts, house ­building by councils will virtually stop after this year while housing associations’ building will be severely curtailed. This is to make way for the new Affordable Rent programme, which will allow social landlords to offer fixed-term tenancies on rents of up to 80% of market rate, and use the extra revenue to build new homes. The government is also investing £4.5bn to provide up to 150,000 new affordable homes over the next four years. But this is an untested model and even if the target were met, it would represent a cut compared with previous new build plans. So the social sector is also facing major challenges, not least of which are the various policy changes that will blur its focus on ­meeting housing need.

Given the economic uncertainties, the impact of the spending cuts and all these policy changes, it would be reckless to try to make firm predictions about the consequences for housing supply and demand. If there is one fairly safe bet, it is that homeownership will fail to grow significantly. Estimating housing need concludes that it will remain at 67% of households, below its 69% peak. So government ambitions of promoting ­homeownership are likely to be frustrated.

Yet there is a massive backlog of need still to be met and the pressures of population growth will continue. If homeownership doesn’t expand, those who can’t buy will want to rent, and those who can’t even rent will share, fail to leave the parental home or eventually present themselves as homeless. There is, as we have seen, a big experiment under way. It is going to affect the housing prospects of the one-third of households who aren’t homeowners and whose chances of buying aren’t likely to get better very soon. 

Announcing the details of the New Homes Bonus in February, the government said that ‘previous ­policies have not met Britain’s housing needs’. As the graph shows, this is incontestable. On the day of the announcement, however, it was revealed that ­housing completions fell again in 2010, and are now 42% below their 2007 peak. The government has set itself the ­challenge of closing an enormous gap, and at the time of writing the gap is getting bigger.