The high price of the UK’s housing shortage

With mortgage lender Northern Rock on life support, everyone is wondering if the housing boom is over – in truth there never was one.

It is worth recalling that commentators have been announcing the end of the housing boom on a regular basis for the last five years; ‘what goes up must come down’ is about as scientific as most economic forecasting gets in this area.

Still, the signs now are worrying. House prices did actually fall last month, though only by less than half a per cent (and slightly more in London). Volume house builders Barratt’s announced that sales slumped by a tenth two weeks ago. In the first half of 2006 30,000 families were taken to court over mortgage payments; this figure is now up by a third.

What is causing the difficulties is a shortage of credit, after a lot of bad US debts (‘subprime mortgages’) failed. The freeze on lending between banks hurt Northern Rock hard because it was overexposed, but commentators fear that the bank’s crisis is just the tip of a bigger iceberg, given the acceleration in UK consumer credit.

If the market does tank, the consequences for individuals will be serious. Lenders have encouraged greater indebtedness by extending the amounts that people can borrow to as much as five times their incomes. If their homes lose their value, the owners will be servicing debts that are unsecured, at higher rates of interest. Investments that many hope will keep them in old age could be lost. Homelessness today is thankfully quite rare, but it is rising.

For the country as a whole, though, the ‘housing boom’ of the past decade has been a scandalous waste. More than three and a half trillion pounds have been invested in housing, the lions’ share now of all investment in the UK. But despite massive growth in investment and prices, housebuilding is at a record low.

Rather than a housing boom, we have had a boom in prices. In the last decade, between 160,000 and 200,000 houses have been built each year. This might seem like a high figure, but it is not enough to replace those existing homes that should come down (1). And it is definitely not enough to meet the increased demand that comes with population growth and increasing numbers of smaller-sized households.

Now that the house price boom is tottering, all the professional PoJeremiahs are gloating. Columnists Simon Jenkins and Will Hutton are telling us that they told us so: too much housebuilding on the never-never has led us to disaster. The good times, they say, are over.

But what are they talking about? There has hardly been any housebuilding, only rising property prices – and this did not increase consumer spending. On the contrary, it swallowed up a lot of people’s income that could have been spent elsewhere.

For the environmentalists, the prospect of new houses was always a nightmare. Climate campaigners Mark Lynas and Madeleine Bunting prefer to have population controls and a cut in immigration rather than new homebuilding. For them, too, the housing boom is evidence of consumer society gone mad.
Far from it, the ten-year climb in house prices was the result of the environmentalists’ most successful campaign: to prevent new homes being built. It was a fluke of politics, but in 1997, environmentalists were drafted in to write the government’s housing policies.

Lord Richard Rogers’ Urban Task Force, drawing on the environmentalist Herbert Girardet’s concept of limiting the human footprint, argued that we needed to beef up the Green Belt restrictions on urban sprawl. New building could only take place on land that had already been developed. Developers should pay for social regeneration (under so-called Section 106 agreements). The net effect of all these restrictions was to choke off new building, leading us to the shortfall we have today.

Britain’s restriction in housing supply coincided with an increase in consumer demand, because central governments across the developed world lowered interest rates, making credit cheaper. This policy was supposed to kick-start economies that were in recession in the early Nineties.

Unfortunately, all that cheap credit did not boost growth. As the construction industry demonstrates, environmentally-inspired government regulations choked off that growth which might have been encouraged. Instead the excess capital has washed around, stoking up investment bubbles – in the East, then the dot.com sector, then the fine art boom and, for the last decade, in house prices. The real disaster is that all of that cash might flow through the housing sector without having any positive stimulus on construction.

It is worth noting that the boom in house prices took place all over the world. The difference is that in countries that had no UK-style Green Belt restrictions, like Ireland, or those regions of the US that had not adopted Portland’s ‘smart growth’ restrictions on housebuilding, the rise in prices encouraged new construction. Only in the UK did prices rise so high while construction slumped so low.

The Jeremiahs are gloating too soon. The credit crunch is real enough, but it is too early to say that house prices are going to collapse. If that were to happen, the outcome would be destructive to say the least. Instead of pushing prices up, the underlying shortage in housebuilding would lead to homelessness. Environmentalists’ I-told-you-so-gloating over householders’ difficulties is particularly galling. It was they who created the housing shortage in the first place.

James Heartfield is author of Let’s Build! Why We Need Five Million New Homes in the Next 10 Years. (Buy this book from Amazon(UK).)

(1) The UK housing stock stands at about 24 million, which means that if they are to last for around 100 years, then we need to build around 240,000 a year to replenish the existing stock. Instead the UK has built fewer than that so that each year, the length of time that the existing stock has to stand increases. John Stewart of the Housebuilders Federation estimates that at current levels of replacement, houses built today will have to stand for 1,200 years.