MONEY COMMENT
Build More Houses To Solve Housing Crisis

By Jane Mack (TMFJane)
December 10, 2003

Earlier this year the Chancellor, Gordon Brown, commissioned a review to find out why there weren't enough houses in the UK to go around. Kate Barker, a member of the Bank of England's Monetary Policy Committee, was tasked with the job and she published her interim report today. Her preliminary conclusion is we're not building enough homes to meet demand.

Obvious, isn't it? But there's a bit more to it than that.

It's true that we're building fewer and fewer houses - in 2001, around 175,000 dwellings were built in the UK which is the lowest level since the Second World War. But, at the same time, the population has been increasing and the average size of households has been getting smaller. The main reason is that more people are living longer and more people are getting divorced.

So, as demand has outstripped supply, house prices have shot up leaving more and more people unable to afford to buy. In 2002, only 37% of new households in England could afford to buy a house, compared to 46% in the late 1980s. And, while in 1993, a London house cost around four times the annual income of a low-income household, by 2002 it had risen to almost eight times annual income.

As well as those factors, and to get back to the point that not enough new housing is being built, Kate Barker puts the blame partly on the house-building industry, partly on planning constraints and partly on skill shortages.

The house-building industry owns considerable amounts of land around the country, some it with planning permission. They've been accused in the past of sitting on it and building houses very slowly and drip-feeding them on to the property market to keep prices high. To a certain extent this is true. But, as the report points out, property developers don't have much incentive to build in vast quantities when the planning constraints are so hard to negotiate and they can't find enough decent bricklayers, carpenters and plumbers to do the work anyway.

House builders also have to consider the fact that a 1% change in house prices affects their gross development profits by almost 8%. That's great for them if prices go up by 1% but not if they go down. It's little wonder that many prefer to build houses in smaller batches – it's less risky.

Kate Barker says in her report that the government is already doing something to make planning procedures faster and more transparent but points out that it has a number of other policy levers at its disposal which it could use to influence the supply of housing, for example through taxation.

One way of doing this, she says, would be to encourage greater institutional investing in the private rented sector. Large investors tend to put their money into building offices, shops and industrial estates – only about 1% goes into residential accommodation generally – but if US-style Real Estate Investment Trusts were available, this could encourage more house-building.

Considering the Chancellor has commissioned two major housing reviews this year, the Barker Review and that of David Miles who is looking at the mortgage market, this is the one and only aspect of the housing market that he mentioned in his Pre-Budget Speech. He said he would look into it.

Kate Barker's report is only an interim one. She's planning to publish her final report and make full recommendations in the spring.

Read the Barker Review.