The urban consolidation end-game

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By Leith van Onselen

I have written previously how the UK housing system is arguably the worst in the developed world.

Thanks to the Town and Country Planning Act 1946, the right to develop has been virtually nationalised and the UK is ruled by NIMBYs. All of the major cities and towns in the UK are surrounded by “greenbelts” that are off limits to development. And the centralisation of government finances has also led to a situation whereby local governments receive little benefit from increased population and development, but bear most of the costs, making them anti-development.

The end result is a chronic undersupply of homes, driving-up both prices and rents. And the situation has recently been made worse by the implementation of the government’s “Help-to-Buy” shared equity scheme for first home buyers and the Bank of England’s “Funding-for-Lending” program, which have artificially increased demand and pushed against the constipated supply system to further inflate prices.

If you want to see the ultimate end-game of forced urban consolidation, look no further than the above video, which shows that when you constrain land/housing supply via planning, you end up with deleterious consequences.

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Watching the video and reading the associated story is frightening. Essentially, Generation Y (dubbed “Generation Rent”) is being unneccessarily forced to live in expensive, cramped living conditions, renting at exorbitant prices from asset rich Baby Boomers or investors, who are gaming the rigged housing system to their own advantage.

There’s the example of landlords renting out individual rooms for exorbitant profits:

Generation rent is downsizing. And as demand for smaller, cheaper accommodation grows, investors and entrepreneurs are rushing to cash in…

“We basically take a property from a landlord, pay him a long-term guaranteed rent and then sublet it on a room by room basis. That’s how we make our margin,” Kim Stones explains.

Kim’s strategy is to adapt living spaces in order to maximise profits when the property is sublet. He rents three bed properties from landlords and sublets them as five individual rooms by turning sitting rooms and lounges into bedrooms. He is at pains to point out that he follows all relevant regulations.

“We’ve got 23 rent-to-rents,” says Kim. “Our target is a minimum £400 a month profit on any property, and we do have properties that make £1000 net profit a month”

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And property developers producing tiny 18 metre square apartments – one-third of the size of a squash court – for “affordable” rentals targetted at Gen Y’s:

A property developer from China is banking on the future of the rental market being tiny. In floor space at least.

He’s hoping to attract priced-out tenants with a new development of micro-apartments. Planning permission has been secured for 160 one bedroom flats starting at just 18 square metres, less than a third the size of a squash court.

Surprisingly, the micro-apartments will be located not in one of the UK’s major cities, but in Oldham.

“Do you really think Oldham’s ready for this kind of living?” I ask Dr Francis Liu, Chief Executive of G-Suite Holdings, the Chinese company behind the project.

“Yes, I come from Hong Kong and I know people are looking for quality buildings with everything in,” he says…

“The trend in New York and San Francisco is for tiny micro-apartments. The idea is coming from those people.”

I put it to Dr Liu that unlike San Francisco and New York, Oldham has plenty of land ripe for development, which could easily house decent-sized homes.

“The key is affordability,” he replies. “You don’t have to be an accountant to work it out. The smaller size will result in lower rental.”

But what does Oldham gain from a development like this?

None of the apartments have been earmarked as affordable housing, and local first time buyers appear not to be the developers’ target market.

Instead, the apartments will be sold to investors in the Far East. They are being promised an 8% return on their investment.

“Micro means small,” says Dr Liu. “Boutique means it has some style. Apartment means self-contained. You can have everything within a tiny space, but without giving up any luxuries.”

Except, of course, the luxury of space.

And many young Britons have all but given up hope of ever owning their own home:

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Daniel is 21 years old and works in a warehouse in Doncaster. The sum of his property ambitions are to one day rent a place of his own.

“This room here is my personal space, it’s the only thing I’ve got really,” he says.

Doesn’t he dream of owning a home? The government has, of course, rushed forward its Help to Buy scheme. It is available to anyone with a deposit with a deposit of 5% or less, including first time buyers.

“Nah, not really,” says Daniel. “It just wouldn’t be affordable. I can’t even consider it.”

These are the true costs of 60 years of forced urban consolidation and strict planning. It certainly does make one wonder why Australia – one of the least densely populated countries on earth where land should be cheap and readily available – is following the UK planning model.

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About the author
Leith van Onselen is Chief Economist at the MB Fund and MB Super. He is also a co-founder of MacroBusiness. Leith has previously worked at the Australian Treasury, Victorian Treasury and Goldman Sachs.