An “entire generation” faces being locked-out

ScreenHunter_18 Jan. 22 07.45

By Leith van Onselen

For years I have argued that the UK operates world’s worst practice when it comes to housing policy.

A key tenet of the UK’s housing malaise is the highly restrictive UK planning system, which has severely limited land supply and forced-up the cost of housing – benefiting those that already own their homes but punishing those trying to get on the housing ladder. These planning restrictions come in a number of forms.

First, greenbelts have been established around UK cities, which have excluded large swathes of agricultural land from urban development (see below graphic).

In the 1990s, the Central Government also tightened land supply even further by explicitly requiring that 60% of all new land for housing must be brownfield land – i.e. land which has already been developed for some other purpose.

The centralised fiscal system in the UK has also created a major road block to the provision of housing. Local authorities – which are the primary decision makers on development and have statutory obligations to provide services for new houses – receive very little revenue from increased population and housing. As such, these local authorities tend to be biased against development, which limits the provision of housing and related-infrastructure.

Combined, these regulatory constraints on new housing construction have meant that housing supply in the UK has been incapable of responding quickly and efficiently to changes in demand, thus placing upward pressure on prices and creating expectations of future capital growth.

It has also meant that UK homes are amongst the smallest in Europe, caused primarily by decades of strangulating urban land supply and escalating land costs (see below table from the London School of Economics):

ScreenHunter_03 Apr. 24 09.33

Now, the UK Telegraph has published an article citing research by the National Housing Federation and Oxford Economics, which claims that UK homes will become out of reach for an “entire generation”, caused mainly by the constipation in housing supply:

Soaring house prices will leave home ownership permanently out of reach for an entire generation by the end of the decade unless action is taken to build more homes, it has been claimed.

The National Housing Federation (NHF) said house prices were on course to soar by 35pc over the next seven years… “With house prices set to rocket … an entire generation will be locked out of home ownership forever and be forced to rent for life,” the report said…

David Orr, NHF chief executive, said the lowest peacetime levels of housebuilding on record meant some parts of England were near crisis point. A lack of affordable housing had put a “brake on economic growth”, said Mr Orr, with businesses unable to expand because workers could not afford to live in areas where economic opportunities were highest, such as London and Cambridge…

“We know that the nation is heading towards a population of 70m, but at the moment we’re building the same number of new homes as we did in the 1920s, when the population of the country was about half what iut will be in 2030,” he said.

“Successive governments have failed to provide the investment needed to generate the housing supply the nation needs, and all of the problems we see now – very high rents, very high house prices, the ratio between people’s incomes and the cost of buying a new home – all of these things are going to get worse unless we tackle the fundamental ussue at the centre of this. We have to build more homes”…

“We get trapped into the conversations about how we can make it easier for some people to access the scarce supply, the answer is we need to build more homes.”

There is the myth that the UK is ‘running out of land’. However, the BBC has debunked this claim, showing that only a tiny proportion of the UK is urbanised:

The urban landscape accounts for 10.6% of England, 1.9% of Scotland, 3.6% of Northern Ireland and 4.1% of Wales.

Put another way, that means almost 93% of the UK is not urban. But even that isn’t the end of the story because urban is not the same as built on.

In urban England, for example, the researchers found that just over half the land (54%) in our towns and cities is greenspace – parks, allotments, sports pitches and so on.

Furthermore, domestic gardens account for another 18% of urban land use; rivers, canals, lakes and reservoirs an additional 6.6%.

Their conclusion?

In England, “78.6% of urban areas is designated as natural rather than built”. Since urban only covers a tenth of the country, this means that the proportion of England’s landscape which is built on is… 2.7%.

ScreenHunter_25 Jun. 25 10.52

In short, it is government regulation that is primarily to blame for the UK’s sky-high land/house prices and declining home ownership. If they allowed more open competition between land holders and developers, land prices would be much lower and homes would be far more affordable. It’s as simple at that.

There are obvious lessons here for Australia, which has adopted many aspects of the UK’s dysfunctional planning system.

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Comments

  1. Hugh PavletichMEMBER

    Great article Leith … and thank you.

    Just around 9% of the UK is urbanised; Ireland 4%; US 2.8%, New Zealand 0.70% and … and … Australia 0.13%. Globally … less than 1%.

    Well worth reading Prof Schlomo Angels “Planet of Cities” …

    http://www.amazon.com/Planet-Cities-Shlomo-Angel/dp/1558442456

    … and … from Texas A&M University Real estate Center “Land, lots of land: How Texas Dodged The Housing Bubble” …

    http://recenter.tamu.edu/pdf/2033.pdf

    Hugh Pavletich

    • The truly sicking part is that once interest rates start to rise in the UK Lord & Serf will both be bankrupted.

      Recently HNH linked a great webcast with Martin Wolf where he showed that the UK banking system was over 5 times the countries GDP. When that ship goes down the UK will be totally up shit creek.

    • David,

      I think that people are unable to understand when we cross the line between vice and virtue. In excess, anything, literally everything, that is good for you is also bad for you (heck, humans can suffer from oxygen toxicity!).

      Our education system dictates to us that things are either good or bad.. (housing good, other investments bad). Our community is laregly incapable of dealing with shades of grey, and how our decisions move us along that spectrum.

  2. Interesting that some of the most densly populated countries in Europe, like the Netherlands, have some of the most spacious dwellings.

    • One reason for this is that they have operated a “compulsory acquisition” system for the land quota that planners designate for urban expansion each year. This stops the price of land zooming up to millions of dollars per acre as a windfall gain for the lucky property owner.

      It is like, the government comes along, says, “we’re buying your farm, you grow tulips on it, that makes it worth about $30,000 per acre, here’s a cheque for $30,000 an acre, the land is now ours”.

      It would be interesting to see what proposals of this nature would do to the “support” for “save the planet” urban planning in countries like the UK where they don’t do this.

      • IF a decent govt wanted to force people into higher density living then the only fair way is to acquire land from those having “too much” and share it fairly amongst all people.

        The current system allows big blocks to persist near the centre of cities whilst tiny blocks are built right on the fringe. This is extremely unfair.

      • I think one of UEs recent stories mentioned Germany doing something a bit like that, councils acquiring farmland at a set price, or something like that. I believe Singapore, being genuinely short of space, has price controls on the majority of it’s housing to keep it affordable for it’s citizens.

        It seems some sort of rationing system is the only way to make consolidation work.

        Agree with Claw, there are some pretty perverse outcomes, where well located, large blocks on the leafy north shore in Sydney are “protected” from re-development, yet high rise apartments are being built in locations like Blacktown.

      • Hamish, I think it is fair to say that in genuinely land-scarce nations the people are more inclined to accept the seeming abuse of property rights. Singapore has virtually no rights at all, what the urban planners say, goes, with no right of appeal. But Singapore would not be Singapore if it tried to act as though it was a normal size nation with plenty of land.

        But the problem is that people have not grasped that there is a corollary to “regulatory taking” – that is “regulatory giving”, which is what rationed rezonings of rural land for urban development are. It is completely wrong to grant a capital gain of several thousand percent to a land owner by handing them a share in a cartel. It is ironic that monopolistic, price-distorting behaviour in almost all other commodities causes an outcry – but not land, for some curious reason.

        The way that cities with UGB’s develop in high-density donut form around low density inner suburbs, has been noted by numerous academics. If you aren’t absolutely committed to doing whatever it takes to intensify the urban area where it makes the most sense – at and near the centre – then the UGB is a destructive waste of time.

        The graph of Portland’s “Spatial Distribution of Density” on page 12 in this paper by Alain Bertaud, should have the “planners” asking what result they really want? Increased density at the fringe but NOT nearer the CBD?

        http://alain-bertaud.com/images/AB_The%20Costs%20of%20Utopia_BJM4b.pdf

        This is because lower income households have been forced by higher land values, to accept smaller homes further away from the CBD; as Bertaud says:

        “…….instead of being able to make a trade-off between distance and land consumption. …….”

        “……..the practical outcome of a positive density gradient is longer trips for more people…..”

        “…… As predicted, land prices are going up because of the supply constraint imposed by the UGB, developers respond by developing higher density housing in the vacant areas between the limits of the current built-up area and the UGB. This of course has a tendency to reverse the slope of the gradient…. …..In the long run, the higher density which will built-up on the vacant land along the UGB will increase the accessibility of suburban shopping malls at the expense of the relative accessibility of the CBD. This is not the outcome that the planners intended…. …”

        Another useful quote on the same subject, is from Jan Breuckner, “Urban Growth Boundaries: An Effective Second-Best Remedy For Unpriced Traffic Congestion?”

        “…….failure of the Urban Growth Boundary to appreciably raise densities near employment centers is the main reason for its poor performance, and this failure will persist regardless of whether the city has one or many such centers….. .”

        http://www.socsci.uci.edu/~jkbrueck/course%20readings/ugb.pdf

        And Patrick Troy in “The Perils of Urban Consolidation” (1996):

        “……..The present policy has had the perverse result of increasing density of dwellings at the fringe……”

        And later in the book:

        “……A high proportion of the new high density housing is now occurring on the fringes of the city. This is a direct outcome of government policy and produces the perverse doughnut effect of an annulus of high density housing ringing the lower density middle suburbs. The greater accessibility claimed for inner suburban consolidation does not occur….”

        Peter Gordon and Harry Richardson note re Seoul, in “Is Sprawl Inevitable? Lessons from Abroad” (1999)

        “…….Although monocentricity is becoming a rare phenomenon, even in developing country cities, the simple 2-parameter monocentric density gradient still yields statistically significant results in all but one of the sample. The Seoul case shows a positive density gradient; a possible explanation is that high land prices have induced higher densities at peripheral locations that were developed later…….”

        I actually reckon you can observe this phenomenon on Google Earth; every city that has “got religion” about “constraining urban growth”, can be visibly seen to have dog-box development crammed against the UGB, and leafy green suburbs in between that and the CBD.

    • I think they are mostly apartments, or row houses in those countries, rather than detached houses, but it does show apartments don’t have to be pokey and small.

  3. “There are obvious lessons here for Australia, which has adopted many aspects of the UK’s dysfunctional planning system.”

    You don’t really think that Australia is going to learn anything from this, do you? In fact, I think Australia is using the UK as a model to follow.

  4. While the BBC report on how much of the UK has been built on is interesting, we should still distinguish between having green space in cities and green belts around cities which are a source of the problems with land supply. Building on every square metre of a city is going to result in a concrete hellhole. For Australia, it would make no sense to do that when there is abundant land around the country.

    As to an entire generation being priced out, I’m not so sure this is true in Australia. Perhaps an entire generation will be priced out of the capital cities, but there are plenty of cheaper houses in rural towns. The problem is rural unemployment and underemployment.

    • Exactly; Green space provided in a form OTHER than green belts are so superior in every way, to green belts, that one can only assume green belts are favoured because of what they do for vested interests.

      If you just had “parks” set aside on a predictable pattern, like 1km diameter parks spaced 5 km apart, you would not inflate urban land prices, and access to green space would be a heck of a lot more democratic.

    • but there are plenty of cheaper houses in rural towns.

      There are very few cheap houses in rural towns. If they could magically be moved to where they are desired, they might meet 0.001% of the demand.

      • Claw, I’ll have to disagree with you although it’s a matter of perspective. I think 350K for a modest three or four bedroom home in a town of 20,000 is quite cheap. There are places which are even cheaper than that. I do agree that they are not located in good places for most people. However, you’re not “locked out” if you could buy a house but choose not to because you want to stay in a capital city.

        As to your statement that they would only meet .001% of demand, if every person in Australia was trying to buy a house, .001% of demand would be about 230 people. You’re basically claiming there aren’t 230 cheap houses in the whole of Australia. Reality is that the demand is a lot less than the whole population, so your exaggeration is even more preposterous.

      • I think 350K for a modest three or four bedroom home in a town of 20,000 is quite cheap.
        Are you saying that with a capital city income, or a small town income ?

        Though even on $150k/yr – a fairly high income even for a capital city – $350k isn’t “quite cheap”.

        $350k for the typical country town punter probably earning $50-60k is ridiculously expensive. $80-100k would be “quite cheap”.

        However, you’re not “locked out” if you could buy a house but choose not to because you want to stay in a capital city.
        You use this word, “choose”. I do not think it means what you think it means. If the only place I can find decent work is in a capital city, then I don’t have a choice about living there.

      • You don’t have to go to a rural town to find cheaper cars and TV’s and there should be no need to go there to find a cheaper house.

        http://www.realtor.com/realestateandhomes-search/Houston_TX/type-condo-townhome-row-home-co-op,multi-family-home/price-na-150000/pg-10

        Farmland within reach of a city costs not a lot different anywhere – not enough to make much of a difference to the cost of housing if there is no UGB. And bigger cities have economies of scale in development and construction.

      • If the average country town punter earns $50k and a house is $100k, that’s 2x income, which is very cheap. With two incomes for many households, it’s incredibly cheap. But yeah, maybe $350k is still too high.

        You do have a choice. “Decent” work but no property or rubbish work and a place of your own.

      • If the average country town punter earns $50k and a house is $100k, that’s 2x income, which is very cheap.
        No, it’s just cheap. Very cheap would be 1x income.

        “Expensive” starts around 3.5x.

        The median house price in Australia right now is about 8-9x income.

        You do have a choice.

        “Decent” work but no property or rubbish work and a place of your own.
        That’s not a choice, that’s blackmail.

      • @Monkey At the end of the day the work isn’t so decent since you spend most of your earnings paying a house off.

    • Government departments/big business should start moving their headquarters to smaller rural towns to help create employment, after the government/big business offices comes cafes, shops, etc etc. This would also help take the pressure off the cost of land and population in major city centres as well as reduce traffic problems and roadworks/maintenance etc.

      You could also have a situation where as soon as house comes up for sale in metropolitan areas, the government gets the first right to buy, then tenders the land out to make the most use possible out of that land, ie maybe build 4 units, give the builder 10% profit and sell them all at the government cost price, their would of course be a win for local councils in this because now 4 lots of rates would be collected.

  5. On top of highly onerous planning restrictions, you also have astonishingly bad social policy.

    The pathfinder programme is the biggest scandal in UK property. Essentially, the plan was to knock down (serviceable, sturdy Victorian) terraces and rebuild more modern homes in their place. Unfortunately, the money ran out after doom lotion, so the new homes were never built.

    http://m.insidehousing.co.uk/6513321.article?mobilesite=enabled

    There are now a million homes standing empty, many owned by local councils. Of those not explicitly acquired by pathfinder, most are just rotting as there is no money to renovate, and most councils claim people wouldn’t live in them anyway. This is in a landscape where families are housed in B n Bs as there is too little social housing available.

  6. They have turned what is really a social good into an exploitable commodity via scarcity (poor land release and cheap debt). This of course favours a substantial minority at the expense of societal justice. The politicians, builders, bankers, etc, are all in the game to screw as much out of it as they can. The economic train though is about to hit the buffers.

  7. Of course the aversion to building upwards in the UK also seems to be an issue, unless you are a financial institution in which case you can build any phallus you desire.

  8. boomengineeringMEMBER

    Anyone see this scenario
    All we need is a global, conventional war, plaque or famine and we could have an over-supply of housing
    The owners of the world must have considered this, why cement over the their best farmland.

  9. It is no surprise that a generation gets locked out by inadequate supply when an almost a full new generation has been added by longer life spans.

    If a generation is approx 20 odds years and lifespans have increased by over 10 years over the last 40 years that means over half a generation of people still wandering about and occupying housing who previously would have been 6 feet under by now.

    That alone is a huge new source of demand that is continuing to grow.

    And many of these longer living folk quite understandably wish to stick around in their own homes as long as possible. Even if there were LVTs and zero stamp duties this would still be the case for many people.

    Supply over the last 40 years needed to ramp up simply to cope with the fact that people were living decades longer and thus ‘using’ their homes for a lot longer as well.

  10. Supply constraint as a factor in increased house prices could be worded as lack of constraint on demand (i.e. population increase).

    Being upset with green belts is similar – every model needs to make assumptions – you can assume that low house prices are the main goal or you can assume that sustainability is the main goal.

    Depending on your starting assumptions you will come to different solutions.

    if you assume that you want a green country and low house prices surely the problem is less supply side constraints and more too much demand?