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Alex Morton: How to ensure a supply of both affordable and more desirable homes

Alex Morton Alex Morton is a Research Fellow at Policy Exchange and runs their Housing and Planning Programme. His recent report Making Housing Affordable won Prospect Magazine’s Think Tank Publication of the Year.  Below he discusses the Government’s proposed housing and planning changes in the Localism and Decentralisation Bill, and why they are so important for the UK.

Students rioted and Nick Clegg was vilified last week.  Yet a £27,000 loan required to obtain a degree is small change compared with the crippling mortgage debt needed to obtain an average property (around £160,000) in the UK.  The idea we should ask our young people to contribute fully towards the actual cost of their degrees (with low-interest loans and costs paid back when you can afford it) provoked riots, and yet a generation have been priced out of family homes without a murmur.  This just goes to show that politics is a funny old game.

For in the long run the cost of UK house prices are set by government as much any rise in tuition fees.  High housing costs are partly down to an asset price bubble (caused by bad regulation) and even more, by lack of supply.  The USA’s planning system operates differently across states and cities, and allows us to examine how the cost of housing is affected by planning.  What economists like Ed Glaeser and Paul Krugman have repeatedly shown that the cost of a new home in areas with few planning restrictions is little more than the cost of construction, while homes in areas with heavy planning restrictions homes cost tens, if not hundreds, of thousands of dollars more, (even if both areas are economically booming, e.g. Texas and California).

Short term, you can have a house price boom with lax building restrictions (e.g. Ireland) but this isn’t sustainable long term, (Irish house prices have dropped 40% and are still falling).  After all the cost of a house = cost of construction + land.  In 1959, the average UK home cost just £2,100.  If its price had gone up with inflation it would now be worth around £40,000.  If it had gone up in line with wages, it would be more – let us say a bit more than twice as much, or £80,000-£100,000.  And this is roughly what a family-sized home costs to build today.  The remainder of the cost is land prices, caused by our dysfunctional planning system.  There is nothing ‘natural’ about our high house prices.

Put simply, over a long period we haven’t been building enough homes and so now people are desperate for housing space and forced to pay huge amounts for it.  This is exacerbated by the fact the few new homes we have built have often been poor quality one and two bedroom flats. 

The Localism and Decentralisation Bill could start to change all that.  Our report, Making Housing Affordable, argued that the current system pitted local communities fighting against developers rather than working together.  The current system pleases no one and fails to deliver what we need.  This week’s Localism and Decentralisation Bill is a brave attempt to start moving to a better way of doing things that actually creates both housing affordability and more desirable homes.

The Government’s approach, typified by the new Bill, echoes various policies ideas promoted in Policy Exchange’s Making Housing Affordable, including:

  • Referendums on development at a neighbourhood level, where new developments are approved by a simple majority, so that developers build attractive homes rather than simply cramming in squashed flats and houses - making development a more attractive option for local communities.
  • Reform so that some planning gain (in the form of the Community Infrastructure Levy on new homes) goes to the neighbourhood directly impacted by developments , not the sometimes remote local authority, giving households a direct reason to say ‘yes’ to new development (as this may be up to £10,000 per home).
  • A sweeping away of many of the counter-productive targets on housing policy that forced many new developments to be unattractive small flats.

Despite often vociferous protests to the contrary, new developments can actually improve areas and increase house prices at the local level, by improving the area’s ‘location, location, location’ factor.  So we can get more and better homes built – indeed there are numerous case studies of attractive and well planned developments actually increasing local house prices and improving quality of life (e.g. Poundbury, the Docklands).  Central government planners may believe without top-down planning this is impossible, but since the 1947 Town and Country Planning Act we have had more and more planning and yet fewer and less attractive new homes.  This isn’t coincidence.

However, while Government has turned away from the unhelpful top-down methods of recent years, we must be cautious.  There remain three key dangers to reform in housing and planning policy:

  • House prices deflate slightly from their current absurd high, making people think that housing affordability will ‘resolve itself’ and weakening the political strength behind reform.
  • The neutering of what is proposed through a thousand and one slight amendments.  For instance, there will be a ‘strategic planning’ role for local authorities.  This must not used to either block or force through development where neighbourhoods don’t want it – or it defeats the whole purpose of the wider changes.
  • The idea that if reform doesn’t embed in the system then local authorities should resume their duties of planning for their area.  There is a danger that stating this encourages the forces of inertia to strangle reform before it can grow and take root.

The Ministerial team at DCLG is one of the strongest in Government.  However, the vested interests ranged against change are powerful and will fight tooth and nail to maintain the status quo.  We all should hope that the reforms embodied by the Bill succeed.  The long term stakes for our society in terms of the attractiveness of homes and communities we live in, and the affordability of homes for millions of people and families could not be higher.


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