The housing crisis is one of the most salient issues in this election. Problems include high prices, low home ownership rates, unaffordable rent, insecurity of tenure in the private rented sector and rising homelessness.
In recent years all parties have tended to emphasise greater housing supply as the main solution to these problems. However, in this election the Conservative manifesto has notably moderated its ambitions, to a rate of new additions lower than what has been achieved over the past five years. This follows a growing recognition, in light of our work, that even significantly higher rates of supply do not offer a real solution to any aspect of the housing crisis.
On home ownership, too, TBI analysis has shown that access to credit, rather than housing supply, is the main determinant of home ownership rates. Hence the two main parties propose a continuation of the Help to Buy scheme. This is the right diagnosis, but Help to Buy needs substantial reform if it is to be an effective use of public money.
A consensus has emerged over the need for significant changes to raise the security of tenure of private renters, however the Conservative proposals leave scope for backsliding. While measures to avoid unfair rent rises are necessary, Labour’s proposals to cap rent increases at the rate of inflation are excessively interventionist and would lead to deteriorating standards in the private rented sector over time.
Only Labour proposes to re-establish the link between housing costs and housing benefit that was broken in 2012. These changes are well-trained on growing rent affordability problems that many blame for rising rates of homelessness.
Labour and the Liberal Democrats advocate major social house-building programmes, which are an appropriate response to rent affordability problems and the need for more stable tenure for families with children who cannot afford to buy. However, such a rate of social house building is probably implausible in the lifetime of the parliament due to limited capacity. Moreover, high rates of social house building will likely displace some private house-building activity.
The housing crisis is rising up the political priority list for voters. Housing is the biggest single component of most households’ expenditure and recent polling shows that 57% of people fear rising housing costs will affect them – slightly above the proportion who expect to see Brexit damage their living standards.
Meanwhile those most affected by the crisis are critical swing voters. Voting is now highly polarised along age lines, with 18-to-30s breaking strongly for Labour and 50+ leaning heavily Conservative, hence people in their 30s are a critical battleground demographic.
Home ownership for 30-34s has collapsed by almost one third, as they struggle to amass a deposit for houses at record price levels. As a consequence, the number of families with children in the private rented sector has tripled over the past 15 years. Deep cuts to housing benefits since 2010 have exacerbated affordability issues for many. At the most extreme end, homelessness has grown substantially since 2010, as has rough sleeping. All of this means that housing will be an important issue in the election.
Earlier this year we published a report on the causes of the housing crisis. It shows why additional general housing supply will have limited impact in improving prices and rents, and points to the real causes of high prices, declining rent affordability, and falling home ownership.
When it comes to tackling high house prices there has been a clear shift in emphasis across the two main parties. Most strikingly, the Conservatives seems to have softened their drive for 300,000 additional houses per year (in England) and are now effectively promising ‘at least’ 200,000 per year. This is a marked downward shift in ambition that hasn’t received much attention. Given that we have been adding some 217,000 houses per year on average in England over the past five years, the new pledge broadly offers a continuation of recent performance.
Similarly, Labour’s language of a ‘supply crisis’ in its 2017 manifesto has been replaced with very little comment on overall levels of housing supply and no commitment to high total number of new building. The Liberal Democrats are the only party explicitly offering faster build rates than the current ones, aiming for 300,000 per year. This change of emphasis among the two main parties reflects the realisation that cranking up housing supply offers no real solution to high house prices, as we described in a recent report.
What kind of effect could these plans have on house prices? Since the last election the ONS has revised down its projection of the rate of household formation in England to just 159,000 per year. Using this projection and the results of the government’s own modelling, it is possible to examine the likely price impact of the three parties’ supply proposals.
The chart below draws on estimates from the Ministry of Housing, Communities and Local Government (MHCLG) of the sensitivity of prices to supply, together with assumptions about household income growth based on short-term wage growth forecasts from the Office for Budget Responsibility (OBR)[_]. It is assumed that financial conditions remain as they are today. The parties’ plans are also compared to the impact of a continuation of net supply at the average rate of the past five years (217,000 per year).
Rising wages, forecast by the OBR, mean that we should expect house prices to grow over the decade in the absence of changes to interest rates or the appetite of foreign investors for UK property. Higher rates of supply can dampen the pace of that increase.
However none of the parties’ supply proposals are sufficient to prevent further real price growth over the coming decade if financial and economic conditions evolve as expected. By 2030, the Liberal Democrat proposals could see prices around 16% higher than their current level, albeit almost 7% lower than they would have been under recent rates of supply. The rapid rate of building under their plan would result in around 10% (or approximately 2.6 million) more dwellings than households to occupy them by 2030, compared to just over 5% today.
If the Conservatives barely meet their pledge of ‘at least’ 200,000 per year in England over the parliament, prices can be expected to rise 26% by 2030, reaching a level almost 2% higher than they would under a continuation of recent rates of supply. The surplus housing stock would grow to around 7% by 2030.
Labour’s plans are less clear, and their impact on overall supply depends on the degree to which new social housing supply cuts the rate of building elsewhere, due to capacity constraints. Nevertheless we can make an illustrative attempt to quantify the effects. Taking current rates of building, if we assume that Labour meets its target of 150,000 social houses by 2024, and that for every two such houses one private sector house does not get built, this would imply an overall rate of supply of around 270,000 per year by 2024. Continued to the end of the decade this would leave prices around 19% higher in real terms than they are today, but around 5% lower than under recent rates of supply. The surplus housing stock would grow to around 9% or 2.3 million houses.
The differences between these plans in terms of their impact on prices and rents by 2030 is not insignificant. But it does little to change the bigger picture of huge real-terms price growth over the past 20 years, and would entail a growing number of empty homes. This realisation explains why the two main parties have dialled down the ‘supply crisis’ rhetoric and rightly begun to emphasise other policy levers to tackle the housing crisis.
Views on home ownership have also shifted significantly in the past two years, particularly for the Conservatives. While their 2017 manifesto linked the decline in home ownership to insufficient housing supply, the 2019 one explicitly, and correctly, pins the blame on the sudden drop in mortgage availability for first-time buyers in the aftermath of the financial crisis. While that availability has now largely recovered, causing home ownership rates to stabilise, both main parties propose to retain the Help to Buy scheme, and the Conservatives plan to foster new mortgage products to help first-time buyers.
Such policies are based on the right diagnosis, but whether they represent a good use of taxpayers’ money or are equal to the task of raising home ownership remains to be seen. The NAO has recently raised concerns that most users of the scheme were able to buy a home without it, and that part of its effect has been to raise the profits of developers. This suggests that a comprehensive rethink of its design is needed if the programme is to offer taxpayers value for money. These concerns notwithstanding, it is at least encouraging that both parties recognise the centrality of credit availability if they want to raise home ownership rates and reduce reliance on the Bank of Mum and Dad.
A further notable shift in the housing debate is the apparent cross-party consensus on abolishing ‘no-fault’ evictions, which are a major cause of the instability of private renting. This conversion owes a lot to the changing composition of sector, with three times more families with children now renting privately than 15 years ago. This move is long overdue, but whether it will improve stability for tenants depends on what other measures accompany the change. For example, if landlords are simply able to raise rents to unfair levels causing tenants to leave, the abolition of no-fault evictions will not be effective.
Here the two main parties divide along equally misguided lines. Labour proposes to cap rents at inflation. It is unclear whether this means changes in rent within a tenancy or between, but in either case the effects are likely to be damaging to the quality of the private rented sector over time, and increasingly penalise landlords. The Conservatives make no commitments on how rent increases within a tenancy might be governed to prevent evictions, leaving open the possibility that their proposals will do little to make the private rented sector a viable long-term tenure for millions.
Instead both parties should be looking to link in-tenancy rent changes to local market rents. This would prevent landlords exploiting sitting tenants, while ensuring that they receive the ‘going rate’.
On affordability, there is a pressing need to re-establish the link between housing costs and the Local Housing Allowance that was broken in 2012. The result of this change is that many private tenants reliant on state support now find that they have to use other income to help pay rent, often putting them in poverty. Numerous commentators have identified this growing affordability problem as a driver of rising homelessness. Of the three parties, only Labour has proposed to re-link Local Housing Allowance to local rents in this way.
On social housing Labour and the Liberal Democrats have entered a bidding war for a huge expansion of the stock. The Conservatives, by contrast, are decidedly cool on the idea. The virtues of social housing lie in its redistributive function (subsidised rent) and in the security it offers tenants, rather than in its impact on market house prices more generally. Given the rapid growth in the number of families with children now in the (inevitably less secure) private rented sector – a group for whom stability of tenure is particularly important - it seems appropriate to increase the social housing stock, rather than only relying on housing benefit to make private renting more affordable.
Achieving 100,000 or 150,000 social houses per year over the course of a parliament is likely to prove impossible to deliver. But to the extent that higher rates of social house building are achieved, they will crowd out private sector building to a significant extent since the capacity of the industry is limited. Consequently, it is far from clear that high rates of social housing supply would markedly increase the overall rate of new supply, at least in the course of the next parliament.
The parties’ proposals to tackle the housing crisis have improved since the last election. A reduced focus on the (marginal) benefits of greater supply has allowed space for the real problems in housing to be addressed more directly: how to improve stability and fairness of private renters, how to ensure first-time buyers can afford to buy, and the need for more social housing.
The parties’ proposals currently fall short on how rent rises in the private sector should be governed, with Labour proposing excessive intervention and the Conservatives not enough. On housing benefit the Conservatives and Liberal Democrat proposal fall short of addressing the pressing need to re-link housing benefits to the cost of housing – for reasons of poverty reduction and to halt rising homelessness. When it comes to promoting home ownership there is a pressing need to redesign Help to Buy if it is to achieve its aims and represent good use of taxpayers’ money.