Wrong way bet
George Osborne is compounding Britain’s wrong-headed housing policy. The UK chancellor said on Nov. 25 he would like to see 400,000 “affordable” new homes built by 2020. A revolution is needed. Osborne’s plan looks like the wrong sort.
The big problem with the UK market is a lack of supply. In 2014-15, the public and private sectors built 152,000 new homes, UK government figures show. That is way off the 250,000 houses a year needed to keep pace with household formation, according to Shelter and KPMG. So if the 400,000 new homes envisaged translated into 80,000 new homes a year until 2020, it would clearly help.
But the policy is likely to have malign distributional effects. The new homes will not be cheap rental properties, which housebuilders currently have to provide by making a sizeable minority of each of their developments for rent. Builders will now be allowed to meet their social responsibilities by providing 200,000 new “starter” homes for sale, instead of rent, at a 20 percent discount.
The other half of the target is supposed to come from extending the UK’s Help to Buy scheme, where the state steps in to take the risk on part of buyers’ mortgages. Ramping up shared ownership and offering loans up to 40 percent of the value of the property in London has some kind of logic, given the scheme will be restricted to new homes rather than secondary purchases. But it looks like a transfer of value to the well-off.
New starter homes cost up to 450,000 pounds in London – 11.5 times the average London salary, Shelter estimates. Shelter also reckons half of English households under the age of 40 won’t be able to afford to buy a shared ownership property by 2020. That means they will have to rent, at a time when separate government cuts to what councils can charge affordable accommodation renters will hit the supply of new rental homes.
On top of that, there’s a feasibility question. Increasing supply by 80,000 new homes theoretically requires an extra 120,000 workers in the construction sector, according to consultant EC Harris. This will take time to build up. Housebuilders have historically failed to build more than 175,000 to 200,000 houses a year, according to a senior housebuilder.
It might have been too much for a free-market party like the Conservatives to commit to the alternative: 80,000 new houses a year to rent, provided by the public sector. But that would have done more to make British housing affordable.