How to rescue Generation Rent Now is the time to change the house-building system, not subsidise it

What’s gone wrong? Ed West cites Peter Turchin’s concept of “elite overproduction”:

“…the socially dangerous situation where too many people are chasing too few elite places in society, creating ‘a large class of disgruntled elite-wannabes, often well-educated and highly capable… denied access to elite positions’.

“So while around half of 18-year-olds are going onto college, only a far smaller number of jobs actually require a degree. Many of those graduates, under the impression they were joining the higher tier in society, will not even reach managerial level and will be left disappointed and hugely indebted.”

Also for UnHerd, Mary Harrington looks at the decline of family formation among the millennial generation:

“A recent Pew report showed 30% of millennials living with a spouse and child, a fall of 10% on Generation X and a whopping 40% drop on the 1968 generation. That’s America, but ONS datashows the age of first child climbing relentlessly in Britain too — while the birth rate is falling in all cohorts save the over-40s.”

Both Ed and Mary also mention housing — as well they might, because it is here that we see the most tangible evidence of the deteriorating position of the Millennial left-behinds. So-called “Generation Rent” — i.e. the Millennials who can’t get on the housing ladder despite their degrees and knowledge economy jobs is now approaching middle-age and thus the point at which they’ll have enough years of work left to qualify for and pay off a mortgage. Remember that next year is when the oldest millennials (born 1981) hit their forties.

Look ahead another two or three decades and they’ll be retiring — a growing proportion of them never having become homeowners. A lot of them, still paying out a massive chunk of their monthly salaries to landlords, won’t have much in the way private pensions or savings either — so how are they going to pay the rent when they retire?

In Abraham Maslow‘s famous Hierarchy of Needs a secure and safe place to live is foundational to the higher needs i.e. “love”, “esteem” and “self-actualisation”. Of course, you can find these things without being a property owner, but having a home that you can truly call your own really does help.

If we undermine the stability of the basics then everything else that people reach for — relationships, purpose and meaning — will also be destabilised.

Economically, socially and culturally, our future depends on solving the housing crisis.

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That task has become all the more urgent — and immensely more difficult — because of the Covid-recession.

On Friday we got the latest GDP figures and, as expected, they’re nothing short of cataclysmic. Output shrunk by 20.4% in April alone and is 25.1% lower than it was before the pandemic. One of the worst affected sectors is construction, which is down 43.6% compared to January.

Of course, a lot of that loss of output is artificial — the result of lockdown restrictions. As these are eased we’ll see a bounce back in activity. The record decreases will be followed by record increases. But unfortunately the latter are highly unlikely to be as big as the former, which is what we’d need for a true V-shaped recovery.

A must-read new report from the Centre for Policy Studies by Alex Morton warns of a W-shaped recovery in housebuilding. The crash that’s happening now will be followed by a partial rebound as developers finish the projects they’d started on before lockdown. However, once that pipeline is exhausted, there will, in the absence of government intervention, be a second crash. Morton explains why:

“Life is hard for housebuilders in falling markets, since they are stuck with the costs of the land they have already paid for. This limits their scope to cut prices – if buyers are waiting for prices to fall, builders simply stop building rather than operating at a loss.”

Assuming that property prices stay depressed by the effects and after-effects of the Covid recession, developers will sit on their land rather than sell it at a loss (or an inadequate profit).

The report explains why the big developers are able to go into suspended animation. Firstly, they have major cash reserves. Secondly, their creditors are patient — the banks know that the money they’ve lent is effectively secured against the developers’ land holdings, so rather than foreclose it makes sense to wait until land prices go back up again. And, thirdly, only about 20% of the people working onsite are employed directly. A minimal level of activity can keep those occupied (supplemented this time round by the furlough scheme) while the outsourced workers fend for themselves as best they can. Many of the latter are migrant workers — a large number of which will return to their countries of origin when work dries up (and, presumably, all the more so in the midst of the pandemic).

When the property market begins to show  signs of life, house builders will cautiously expand their, output again — but not so fast as to stall the recovery in prices. And thus the recovery in house building — the final upstroke of the “W” — will most likely be long and shallow. In the last recession, after the banking crisis, it took half a decade to get back to the level of construction before the crash.

If the same thing happens now, then that means years of drag on growth, employment and the supply of new homes needed to alleviate the housing crisis. It will also most likely mean another period of market concentration in which the big developers become even more dominant — because smaller, independent firms don’t have the resources to hold on through the slump.

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What can government do to prevent this? Alex Morton’s proposal is what he calls a “Help to Build” scheme — that is a system of grants paid directly to builders for each new home built. The scheme would time limited and conditional upon maintaining a steady supply of new homes.

As an idea it’s more relevant than what the government appears to be working on. According to a story in the Financial Times, Downing Street is resorting to that old stand-by — reform of the planning system. If the proposals end up improving the quality of new development then that’s great, but the idea that planning restrictions are holding back the quantity of new development is one of the biggest and most persistent myths in public policy.

The number of permissions granted for new homes runs way ahead of the number of homes actually built. According to Morton, the most recent figures (pre-Covid) show that the level of the latter (homes built) is only about 60% of the level of the former (homes permitted). Meanwhile the Local Government Association points out that, over the last decade, more than a million homes have been granted planning permission that haven’t been built yet. So forget the standard narrative about nimbys, they are not the obstacle here.

What then does determine the number of houses being built? It’s pretty clear when you look at the figures. Over the last 40 years or so, there’s been an incredibly close relationship between new homes built and the total number of transactions in the housing market. Morton puts the ratio at one new build for every 8.5 to 12 transactions. Or to put it another way roughly 10% of all houses sold are new houses (the rest are second-hand). In fact, if you were to plot new build against transactions on a graph with the latter divided by ten, then the two lines would be almost on top of each other, rising and falling in almost perfect synchrony.

Why would that be? Well, it’s because the big developers — who dominate the industry — won’t sell houses (and thus the land they’re built on) until they make a profit on the land that they originally purchased. The more demand there is in the housing market (itself a function of the amount of finance available), the more houses can be built and sold without that supply overwhelming demand and pushing down prices. In a recession, when finance dries up and buyers are cautious, demand collapses and the big developers ration supply accordingly.

Given how this system works, the only way for government to accelerate the recovery of house building is to subsidise it — either by ‘compensating’ the builders directly or by artificially boosting the supply of finance to purchasers through measures like the Help to Buy scheme (in which taxpayers’ money is lent out to fund deposits).

Help to Build is an improvement on Help to Buy, but it still amounts to life support for a fundamentally flawed system. With the house building oligarchy on its knees, now is the time to change the system, not subsidise it.

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And make no mistake it can be changed. The ratio of one new build home for every ten sales in the housing market is not an immutable law of physics. It may have held true for decades, but only because this is a period in which the big commercial developers have built the great majority of new housing and have a stranglehold on the supply of building land.

Before the mid-1970s that was not the case. Local authorities and housing associations were still obtaining land and building houses on a massive scale. This doesn’t mean that the private sector was squeezed out — indeed, since the war, the commercial builders have never built more houses then they did in the 1960s. Furthermore, despite all the council housing, this was a period of rising home ownership — and, no wonder, houses were actually affordable, allowing the baby boom generation to get onto the housing ladder when they were still in their 20s and 30s. Most strikingly, that ten-to-one ratio between transactions and new build was more like five-to-one.

It’s worth noting that all this happened in the decades after the much-maligned 1947 Town and County panning Act came into force. So we should stop blaming the planning system, or the green belt, or all other convenient scapegoats . What caused the housing crisis — i.e. the last four decades of chronic house price inflation — was the shift in power over the land supply.

This must be taken out of the grip of the big developers — with publicly-owned ‘community land banks’ taking control instead. What these bodies would do is buy land, grant planning permission upon it and put in place the basic infrastructure. Commercial developers, housing associations, councils, social enterprises and self-builders would bid for the right to build on the serviced plots — and to sell and/or rent out the completed properties. At no point would the house builders own the land themselves. Therefore they could neither profit nor lose from its eventual sale. Instead, the end-purchaser would buy the plot from the community land bank and would pay the builder for the building in much the same way that one pays a builder for an extension.

House builders would cease to be land speculators, and would instead compete solely on the basis of the price and quality of what they build. They would have no incentive, or ability, to ration land supply to the market.

Of course, the publicly-owned land banks that I’d like to see managing the land supply instead are ultimately underwritten by the state. If they mess up — buying land for more than they can sell it — would taxpayers end-up bearing the loss? No, they wouldn’t — not if the land were purchased at close to its market value as farm land and not its value as building land (the latter being a multiple of the former). Legislation must be passed to abolish the morally indefensible “hope value” principle — which entitles land owners to the capital gain that is created by the granting of planning permission for development. This uplift in value is not created by the land owner and therefore should belong to the country, be used for the common good and protect taxpayers against the ups and downs of the property market.

At first, the reformed land supply system would be used to boost social housing, as part of the Government’s emergency economic stimulus. But, in time, the system would be expanded to provide as much land as was needed to meet demand for new owner-occupied homes.

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OK, assuming this all works and a lot more land gets released into the property market, wouldn’t it put downward pressure on house prices? Absolutely it would, and quite rightly so. After all, we don’t just have a housing crisis because we’re not building enough houses, but also because houses are too expensive. In almost every other sector of the economy — from food to consumer electronics — we welcome lower prices. To be able to produce more for less is what economic growth is all about. It is what makes us richer. Driving out cost, improving quality and expanding output is what the market does best — when it’s not captured by vested interests.

The idea that a basic need like housing should be an exception — that we should positively welcome inflation — is absurd. Indeed, worse than that, it is a fundamental injustice by which an entire generation is being systematically ripped-off.

If charity begins at home, then fairness begins with housing. A land allocation system based on the monopolisation and manipulation of supply cannot be allowed to stand.

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