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A chance for Chancellor Hammond

A chance for Chancellor Hammond

Sovereign funds and Britain’s housing crisis

by Brian Reading

Wed 27 Jul 2016

Rising demand and falling supply explain Britain’s housing crisis – a blight on social mobility, labour market flexibility and growth, not just for now but for generations. If the UK wishes to profit from the new-found opportunities following last month’s vote to leave the European Union, then tackling Britain’s deeply detrimental housing imbalances should be high on the list of the new UK government’s priorities.

Population growth plus shrinking household size have increased demand. A collapse in local authority building explains most of the fall in supply. Fortunately, a solution is at hand. It stems from a combination of low interest rates, strong institutional demand for sterling-denominated assets (especially from abroad at the lower, more healthy exchange rate) and the chance for Philip Hammond, the new chancellor of the exchequer, to abandon misguided public spending shibboleths espoused by George Osborne, his predecessor.

There is no world shortage of savings seeking sound investment. The lower level of sterling is helping to rebalance Britain's external accounts, as I had hoped before the EU referendum. Sovereign funds and other sources of long-term savings from the UK and abroad could finance local government build-to-rent portfolios, which could also be securitised. Given a government guarantee, assets and assured rental income (unlike sub-prime mortgages), these assets would command genuine triple-A ratings.

Similar considerations apply to the US. OMFIF has published a report (by Meghnad Desai) on the implications for infrastructure spending of a potential president Donald Trump.

Moreover borrowing cheaply today to provide decent homes is an inter-generational income transfer from baby-boomers to millennials. A well-spent rise in public debt is a blessing for future generations, not a burden.

The need for a massive local authority housebuilding programme arises because, in past decades, social housing has suffered a triple blow. Housing subsidies have been cut. The right-to-buy reform under which tenants bought their properties (often at below-market prices) – providing a cash injection for the British state but cutting local authorities’ annual income – crippled housing budgets. Housing spending accounts are capped, limiting borrowing-to-build. The government can remedy all this without having to tackle contentious planning restrictions, including encroaching on ‘countrified’ green belt areas highly esteemed by much of the electorate.

British Treasury orthodoxy is to blame for these shortcomings. Local government borrowing and debt count towards the public sector’s deficit and debt. In serial austerity programmes since 1979 the Treasury’s axe has mercilessly hacked public investment in general and local governments’ in particular.

In setting deficit and debt targets, the Treasury does not seem to consider that public investment can create profitable income-generating assets. When long-term government borrowing is unbelievably cheap and housing investment is unbelievably beneficial, the solution is blindingly obvious: to invest in social housing infrastructure, allowing councils to borrow, build and let.

Understanding the crisis requires an examination of UK demographics, planning controls and Treasury parsimony. The UK population is 65m. The urban population is 83%, or 54m, living on 7% of the land. (The country's 11m rural inhabitants live on the remaining 93%.)

For decades the number of dwellings increased faster than the population. Between 1881 and 1991, the population per dwelling halved from 5 to 2.5. In the next two decades, new houses per head slowed, then halted; since 2011, the process has gone into reverse. In 2015 the UK population increased by 500,000, but only 145,000 new homes were built.

In 1969 the average house price was £4,300. Today it is £200,000, 45 times higher. Average incomes have risen five times. The adverse impact on inter-generational wealth distribution has been socially, economically and politically corrosive.

Housebuilding boomed during the 1930s depression with cheap mortgages, cheap houses and unchecked urban sprawl. It peaked at 365,000 in 1936. The population increased only 206,000 that year during the birth slump.

Building and associated spending did much to lift the UK from the depression. Housebuilding boomed again during the 1950s and 1960s, peaking at 414,000 in 1968 against a 241,000 population increase.

In 1936 less than a third of new houses were built by local government. In 1968 almost half were. Since then, both private and public housebuilding has collapsed.

Private building has halved from 220,000 a year to 110,000. But local authority and housing association building has fallen from 200,000 to 30,000 – an extraordinarily pernicious result of successive attempts to control public spending since 1979.

If he is serious about improving the economy, Chancellor Hammond should free local government investment from the Treasury’s stranglehold. Hammond and his officials can join forces with Sadiq Khan, the new mayor of London, in devising innovative financing vehicles for the capital. Expanding social housing provides a far better way of sustainably boosting growth than pumping up asset prices with more quantitative easing.

Brian Reading was an Economic Adviser to Prime Minister Edward Heath and is a Member of the OMFIF Advisory Board.


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