22
Examination of witnesses
Liam Halligan, Dan Wilson Craw, Warwick Lightfoot and Professor Rebecca Tunstall.
Q1 The Chair: Mr Halligan, Mr Craw, Mr Lightfoot and Professor Tunstall, welcome to the Economic Affairs Committee. We are extremely grateful to you for coming today. We have two panels today. You are probably familiar with our previous report on housing. Perhaps I could begin by asking a general question. Do you think that the Government are on track to meet their target of building 300,000 new homes, and what might be done to ensure that those homes are of the best standard and quality? Having started to read your book, Mr Halligan, I know what you will say, so I would like to start with you.
Liam Halligan: The important thing for the Committee to grasp is that meeting a 300,000 target at a point in time in a particular year does not do anything to address the huge backlog of shortage that has built up basically since the end of the 1960s. Professor Paul Cheshire—I know that the Committee is familiar with his work—estimates that there is at least a 2 million or possibly 3 million unit shortage in our housing stock. It is not just about meeting the target at a point in time; it is about achieving a sustained rate of housebuilding that reflects our natural demography and net immigration.
Secondly, the large-volume housebuilders know that politicians and journalists are increasingly interested in this subject. A lot of the uptick that we have seen in the last two or three years as this debate has hotted up—30,000 to 35,000 units of the latest annual increase—has been permitted development rights housing, which is the conversion of shops and particularly office blocks into housing. Sometimes these schemes can work well in relatively affluent downtown areas, but often they work very badly. I can cite quite knowledgeable people who say that we are building the slums of tomorrow. That is particularly the case on the outskirts of London and in some of the traditional spillover towns in the south-east. Using permitted development rights to turn office buildings, which are often of low standard anyway, into housing is a one-off—you can only convert each office block once. Also, inexplicably in my view, the law says that if you convert office buildings, you can partition them so that you do not have to meet the usual regulations on space or even on light and ventilation. This is a really big problem.
Therefore, I do not think that the Government are on course. As well as not relying on increases in housebuilding via permitted development rights—which not only do not include space and ventilation stipulations but also come with no related obligation on social housing, community infrastructure levy, Section 106 or other aspects of community value that housebuilders are meant to meet—we have to look more fundamentally at the housebuilding industry. The top end, to quote this Committee’s report of July 2016, shows all the aspects of an oligopoly. The last time we had a proper OFT—as it then was—inquiry into the housebuilding industry was in the aftermath of Kate Barker’s excellent report in 2004-05. The report came out from the OFT in 2008 and was buried under the headlines on Lehman.
Regarding the extent to which the housebuilding industry became concentrated after that, the OFT said that it was okay for now but if it became more concentrated it would be a problem. However, it has become much, much, much more concentrated since then, with SME builders—particularly the “S” builders—being pushed right out after the financial crisis. They are finding it very difficult to get hold of land.
That is why the housing market is broken. It is partly because of the way the market for land operates, as I outlined in my book. I hope, Chairman, that you have got to that bit. If not, I can explain it. However, a big problem is that the big housebuilders practise contrived scarcity in particular localities. They go slow and ramp up prices as high as they can in the face of massive overextended demand. That, in my view, is the root cause of the now chronic affordability crisis in our housing industry.
Dan Wilson Craw: I broadly agree with what Liam has just said. My first observation is that, although private housebuilding has increased quite substantially over recent years, affordable tenures have stayed fairly flat. We are still not building the homes that are needed for people on very low incomes who simply are not able to afford to pay market rents or prices.
Secondly, in the past year or so, the number of new housebuilding starts has dipped. So, although the trajectory in recent years might suggest that the Government are on track, we might still see that splutter in the months and years ahead.
The key is to direct policy at building more affordable—by which I mean genuinely affordable—homes, where people on below-average incomes do not spend more than a third of their income on their rent. It is a situation that too many people are in. We have more than 1 million households on council waiting lists, and that follows cuts to council waiting lists and eligibility. At the very worst end, we have 86,000 households in temporary accommodation. Those are the figures that we need to really focus on in ramping up the supply of new homes.
Warwick Lightfoot: I agree with the two previous witnesses that it is unlikely that the Government will achieve their target. But I think that we at the Policy Exchange would question whether the target is really worthwhile. The Government do not have any targets for how many jobs there should be in the economy. There is a demand for housing—we have more people and more households, and incomes are rising—but over the last 50 years housing supply has not been able to keep pace with it. It is rather odd to set a national target for the number of housing units we will have.
We also think that you could achieve that national target but still have a lot of problems in the housing market because the housing is in the wrong place. You could have a lot of houses built where there is little demand for them. You need to expand the number of dwellings where people want to live, work and lead their lives. We are very clear that there is probably no form of public policy that can overcome the issue of positioning. Some people will want to live in a certain category of housing in a certain place. It will be very expensive and exclusive, and will set social limits on growth. There will be certain property markets like that but, overall, there are distortions in the UK property market which, in our judgment, come essentially from the planning system and a reluctance to enable people who own land to sell it to someone who wants to build on it.
This issue goes much broader than just housing. We have just published an important paper—at least, we think it is important—on planning. We argue very strongly that what is important is not just housing but the development of the economy and the development of public services. You need also to build a hospital, a school and a residential care home. The last time I came to help your Committee, it was to talk about social care. Having been involved in building social care homes, I can assure you that the planning system is an obstacle. This is a very broad, structural problem in the UK economy.
I will finish by saying that, whereas 40 or 50 years ago you might have identified a series of structural issues that were plain and obvious to see, the one remaining clear and obvious structural impediment that legislators and policymakers sitting in institutions like this might address would probably be the planning system. The OECD shows that we are unusual in relation to land use and planning, and also very unusual in being a very flexible economy; one of the few remaining structural rigidities is in the planning system.
The Chair: Your report has been circulated to the Committee, and I am sure everyone has read it.
Professor Rebecca Tunstall: I am in the position of coming fourth, and I agree with most of the things that have been said. In some ways it is quite positive that you are finding consensus among us, but on the other hand, perhaps rather negative. I think we are saying a lot of the same things that you concluded yourselves in your report of 2016-17: we are not building enough homes, but to build enough homes is not sufficient, in any case, to deal with the housing problems.
We need houses of good quality that are affordable and sustainable, that can be maintained and that we would like to see in 100 years’ time, unlike some of these converted office buildings that we are talking about. That is quite a big challenge, and in some ways the problem has got worse over those intervening years. Certainly, affordability has got worse and if you look at the most extreme end of the system, homelessness has got much worse over the last 10 years.
We really are in a difficult position, and to some extent central government, researchers and so on, have gone around all the possible causes, all the possible solutions, but there are some we really do need to talk about more. We have talked about the planning system a lot and tried a lot of things with it, but really making a big effort on affordable housing and on homelessness are two things we could certainly do. We need to do something different, because what we are doing at the moment is not working.
I would like to put a big rider on everything we have all said, though, because to some extent Britain has never been as well housed, and we should not forget that. The quality of housing, the amount of housing, the space inside houses is better than it has ever been. We have addressed some of the really terrible housing problems that plagued us through the 20th century, and that is literally embodied in all of us who have grown up healthier than the generation before partly because of that progress in housing. But, again, we do not need to stop now; we can continue making progress. Now we need housing that is sustainable and supports life in other ways, but we need to think quite dramatically. We can end homelessness, but we will not do so by following the kinds of policies we are following at the moment. It is going to be a bit more expensive and will take a little more effort.
Q2 Baroness Kingsmill: First, we are revisiting this issue so that we can hold people’s feet to the fire to some extent, so bear that in mind. We are not just going over old ground; we are doing this because it is a way of bringing the whole issue to the forefront. Is it simply a case of too few houses being built? Is that the real issue: we just need more to be built?
Liam Halligan: That is not the only issue. As Warwick said, you do not want to be building too many homes in the wrong places, where there is not the demand. We have been building more homes in Doncaster and Burnley than we have in Cambridge. It is not just about the number.
Baroness Kingsmill: We did have a big policy of new towns at one point.
Liam Halligan: Yes, but we have not built new towns since the early 1970s—that was Milton Keynes—even though our population has increased enormously. For the purposes of conversation and making sure that there is not a complete consensus, I endorse what Professor Tunstall said but, on the other hand, we are building new-build homes now with the smallest living rooms since the 1930s and our volume housebuilders are making margins of upwards of 30% on very old technology, which shows that there is no competition.
We have astonishing rises in the number of concealed households, particularly in urban Britain, which are not included in the estimates of the numbers of households that are coming onstream. The ONS recently changed its methodology for looking at the number of households, in a completely retrograde way, in my view, suggesting that if households are not formed, the demand for a house does not exist—that household does not exist. They do exist: they are living in someone else's loft. This is a problem.
It is partly about the number of homes, but also about homes being in the right place. New towns happened and were associated with the infrastructure—new schools and hospitals—precisely because most of the new towns were incorporated before the Land Compensation Act 1961, which I think should be a major part of your investigations. It is at the centre of my book and was closely investigated by Clive Betts's committee in the other place in 2018 and 2019.
We do need to build more homes, I agree with Dan. When I wrote this book, I set out to write a love letter to home ownership, as a working-class person who grew up in a first-generation owner-occupied home, knowing that the equivalent of Liam now would not be in an owner-occupied home. That is a big part of the problem. Yet, a lot of my book ended up being about homelessness and social housing, because, frankly, the more I looked into it, the more shocking the figures on homelessness and the lack of social housebuilding became. That is really where the human misery is: at the sharp end, notwithstanding Professor Tunstall's broader comments.
Baroness Kingsmill: Home ownership might not be the answer, though.
Liam Halligan: I do not think it is either/or.
Baroness Kingsmill: The council houses of yesteryear were—
Liam Halligan: With all respect, I think that is wrong. Home ownership is a way of giving people stability and security. It has been a tremendous engine of social mobility in Britain for most of the last century. We now have a rate of homeownership well below the EU average: there are only three EU countries below us. I personally think that it will be a national reversal in fortune when we go below half of households being owner-occupied. It became half in 1969, the year I was born, and on current trends we are heading for 50%. We have gone from 73% to 61% in the last 10 years and are heading for 50% quite soon. I personally think that it would be a major misfortune if that happened.
Warwick Lightfoot: It is about a lack of houses and a planning system that requires root-and-branch liberalisation of a most radical character. The planning system gives opportunities for the rent-seeking and oligopolistic behaviour that Liam has drawn attention to so vividly in his book. This has not just happened in the housing market: do you remember the supermarkets in the groceries market? Do you remember how many inquiries there were, when we were told there was no problem of monopoly in the supermarkets, it was all tickety-boo? Just do a trip to Aldi and realise that for many years, there was a monopoly being extracted there. We were very slow to get to grips with it and part of the story was the planning system limiting the number of shop spaces and so on.
When you have a defective framework of regulation, obviously rent-seekers will take advantage of it. I can understand land banking and why, if you are running a housing business, you would have to behave in that way, with the constraints you are under, but it certainly gives you genuine opportunities to extract monopoly profits. I also think we should take advantage of the more energetic competition authorities we now have. We encountered their full personality in Lord Tyrie in the Corridor a little while ago. That is something we should be looking to as well.
I also think there are one or two very practical things—we were talking about them in the Corridor. I have an eye to the householder who buys a house and it has not been built very well. You would be surprised at how many new-build householders are dissatisfied with quite serious things that are wrong with their properties. I have no expertise in the practicalities of building, but when someone shows me a house where the ceiling and the wall have not met—an executive build on a redeveloped estate, an old Ministry of Defence property in Plymouth—I can see that that is fundamentally wrong.
When you have an encounter with a plumber who says, “I am going to have to do quite a lot of damage here, I am afraid" and he comes out and there is no damage and he says, "Actually, this was built in the 1960s, so we can get to the pipes quite easily. Mind you, if you go into a new house, they never build them with a view to maintenance"—it is those sorts of things we have to think about on behalf of the consumer.
Baroness Kingsmill: So there is a need for better-quality housing, not simply more housing.
Warwick Lightfoot: Yes, and a common-sense element.
Lord Tugendhat: May I go back to the very interesting point made by Professor Tunstall? You made a general point about the nation. Would you be able to differentiate between different regions of the country, or urban and rural areas? The point that you expressed is rarely heard, and I just want to get a feel for whether it can be applied generally to the nation or to regional, urban and rural areas and so forth.
Professor Rebecca Tunstall: The nation as a whole is better housed than in the past in terms of the space per person and the quality of homes. There are big differences between regions and between urban and rural areas. There is a greater concentration of housing problems in the big cities, although some housing quality problems—particularly to do with insulation and the cost of heating—are greater in rural areas, particularly where people have been using solid fuels and so on.
London is rather peculiar, because people pay the most for housing but have the smallest homes and share them the most, and lots of other housing problems are concentrated in London. I would never want to overlook the serious housing problems that we still have and that are still causing people angst, illness and early death, but those are concentrated among small populations in certain areas—mainly the big cities.
Q3 Viscount Chandos: There is a school of argument that supply is not the problem; it is just the financial markets, QE and other factors. Do the four of you think that that is convincing, or is it an exacerbation of a problem that is rooted in supply?
Dan Wilson Craw: It depends on whether you are looking at house prices or rents. At Generation Rent we are thinking about the well-being of renters. Our focus is on what rents cost and how we can bring them down. Over the past decade, rents have gone up by 19% nationally and house prices have gone up by 40%. Whereas you can think of rents as being purely to do with the supply of and demand for housing services, there is an extra layer of market behaviour going on with house prices. People see houses as an asset. The influence of low interest rates has driven house prices to rise much faster than rents. That is because a low interest rate means that you can effectively borrow more, and if you can borrow more, you can afford to pay a higher asking price for a house, and that fuels house price inflation. The other effect of a low interest rate is that there is really nowhere else to put your money to get a decent rate of return. That has fuelled the popularity of property as an asset, and it has brought more people into the market and fuelled house price rises.
If we are thinking about the well-being of renters and others who need affordable homes, we need to think specifically about rents. There is a valid case to be made that it is not just about supply, but only in relation to house prices.
The Chair: I should perhaps have declared my interest as the chairman of a bank, as we are getting on to that subject.
Liam Halligan: There is a chapter in my book called “The No Shortage Myth”. This is a very convenient narrative for the big housebuilders and their in-house economists, who have made a very concerted effort to influence national newspaper columnists. I speak from personal experience. This is a story that a lot of people want to read. It says, “Oh, it’s fine. We don’t need to build more houses. We don’t need to sacrifice any of the green belt. It’s all down to QE”.
Part of the reason is QE. I cite a Bank of England report from early 2018 that was not particularly publicised. It says that about 25% of the rise in house prices since 2009 has been due to quantitative easing. However, there have been low interest rates all around the world. There has been quantitative easing right across the European continent and America, but the rise in house prices in the UK is far, far sharper, and the affordability multiples in the UK are far, far more difficult.
Also, a lot of the no-shortage narrative—the narrative started after Labour asked a chief executive of a big housebuilder to carry out a review of the housing shortage, which was a bit strange—relies on numbers relating to housing supply that include all the one-off conversions that I have referred to. There is a difference between net additional dwellings and new homes added, and there is a different statistical series that the ministry puts out. Those net additional dwellings numbers in my view massively overstate the real sustained increase in housebuilding, because a lot of them are one-off conversions of very low quality, as I said.
Also, to drive the no-shortage narrative, the housing demand numbers are artificially lowered by arguing that, if a household is not formed, that household does not exist. But it does; it exists within concealed households, of which there are now 1.2 million in London alone. That household exists in the fact that 32% of men between the ages of 20 and 30 now live in their childhood bedrooms. That figure is up from 20% just 10 years ago.
I believe that the no-shortage narrative is more than convenient; it is deeply disingenuous and self-serving on the part of the big housebuilders, who know that people like you and like us are now having a very serious look at this industry. I think that you should regard that narrative with extreme caution and scepticism.
The Chair: Are you implying that people are trying to maintain house prices and that is what is driving it?
Liam Halligan: Yes, I am maintaining that it is a convenient narrative for a lot of politicians who do not want the grief of fixing the supply side of the housing market. They would rather come forward with ill-judged demand-side measures such as Help to Buy. That has been a big reason why there has been such a bonanza for the volume housebuilders at the top end, even though they are building very sub-standard homes in some cases. They get lots and lots of planning permissions—it is in their annual reports. There are now 1 million outstanding planning permissions. The big housebuilders sit on them and that allows them to control housing supply in specific localities to keep the margins as high as possible and thus make more money building fewer homes.
Q4 Lord Livingston of Parkhead: I am deeply sympathetic to the point about the lack of supply. Of course, you can build housing. However, I want to ask a question of Mr Lightfoot and perhaps Professor Tunstall. I think that Mr Lightfoot referred it to initially.
I want to pick up on the point about family homes that are occupied by much older people who might well move into an assisted living-type of accommodation if it was available. Is there another part of this narrative, which is the availability of assisted or supported living for older people and the freeing up of family homes?
Warwick Lightfoot: That is slightly beside the point. What you need is wider housing stock and a wider range of choice for people. At the moment, there is barely an incentive for anyone to move out of a four-bedroomed house into a two-bedroomed flat. When you go through all the transaction costs, you see your net saving and the permanent income that you will get out of what is left after moving and you ask yourself, “Why go to the trouble of doing it?” The next question is, “Do you want to live like a pig in a poke?” I have a lot of friends who are a bit older than me and all live in four-bedroomed, slightly unmanageable houses. They would all like to move to something a bit easier but the truth is that we do not want to live in a place where you cannot swing a cat and where space standards and so on are a problem. Sometimes it has been quite difficult for people getting planning permission from the planners to get permission to build bigger houses. You will find that there are a lot of constraints. There is the cost, which is the real key, but also sometimes the planners are not so accommodating when it comes to a roomier build.
This is a marginal issue. Going back to the Chair’s question, it is a complicated issue. You have limited supply and periodically you have monetary shocks. There was a monetary shock in the 1970s with the Barber boom, there was the Lawson boom and there were very loose monetary conditions before 2007. The Bank of England has often turned a Nelsonian eye to the impact of monetary policy on house prices. I think that the previous Governor, Eddie George, said that there was no connection.
Lord Livingston of Parkhead: I will come to house prices in my second question—we are going slightly off the page. Professor Tunstall, is this an issue that you see at all or should we, frankly, forget about it being a problem?
Professor Rebecca Tunstall: Yes, I think it is. I think that probably all four of us on the panel would agree that there is both a housing undersupply problem and a money excess supply problem. Both those factors are at play. The increase in house prices cannot be accounted for simply by the increase in population. There is plenty of scope for policy in both those areas. The tendency has been to focus on just building more homes without thinking about who gets them and how much they will cost.
In my research, I have looked at how much space different groups of people have. Between 1981 and 2011, housing space inequality increased. If you were a dirigiste Government at the centre, you would say that this was inefficient or that you needed to reorganise our existing stock. Everyone has more per person but the gap has increased.
When you look into the processes to understand why that has happened, you find that it might be partly due to increasing income inequality, with a difference in people’s ability to access mortgages and finance and so on, but it is also partly due to demographic issues, with an increasing number of people living on their own. It is also due to the housing supply, with a focus on larger homes, despite the changes that there have been since the 1990s and an effort to encourage developers to build smaller homes.
We are getting a mismatch in the system between the kinds of households and homes that we have, and that ends up with people occupying more space than they need. They might want it and enjoy it but many older people, in particular, would like to downsize if that option was available, and that would allow more efficient use of the national stock.
Q5 Lord Livingston of Parkhead: I would like to explore with Mr Craw and Mr Halligan the issue of pricing. To what extent is this predominantly a London and south-east issue? There is a different set of issues in other parts of the country. We are looking at this from a very London-centric perspective, where rents are particularly high compared with the rest of the country.
Dan Wilson Craw: There are housing difficulties in all parts of the country. There are areas where the job market is not particularly good. It is particularly difficult for younger people to get a decent career and build up a pot of savings that they can buy a house with. That is taking place around the country. The percentage rise in the cost of the private rented sector has been fairly consistent. Even in the north-east, where house prices are particularly affordable, the cost of private renting has increased substantially. But whereas in the rest of the country home ownership has fallen, the social housing population has fallen in the north-east and the private rented sector has moved in.
Beyond that, there are questions of quality. Are rented homes, in particular, being maintained well enough by landlords, and are people getting value for money in the homes they pay for? That is a bigger issue. It is an issue in London as well because landlords have power in the market and can essentially neglect their properties. However, there are different dynamics in different parts of the country.
Liam Halligan: The affordability crisis is most acute in London. The most basic metric, which is average house price to average earnings, was below four as recently as the late 1990s. Now, nationally the average is almost eight. In London, the average is 12—figure 2.6 in my book—but even in places like the south-west, the south-east and the West Midlands it is above six. If you think that the usual multiple of earnings is three, if it is above six in the West Midlands, that means that two people earning full time, before you even think about childcare, cannot afford a house.
When I made my latest dispatches on housing, it was about new-build homes, because I wanted to make sure that this was not just a south-east thing. The north-west, the north-east and the West Country are covered by chapter 7 in the book — “New Build Nightmares”. We found that house prices were very, very high in all those areas, particularly for young couples trying to buy a house. These are often second and third-generation owner-occupying households. It is a source of great anguish for them and their parents that they cannot do what their parents did, even though their parents were semi-skilled or manual workers and they are graduates. As I said, we found that house prices were very, very high. The majority of the people we spoke to, even in the north-west and the north-east, relied to a degree on the bank of mum and dad. That means that it is not progressive, because you might not have that option.
Also, because Help to Buy meant that they could buy only new-build homes if they could not afford more, the quality of the homes was very low, and not only in terms of not passing building regulations. We found that countless young couples were being thrust into homes that were unfinished by the volume housebuilders so that the sales could be reported for their quarterly earnings, so getting a share price bump that gave all the executives a nice Christmas.
If you think that it is just a London thing, have a look at “Beds in Sheds”—something else that was a complete diversion for me in getting my book written. I kept saying, “I’m going to finish it any day”, then I would discover something else. Beds in sheds is not just a London phenomenon. Brent Council was the first of many councils that now use heat-seeking drones over outbuildings in suburban homes to determine who is sleeping in sheds. There is a beds in sheds epidemic in Oxford, Salford, Liverpool and Bristol. This is not just about dodging council tax; it is about people living in squalor in damp outbuildings. It is happening in a big way in our country and none of it is in the national statistics or considered by my friends in the press who talk about there being no housing shortage.
Q6 Baroness Harding of Winscombe: Given the discussions on QE, I should declare my interest as well as the deputy chairman of the Court of the Bank of England, so I will not talk about QE. I want to talk a bit more about supply. I am particularly interested in the panel’s views on where the land should come from to build more homes. If the consensus of the panel is that at least part of the problem is supply, it has been suggested that more publicly owned land could be released for building.
To what extent do you think that it is in the gift of national government or local government to release publicly owned land? Or is the problem that these wicked and evil property companies are land-banking all the land and we need to change the incentives so that they start building on land that they already own? Is it about opening up the green belt or is it about going upwards in our cities as opposed to outwards? Where do you think we would have the biggest impact on improving supply?
Liam Halligan: I have spoken a lot and, uncharacteristically, will stand back here.
Warwick Lightfoot: There is a fundamental flaw in the planning system. Try farms. We need to make use of a lot more farmland and should also examine the green belt. Of course, there are public sector organisations that own land that they would rather sit on and it is hard work making them disgorge it, particularly the Ministry of Defence. Some local authorities are slow off the mark as well.
When we talk about urban environments, I would just say that the burden of having additional houses should not just be in urban environments, where there is green space that becomes more densely used. I certainly think we should consider going up in a nice way, not in tower block-land but nicely; higher but with greenery and parks around. You do not want local authorities to have the incentive to build on all the amenity that is within a city. That is very important, because those people who are already living in the cities, making their contribution to this, should not have their walks and parks taken away from them or compromised.
We have to think very hard about farmland. Do we really need to have so much farmland in England and could we build on a lot more of it? And we need to think about the green belt as well.
Professor Rebecca Tunstall: With respect, it might be slightly the wrong question. It is a technical question about where we can lay our hands on land to build on to meet this year’s targets, but we should be thinking about which bits of land are the right ones to build homes on that are going to be right for the economy and for society, and will be good places to live in 100 years’ time. That could be all sorts of different kinds of land, but I do not think we will find some sort of treasure trove of land, certainly in public ownership at the moment, that is going to solve all our problems. Some of it is going to be in the wrong place; a lot of it is contaminated or quite remote, depending on what public sector use it had.
The Chair: Is not the fundamental problem the price of land?
Professor Rebecca Tunstall: Yes.
The Chair: What do you think we can do about that?
Professor Rebecca Tunstall: This goes back to some of the points that Warwick has been making about how radical we want to be about private land ownership.
The Chair: This is a very radical Committee. Try us.
Professor Rebecca Tunstall: It would be perfectly possible to nationalise land, if you are being radical, and to determine its use according to our concept of the public good or the economy’s good, rather than its owner’s good.
The Chair: I think Warwick is having a bit of a coronary now.
Baroness Harding of Winscombe: How would you identify the right land for building, if your answer is to nationalise it?
Lord Fox: How would you persuade the community, having identified that land, to accept it? Clearly, you could nationalise it and land these things, or you could find some way of coming to an agreement—identifying the land but also the process by which you are going to build on this agricultural land.
Warwick Lightfoot: There are two thrusts of the work of my colleagues at Policy Exchange. One is the more liberal one of the planning system and land use. The other is recognising that we seem to have the worst of all worlds. We have control over land that means it is difficult to get new housing supply, but many communities are very dissatisfied with what stuff looks like when it gets built. Then there is the agenda of a more attractive environment that the late Sir Roger Scruton was involved in. My colleagues at Policy Exchange think that if you could enable communities to be consulted more effectively on the way things should look, in a manner that pleases them, rather than certain prominent architects, we might get more consent to some of the building.
The other thing would be changing the planning system and the scope for local communities and local councils to make decisions on individual projects, which seems to me to be an opportunity for entrenched distemper. I was a member of a local authority for many years and I saw the extraordinary efforts that were made to have a row over the planning system. You are all familiar with the arguments over Brexit, but I can assure you of the intensity of the arguments in local communities over the planning system.
The other factor is the ad hominem attack on anybody who wants to change anything or build anything. Whether it is changing a shop or replacing a bungalow with a very big garden which is hideous and half falling down with two very nice houses and two more manageable but nice gardens, the vitriol that gets driven into those people in their local communities is something to behold.
The Chair: On the point about the cost of land, do you want to comment?
Liam Halligan: I will, if I may. There are one or two hares running and I have one or two points to make that might be helpful to Baroness Harding, because this is a key political moment, I think. Yes, of course, building up is part of it, in an aesthetic way, as Warwick said. London has just 100 inhabitants per hectare. Madrid and Barcelona have well over 300. They are not unattractive places. Paris has more than 200. Again, it is not unattractive.
The first thing to say about land is that we have lots of it. Total residential buildings in England, including gardens—I only have the numbers for England—account for 1.3% of our land mass. There is an awful lot of space out there. The green belt, in contrast, is 13%, and it is not as if the green belt is being built on. The green belt is currently 168% bigger by acreage than it was in 1979, because it keeps getting added to, a point that is not often made.
In terms of state land, the state owns about 6% of freehold land in the UK. Often, the Treasury does not want it to be sold because it wants the best possible price; but when there is a shortage not of land but of land with planning permission to build on in the hands of people who are prepared to build—and all those qualifications—the price keeps going up, so it is very difficult for other departments to sell the land. If the state released just one-twentieth of its land for development, according to my sums, there would be enough—at the current UK average density of 45 homes per hectare, which is low by international standards—to build well over 2 million homes. That would solve our housing crisis with one-twentieth of the state’s land, and we could build far more if the state-owned land was urban, which it often is, because you could build at a much higher density.
When it comes to the price of land and buying land, when you build a new-build home, the price on average of the land is 70% of the value of the home, which the household must service with an often bloated mortgage for the rest of their working life, in many cases, with mortgages going to 30 or 35 years now. In the 1950s, the land was 5% of the price of the home, even though we had already had planning permission through the Town and Country Planning Act.
The price of land is driven by speculation, because there is always an incentive to sit on land, so you have to do two things—and I speak as a free-market person, as many people around this table, many former teachers of mine and friends and colleagues, know me to be. First, you have to tax developers when they have planning permission on the land. Secondly—
Lord Livingston of Parkhead: A return to a development land tax?
Liam Halligan: Yes, but it has to be a Conservative Government who do that, because we reversed it in 1961. Labour had three attempts at bringing back a development land tax and the market always felt that in the end, the Tories will reverse it. In fact, when the 1961 Act was reversed, the Housing Minister at the time, or just after, who tried to stop that reversal and go back to a situation where the state took some of the upside of the planning gain, was Keith Joseph. Milton Friedman supported him, in memos that I have found.
My proposal is not that we go back to the 1947-1961 regime, which was Attlee’s new Jerusalem, where the state took the whole of the upside when planning gain was pertaining. Of course, when you had big estates that were being hit by death duties and all the rest, it meant that they really did just sit on the land and you had to CPO them and have dogfights. If, as in many other countries, including Germany, the Netherlands, a lot of the States, Australia, South Korea and Singapore, you actually split the gain in a meaningful, transparent way—which I would say would be 50:50, and the Chancellor agrees with me on the record in this book, by the way—then the speculation will come out of the land market. And crucially, to go back to your point, Lord Fox, the local authority will then have money earmarked for those schools, hospitals, doctors’ surgeries, children’s playgrounds, bypasses and new railway stations, to revolutionise the local politics of planning.
People are vindictive, Warwick, as you know, because there is nothing in it for an existing resident in new build homes. It is more pressure on everything—it is noise; whereas if you had my mechanism of sharing the planning gain, you could get rid of Section 106 and CIL, which is just a lawyers’ bonanza paid for by new homeowners and the state, and you would just have this very discrete, transparent sharing of the planning gain. Tony Pidgley of Berkeley Homes agrees with me, as do lots of different people from across the spectrum. Local planning disputes would be far less divisive and vindictive, because a lot of the local population would want those new homes, because it would turn the place they live into more of a place. There would be more local infrastructure and better communications. Their house price could actually go up.
Warwick Lightfoot: I am quite sceptical of all that, in the sense that I have seen plenty of arguments about the planning gain being used for a local school. I can assure you that people do not always want a local school. The arguments you can have over a residential care home or a local school and its shape can be very intense. I do not buy this idea that there will be a game of happy families if you simply have a more effective way of capturing the gain.
Lord Tugendhat: I query Mr Halligan’s comparisons. When you compare London with Barcelona and Paris, do you mean Greater London or Inner London? London is a very big place, if we take Greater London. I do not know whether the definition of Barcelona and Paris is the same.
Liam Halligan: The numbers I used—figure 2.12 in my book—are from the European Commission. I looked into them, because friends of mine reading drafts of the book asked exactly the same question as Lord Tugendhat. The definition that it used was inside the main périphérique road. That is inside the M25, so it includes a lot of suburbs and semi-rural areas. It is the same in Paris and Barcelona. London is not like Madrid, Paris and Barcelona, which have much higher densities. As I say, they have over 200 or 300 inhabitants per hectare respectively, but we have just 100. They have suburbs, too. So I think it is a reasonably fair comparison.
The Chair: I am conscious of time, so we need to move on to the next question, which Lord Stern will ask. I am a little confused about the idea of bringing in a tax. I cannot see how that will deal with the problem that such a large part of the cost of housing is in land. Indeed, you just argued that it might actually result in house prices going up.
Liam Halligan: In relative terms.
The Chair: Yes, but I do not really understand how this can help.
Liam Halligan: Chair, with respect, because it takes the speculative heat out of the market. You would have to combine it with CPOs in certain cases and with other measures, so that once developers have land, they have to use it within two years and finish the home, not just start it, which they do cynically. That brings more supply to the market.
Q7 The Chair: I can see how, as you say, you will have to pay a tax in five years’ time that might result in people offloading a whole load of land, which might reduce prices.
The question I wanted to ask you on house prices, which you more than hinted at in your book, is this. If we were successful in reducing house prices and creating supply, what do you think the implications of that would be for financial markets and the wider economy? You suggest in your book that there is a kind of—you do not use this phrase—establishment conspiracy to not address this problem, because the fact that these high house prices are supported by a lot of debt makes it very difficult to solve the problem without creating a crisis.
Liam Halligan: There are two levels to that. First, it is just basic political analysis that politicians like high house prices and remortgaging—the feel-good factor—because it gives the economy a boost and home owners are generally more likely to vote. However, the political geometry is shifting. A lot of home-owning parents are very alarmed that their adult children cannot buy homes. We are destined for increasingly radical politics if we do not solve this problem.
However, you are right that there is a kind of deeper, less widely spoken and broken argument, which is that if you take real action to increase the supply of homes and house prices fall—given that I think around 70% of bank loans in this country are linked to property of some kind, often residential—there may be a concern that you are undermining the solvency of the banking system.
I am not arguing to build half a million homes a year; we need to build more like 300,000 to 320,000. That needs to happen consistently or be the consistent average over time. What I am looking for is a normalisation of house prices. It does not need to be an absolute fall but a move back to a situation in which the average house price across the country is more like three or four times the average wage, rather than eight times, where it currently is.
The Chair: An answer worthy of a Minister.
Lord Stern of Brentford: I want to come in on this point, and then I will ask about concentration. I have been teaching economics for 50 years; that is my job. If you look back over 40 or 50 years, during that period, including with the deregulation of the financial system, we have had more and more of savings and finance going into financing houses rather than investment. Adair Turner and many others have addressed this; Adair’s book, “Between Debt and the Devil”, focuses on that story. We end up with the number you just described for how much of bank lending goes into the housing system. That is, in large measure, driving up the price of land rather than causing investment to take place. That is a problem that we have created, not just in the UK—
Liam Halligan: I agree.
Lord Stern of Brentford: —but particularly here, over the last 40 or 50 years of deregulation in various shapes or forms. Would you not agree that that is something that we ought to address directly, for example in restricting the fraction of the house price that a mortgage can be advanced on, and so on? Should we try to control how much of national savings and the national financial system is oriented into housing, thereby pushing up the price of land?
Liam Halligan: The economist in me completely agrees with you. It is weird being here having read all your textbooks over the years. However, the political analyst in me suggests that that is unlikely to happen. We are already seeing the return of large mortgages. According to one headline, “The ‘monster’ mortgage is back”. Some providers are already lending at five and six times earnings. Some politicians will always reach for the easy solution of letting people borrow more.
Lord Stern of Brentford: Yes, but controlling the fraction of the mortgage in relation to the house price is one way of dealing with this.
Liam Halligan: I would like to do that, but I cannot see it happening, I am afraid. I just do not think—
Lord Stern of Brentford: We are here to think of policies that work.
Liam Halligan: You are.
Lord Stern of Brentford: Policies in relation to the amount of lending going into driving up the price of land.
Liam Halligan: You need a suite of policies. Learned analysts and lawmakers such as all of you here need to keep the pressure on to stop people going for the easy route of more and more easy credit, getting up to lending at five and six times earnings and 110% mortgages, as was the norm before the financial crisis. We also need to ease the situation, not by stoking up the demand side with more Help to Buy, which could yet be in the pipeline—I hope not—but by easing the supply side and getting competition into it, so that we can build more homes and address the policy from all angles.
Lord Stern of Brentford: You have to look at both the demand and supply side. It would be barmy to look just at one.
Liam Halligan: But you should not artificially boost the demand side in the face of relatively low supply, pushing young people into buying only new-build homes with disastrous consequences for quite a lot of them.
Lord Stern of Brentford: Understood.
The Chair: Just before we leave this, do any other members of the panel want to come in?
Warwick Lightfoot: You are absolutely right to think about this. The central banks will have to think more carefully and take some guidance from emerging market economies, not least the People’s Bank of China, on how you direct lending to small firms and try to divert it. I also think that, as part of our framework of monetary control, we need to think again about not just relying on interest rates to change price and demand but introducing an element of direct control in the banking system to restrain a demand that we cannot deal with. Central bankers will have to get their hands dirty.
Lord Stern of Brentford: As will the Ministers of finance who instruct central banks.
Warwick Lightfoot: Indeed.
Dan Wilson Craw: If you wanted to do something with the financial system, you could look at discretionary investment in property—namely, the buy-to-let mortgage. You could restrict the availability of interest-only mortgages, so that you drive investment away from existing stock and into building new affordable housing, for example.
Q8 Lord Stern of Brentford: Yes. There is a whole range of policies there. Let me ask about concentration. My question is how it actually manifests itself in the market. Are the oligopolies so strong that these people are getting together in what we used to call smoke-filled rooms and stitching up markets? How does it actually work and what are the consequences?
Liam Halligan: The numbers are pretty incredible. I mentioned the 2008 OFT report. Volume builders, 2,000 plus, built 30% of homes in 2015, since when, anecdotal evidence would suggest—
Lord Stern of Brentford: No, my question is about the manifestation of those concentration ratios and what actually happens.
Liam Halligan: Sure. In 2015, volume builders went to 59%. I would not talk about conspiracies or smoke-filled rooms, but I do report testimony in my book from various local authorities which suggests that local builders are so powerful that, behind closed doors, they can negotiate away their Section 106 obligations to provide affordable housing, to provide local infrastructure and to make payments. Often, there are so few local housebuilders who can produce and can sink the capital in—
Lord Stern of Brentford: So it is power in relation to local authorities?
Liam Halligan: Yes: they are choosing not to impose the CIL, which, of course, is still discretionary. There is other evidence in my book that, of the headline rates of Section 106 moneys and CIL moneys that are due, a very small proportion actually ends up being paid. Local authorities in the end face a choice—do you want us to build these houses in the next year or not? If they are not built, you will get into trouble with Whitehall.
Lord Stern of Brentford: How do you break up the monopolies or oligopolies? I understand that it is power in relation to the local authority, which is an important feature.
Liam Halligan: The first thing to do is to have an inquiry and get the numbers. It is very difficult now to get the numbers. I have tried very hard. Various industry bodies that used to provide them have suddenly stopped providing them.
Lord Stern of Brentford: What policies could you follow?
Liam Halligan: We should actively help small businesses to get hold of land. Some of that state land I have talked about should be sold and earmarked specifically for small and medium-sized firms. That would do something to bring about more competition and help get back to the situation we had before the financial crisis, when small and medium-sized builders were building the majority of our houses. That meant that they turned planning permissions around quickly, because of their cash flow and their employment intensity, and they built better homes because they rely on local reputation.
Lord Stern of Brentford: In other sectors you might require disposal of assets or prevent takeovers. I agree with encouraging SMEs, but that does not necessarily, by itself—
Liam Halligan: That is a possibility. I cannot get hold of concentration numbers beyond 2015, and I tried really hard. Until I see the numbers—
Lord Stern of Brentford: Suppose you could; what policies would be available?
Liam Halligan: It may be that you would have to call for deconsolidation of what is now a very consolidated housebuilding sector in certain places. As I say, the picture is very opaque. The picture of who owns land in this country is extremely opaque, let alone who is building houses. It is very hard to get hold of these numbers.
The Chair: Does any other member of the panel want to comment on this?
Warwick Lightfoot: Very quickly, the difficulties we hear about from smaller housebuilders are difficulties getting viable land, difficulties getting planning permissions and never getting Section 106 agreements. You have an oligopoly that has piggybacked on a defective framework of regulation and land use control, and that is the nub of what you have to get a purchase on if you are going to remedy this in a serious manner.
The Chair: Lord Burns, I am conscious that we are running out of time.
Q9 Lord Burns: Can we talk a bit about the rise of homelessness and how this fits into the story you have been telling, and the mechanisms? I am aware, having in the distant past tried to model the housing market in various forms, of the extraordinary endogeneity of it all. Ultimately, everything seems to affect everything else and highlighting the root causes is quite tricky. What I would like to hear from each of you is to what extent this process we have been talking about has led to homelessness. To what extent has homelessness risen and what measures should the Government be looking at to deal with it?
The Chair: I think this is your subject, Professor Tunstall.
Professor Rebecca Tunstall: You are absolutely right that everything is linked to everything in the housing world. It is a highly segmented market, but it is all one market in the end. If you focus on rough sleeping, it is quite a small problem in terms of numbers, although it is very significant for those people and for society as a whole. To that extent, it is much more specialised. Having stresses in the housing system as a whole, around the affordability of home ownership and whatever, is linked indirectly to street homelessness. You can see that pattern if you look at the historical trends, but the immediate causes of street homelessness are a bit more specialised.
It does not help to have that context, but we know what causes street homelessness and we have done everything over the last 10 years to follow the recipe for creating a rise in it. It is about support from local authorities, funding for NGOs that work with homeless people, support for renters to pay their rent, housing benefit and universal credit and support for people who have specialised problems. We have done everything wrong, unfortunately, in all those areas, and the result is a very big rise in the last 10 years.
If you look at family homelessness, that is a much bigger problem in terms of numbers, and it is more directly linked to the stresses and strains going on elsewhere in the housing market: difficulties in affording home ownership; difficulties in finding affordable private rented accommodation and staying in it. There again, unfortunately, we have done all the things that will make it worse, but we know that we have the recipe for reducing homelessness as well.
When it comes to reducing street homelessness, not only have more than 500 reports been written in Britain on how to do it; we have successfully done it in the past. The Major Government had great success and reduced rough sleeping by half in three years. The Blair Government had great success and reduced rough sleeping nationwide by two-thirds in four years. We can do it again; we just need to put a bit of money and effort in and reverse the policies that have put extra pressure on the system recently.
Lord Burns: Then there is the disguised homelessness, almost, that we have been hearing about, which is the sharing and the people who are still living with parents.
Professor Rebecca Tunstall: Yes: some colleagues of mine at Heriot-Watt University have developed a new concept of homelessness that includes rough sleeping but also people sleeping in tents and cars, concealed households and people in inadequate temporary accommodation, and that number has also gone up greatly. They have done some modelling and quantified the likely impacts of various changes. They think you could reduce core homelessness by 22% in five years if all local authorities would provide prevention and support services to the same extent and quality as the best. You could also get large percentage changes if you rolled back some of the recent benefit changes, if you increased the provision of affordable housing, and so on.
Lord Skidelsky: What are the numbers of homeless in the UK on the expanded definition?
Liam Halligan: Shelter says there were 306,000 homeless people across the UK in 2018—that is rough sleeping and other forms of homelessness. That is up from 293,000 the year before and it is a tenfold increase since the early 1970s. Rough sleeping is separate, as Professor Tunstall says, and I too recommend the Heriot-Watt work, which is excellent. A lot of the reason why we have people falling into homelessness, be it bed-and-breakfast homes, temporary accommodation, families being split up—the sort of “Cathy Come Home” scenario—is that in many cases, we have stopped building social housing.
It fell under the Thatcher Government, but it was extremely low under Blair through Brown. Housing authorities are building about 25,000 homes a year. A lot of them are “affordable”, which means they cost 80% of market rent, but 80% of market rent in Camden or central Manchester is not affordable. Many housing authorities build lots of social housing, which costs roughly 50% of market rent. It is not always 50%; there is a formula and an algorithm. Housing authorities are not building all that many social housing homes—council houses, if you like.
In the last couple of decades, we have shifted our focus in social housing from subsidising bricks to subsidising benefits. We are now spending some £25 billion on the housing benefit bill. Some of that goes to housing associations, but a lot goes to private landlords. Then, for understandable reasons, George Osborne capped the amount people can have in housing benefit, yet rents have continued to rise. A lot of people have fallen out of social housing because the state does not actually own the homes they are in. They are not secure. You are putting insecure and often vulnerable households, or plain low-wage households which want to do an honest job and in which both parents go to work, in a housing benefit situation, in which their housing benefit is one-third or a half of their rent and they just cannot make the rent.
We need urgently to reverse the ideological move to stop building council houses and put the borrowing and the house on the state balance sheet, so that the state does not have to keep subsidising the mortgages of private landlord, buy-to-let empires and can actually build some physical, tangible homes. There will always be a need for one-fifth of the population to be housed in housing at submarket rent.
Dan Wilson Craw: To add to that quickly, obviously it will take a while to build more social housing. Homelessness is a symptom of certain things, including the lack of security for private tenants. About 10% of homelessness arises because landlords sell their properties and evict their tenants. The other big issue is the lack of housing benefit and a failure to keep up with rent. Those are things the Government could address now to stem the problem.
The Chair: On that note, our housing report picked up some of the points about social housing. We sent out the call for evidence last week and are about to look at the impact of universal credit and so on, so I am sure some of these issues will come up.
I am very grateful to the panel. It has been a really interesting discussion and the only reason I have to close it down is that we have another panel. Thank you very much indeed.
