Oral evidence - Economics of the United Kingdom Housing Market

Members present

Lord Hollick (Chairman)

Baroness Blackstone

Lord Forsyth of Drumlean

Lord Griffiths of Fforestfach

Lord Kerr of Kinlochard

Lord Lamont of Lerwick

Lord Layard

Lord Monks

Lord Sharkey

Lord Teverson

Lord Turnbull

Baroness Wheatcroft

_______________________

Examination of Witnesses

Martin Wolf, Financial Times, Dame Kate Barker and Chris Walker, Policy Exchange

Q1 The Chairman: Good afternoon, Dame Kate and Martin Wolf. I gather that Chris Walker is stuck in security. We feel we ought to make a start. I am sure he will catch up very quickly.

This is the first hearing of our inquiry into housing. As you will have seen from the call for evidence, we have very much focused on the supply of affordable housing, both for the social sector and the first-time buyer sector. That is our remit and the focus of this inquiry. I want to ask both of you about the likely number of homes that we should be targeting over the next five years. The Housing Minister has said that he wants 1 million new homes. Other numbers have been bandied about on previous occasions. The Chancellor had some comments last week about the number of homes. In your view, what is the target that we should be looking at and why?

Dame Kate Barker: Please stop me if I go on for too long. The first thing I would say when you are asking what target you should be looking at and why is: what is your policy objective here? I guess most people would say that their policy objective is for everybody to have a decent home of some standard. Previous Governments added to that, they said it should be in a place they would like to live and work. That is quite ambitious because there are lots of places I would not like to live and work in at all.

When I say that it depends on your policy objective, what I am really saying is that there are certainly people around, including economists—Dieter Helm, for example, who has recently been writing about the green belt—who would think it should not be a policy objective to meet the whole of demand for housing because of the environmental costs.

When I finished my report in 2004, one of the suggestions I made was that the Government should take a systematic look at some of the environmental costs of extra housebuilding in the south-east. There was a piece of work done, but I have never subsequently seen any conclusions drawn from it. Before you start to ask how many houses you should build, the prior question I would raise is: have you thought about whether you want to meet demand, or do you want in some sense to say that, for environmental reasons, you do not want to meet the whole of demand? That would inevitably change your answer.

However, I do not have a great answer to the question of whether I would like to meet demand or not. I suspect, as a matter of fact, I probably would want to meet demand rather than anything else. I can see that you have Geoff Meen sitting on your right. Since I have always used Geoff’s numbers as my guide to what should be done, I would say that if the objective over the next five years is to keep the affordability of housing no worse than it is today, or even to lower it a little bit, we would probably need to be building around 300,000 houses a year or in excess of that. We would also have to build them in places where there is demand. Obviously, if we built them all around Sheffield it would not be very useful. If we spread them around the country, particularly in places of high demand, it would be more useful. It would be numbers of that order.

The Chairman: Mr Walker, welcome. We are just starting on the first question, which is about the number of houses that we should be targeting over the next five years. Martin Wolf is answering next.

Martin Wolf: I can probably answer this fairly briefly. There are two ways of answering this question and I am glad I have Kate next to me. One answer is: “I have this fully specified model of the British economy in which I have imposed some sort of welfare function and included the negative externalities associated with environmental cost, and the answer is X”. I do not have such a model. I do not think I would believe one if I saw one. I cannot give an answer of that kind.

The other sort of answer, which seems to me sensible for an economist, is: “I do not know, but clearly rather more than we are building as we can see from what is happening to prices.” If prices are continuing to rise at an extraordinarily rapid rate for a commodity that does not seem to me as naturally and inevitably scarce on the scale it is, then it is clear that we should be building a great many more. We will find out how many more we need to build by finding out what happens to prices when we start seriously building. Since we are not, I expect them to continue to rise. I would tend to say that the market is showing a profound disequilibrium, and the existence of the disequilibrium that exists indicates that we should be building a great many more. To be perfectly honest, I do not have the sort of model that would allow me to tell you how many more that would be. I do not know whether anyone does, but I do not know it.

The Chairman: Mr Walker, have you brought a model with you?

Chris Walker: I am afraid I have not, but I would say that I broadly concur with Kate Barker. If we are to keep up with our growing population and the changing population demographics, then we need to be building roughly about 240,000 homes a year in England. Of course, it is important to understand the distinction between England and the UK. Housing is a devolved matter. It is also estimated that we have a housing shortage in England in the order of 1 million homes. In order to address that shortage, as well as catering for the growing population going forward, I would again concur with Kate that broadly in England we need to be building about 300,000 homes a year.

The Chairman: Is the industry capable of significantly increasing the number of houses built? A lot of people left the building trade after the crash. It is now estimated that there are simply not enough skilled people in the labour force to achieve the 250,000 or 300,000 homes. Do you have a view on that?

Dame Kate Barker: You did not ask us to introduce ourselves at the beginning. Had you done so, I would have declared my interest in this matter. I am on the board of a major housebuilder. I am not here representing them but I can absolutely say that it would be very difficult in short order to get up to 300,000 homes. I am grateful for being reminded that that is in England, which is a point I usually remember to make. That would be an increase of 70% plus more than we are adding today. We know that the increases in housebuilding in the industry over the last year or so have led to increases in the cost of materials and some particular trades. You are completely right that both some of the manufacturers of material and indeed some of the trades have gone out of business during the financial crisis. Many small companies have also gone out of the industry.

There is a question as to whether you could materially affect the situation by using more custom build. There are various things about custom build. One is that when you have them in they can be quite inflexible as dwellings. They are properties that are not so easy to change once they are there. The second thing is that we do not have any factories producing custom build, so I am not entirely sure in the short term that it would help you. I think the industry would not be capable of going from here to 300,000 in short order. Over time, and with clear signals that that is where we were going, I am sure that could be done. I would be really startled if we could get there by 2020.

The Chairman: You have talked about custom build. It is noticeable that in Scandinavia, the United States and Germany there is far more of an industrial process involved in housebuilding. Why has that not landed on these shores?

Dame Kate Barker: It is a very difficult question to answer. I was discussing this with somebody yesterday. One of the points worth making is that, in some of these countries where they do have more custom build, they undertake much more demolition. I made the point that the housing is not necessarily very flexible and some of it does not have such a long lifespan. We have tended, for reasons that perhaps I do not fully understand, to build to last here. It is worth thinking that, if you have custom build, you are going to have to produce more in the long run because you will find that they have a slightly shorter lifespan. I am slightly puzzled as to why we have not produced more custom build here. The truth is that people have not found it very easy to make custom build pay. Indeed, the company I am on the board of closed its custom build recently because they were not finding it profitable.

The Chairman: We need a modern prefab.

Dame Kate Barker: Yes, but, as you know, their lifespan was nothing like as long as a traditionally built house.

Q2 Lord Teverson: I declare my interest as a chairman and director of Wessex Investors and the Anchorwood development. I only have a slight connection with domestic housing, in the social housing area.

Generally, in infrastructure, we have become very sceptical about predict and provide, and certainly when it comes to transport infrastructure and those sorts of things. I am interested to know whether there is any alternative to predict and provide in the housing market. Do we have to provide everything for a civilised life for people who want to rent or own a house; or are there alternative policies that mean we can cope with not providing all the housing that everybody thinks they want or need?

Chris Walker: Perhaps I could pick up on that. There is certainly a lot to be said for the argument that meeting the 240,000 or 300,000 is not necessarily entirely about supply and building extra homes. There is probably something to be said about changing the way we use our housing stock. Our housing stock is not used terribly efficiently in this country. We have a lot of underoccupancy, for example, particularly in the owner-occupier sector. There is certainly a problem among the older generations and indeed people of my parents’ age. They want to downsize and move to a smaller house so they do not have two or three spare bedrooms, but they do not have a suitable alternative to which to downsize. It is almost like a bit of a gridlock in the housing market. There is not the provision of alternative, smaller housing such as the bungalows that older people want to downsize to.

Certainly, when it comes to London, where obviously demand is among the most prevalent in the country, there is probably a lot more we could do to encourage a more efficient use of the stock. That starts to get us into conversations about tax, for example.

Baroness Blackstone: We all agree that we need a lot more houses to be built and there is a disequilibrium in the housing market. How far do each of you think that the planning system is part of the problem and that that will be a block to increasing the number of houses that we build in future?

Martin Wolf: It seems to me pretty clear that it is. The main symptom of the disequilibrium is ever-rising land prices. There are some reasons for land prices to rise even in the absence of restrictions on its availability for housebuilding. For example, there are particularly valuable locations within an urban conurbation, and building more in the green belt will not necessarily do anything very dramatic about the value of housing in Mayfair. If you take London as a whole, or any conurbation that I know anything about, the difference in the value of the land that is built upon next to the land that cannot be built upon is so vast that it is impossible not to conclude that the land price in the City overall would fall if more land were made available and used for homes. Therefore, it must be the case that restrictions on the use of land is a fundamental factor in determining the price of housing and above all the land on which the houses sit, which is the principal component of the cost of houses in places like London.

Dame Kate Barker: I would like to answer the predict-and-provide question. You are right about predict and provide, although of course there are examples of houses that are left empty. I am saying this because planning areas are now supposed to have this concept of objectively assessed need. That is an interesting concept for two reasons. I suppose being objective means you have no bias in either direction, but since any forecast is inevitably inaccurate, the idea of an objective assessment is a bit odd, and “need” is the wrong word anyway; it ought to be “demand”, unless you decide you do not want to meet demand for the environmental reasons I set out earlier, in which case I would completely agree with the person on my left and you would use tax. This is why I think that the policy objective you are trying to get to is such a fundamental problem; it is where you strike the trade-off.

On planning, one of the things I have tried to learn to do is to avoid talking about planning as though it were some kind of terrible impersonal force. Of course, the planning system is, in a way, trying—although it does not do it very well—to be some mediation of what we as a society want. You see this conflict in planning, which has gone on for quite a long time, between the national level where there is a view about building a lot more houses and the local level. The local authorities struggle with the question of, “Gosh, we really have to find places for all these homes. Where are we going to put them so that we will not be thrown out at the next local election?”. We have to be careful to say that it is the planning process as such rather than what local electorates think they want. After all, planners are trying to do the job that I described earlier. They are trying to work out the environmental and welfare considerations of building in different places. I am not sure they always do it terribly well or articulate it in that way, but that is what they are trying to do. They are trying to make the places and the transport work, and that is all terribly difficult.

To come to your question, I think the NPPF was a big step forward because it gave a very strong lead towards growth. We had some very good planning guidance produced following it, which generally means that you are forcing local authorities to produce housing numbers that at least come up towards the household projections. At some point, Geoff will tell you that building in line with the household projections is not enough because housing is income-elastic. People want more as they get richer. Even if building in line with household projections was enough, there are a number of problems in the way that the local plans work.

I had a slightly wearisome look a couple of months ago at the status of planning in Hertfordshire. That was simply because I live relatively near it. I added up all the local plans as far as I could ascertain them. It is not easy to ascertain where people are with local plans. In total they only added up to 75% of the household projections, which, as I have just said, is not enough. Why were they too low? Some of them were too low because they had been produced ahead of the NPPF and there is no particular pressure on some of these places to push them up. Some of them were low because they are still in the process of being made and the planning inspector has not forced them into co-operation with the other authorities. You have this inbuilt tendency in the system to be planning for numbers that are below household projections. If you are planning below those, given that plans are often not fulfilled, you are almost inevitably going to build below household projections and they are not high enough. In that sense, I do not think the planning system works.

Martin remarked earlier—this is very simple and the new planning guidance does give a nod towards it—that it is all very well producing these plans for the next 15 years, but really none of us has any idea what is going to happen. But looking at prices in your area does tell you whether you are producing enough new houses or not. Personally, I think it is very important to plan where you want to put the next 100 or 1,000 houses when you decide to have them, but being forceful about whether you want 100 or 1,000 seems a bit odd to me and completely isolated from the market. We saw, after all, in the financial crisis that the effective demand for housing fell very quickly because people just could not get finance. The market does play a big role. I am sorry for the very long answer.

Baroness Blackstone: Would it help if there were stronger powers for the compulsory purchase of brownfield sites? It is one of the items that the Government have talked about but it has not yet come about.

Dame Kate Barker: Yes; I would be very sympathetic to the idea that there should be stronger compulsory purchase, and not just for brownfield sites. I am one of the many people who agree with purchasing land with compulsory purchase that has not previously been zoned for planning and so has no hope value, because you want to establish a new settlement and you can get all the land value out from the public realm. Many people think that this would be a very good way forward to develop more housing at scale. I do not think it would solve the whole problem but I would support it.

Baroness Blackstone: Why has it not already happened?

Dame Kate Barker: You would have to ask the Government that. Many people have been talking about it. I talked about new towns in the review I wrote in 2004. One thing is courage. The difficulty with housing is that it has to go somewhere. A new town will be in somebody’s constituency. It is rather like Heathrow. There is a question about it. The other thing is that, even if you are buying land in quite cheaply, you have to have a funding mechanism to put the infrastructure in early, and of course public expenditure has been short. Although there has been a lot of talk about new towns, I really do not think there was very much energy put into them under the previous Government. It is not quite clear what the present Government’s target on housing is, I hope it is a question you will tease out of them. However, they seem to be more energetic and it may be that they will get on with it.

Q3 Lord Turnbull: On planning permissions, if that is a real constraint, you would expect that any site that had an active planning consent would be immediately developed, but that does not seem to be the case. There is quite a lot of land where builders could build but are not building. Are they just holding back because by waiting two or three more years it will be even more profitable? Are the incentives strong enough to force people to use their planning permissions quickly?

Chris Walker: I could pick up on that. One of the issues is the volume developer business model. In essence, volume developers are margin maximisers and not volume maximisers. Just like any other commercial entity, they are about maximising profits. That is not a criticism, by the way; that is what they are there to do. What that translates to is slower build-out rates than we might otherwise like to see. Of course if, as a developer, you suddenly build a vast number of houses and flood the local market with those houses, then you affect the selling price of those houses and therefore do not maximise your margins.

Where this is a particular problem is here in London. Of course, most of the building sites in London are large sites. There was a study by Molior back in 2014—I think they did another one the year before—which basically showed that no large site, a large site being one with more than 500 consented homes, would build out at more than 100 homes a year. By deduction, that is less than the 20% build-out rate on large sites. That slow build-out is symptomatic of the profit-maximising nature of things.

Dame Kate Barker: The thing about the Molior study and the figures is that they talk about unbuilt permissions. The comment about the build-out rates is correct and you obviously do not take prices down, because that would be an irrational thing to do. Local authorities could deal with this by making sure that sites get split up a bit more. With the Molior data, if you have consent for 100 homes and you have only built out 50, my understanding is that the Molior figures count them all as unbuilt, so you should not think that they immediately translate into all these permissions being unbuilt. What they mean is that you have not got to the end of the site. In one sense, they overstate the issue.

On the second issue, I am speaking as a developer. The truth is that you are absolutely right. When you get planning permission, particularly for a big site, you put a hell of a lot of money into it. You immediately have a carrying cost for all that money you have put in. Your incentive is to get on the site. Why do you not get on the site the day after the planning permission? Generally, you are waiting for your planning conditions to be cleared. At the moment, one of the issues is that local authorities have stripped their staff down so much that you can sometimes wait two or three months to get your planning permission cleared, during which time you are not supposed to make a start on the site because it would be a contravention of what you are supposed to do. The date you get the permission is not necessarily the date that you have immediate clearance to start on the site. You start with groundworks and so on, and, even with the best will in the world, they take time. It will be very interesting to see what happens with the project that the Government are going to trial in Northstowe, where they will try direct commissioning and put some time limits on people for the build-out rate. We will see how far that succeeds and what it does to pricing. Northstowe is north of Cambridge, as you probably know, and is a very buoyant area. They should be able to get the housing away, but if you had a big permission in a relatively small town you would not want to build it out quickly because the stock might just stand empty, and that would not be helpful to anyone.

Baroness Wheatcroft: I find the figures that you have given us on build-out rate very hard to equate with the blocks of flats that are coming on stream all over London. Does this mean that you have a different way of counting apartments, as they are all known in London now? I am pretty certain that at Battersea, for instance, it is coming along at a rate faster than that you have been talking about.

Dame Kate Barker: Yes; flats do come along much faster. You may get permission for two or three blocks but you do not generally build all three; you build them a block at a time. With flats particularly, you obviously like to have pre-sale because you want some money before you start building 100 flats. You need to sell a few off.

Baroness Wheatcroft: Maybe we need to be clear about terminology. For the purpose of this inquiry I tend to think of an apartment as being a home, just as much as a house, but the tendency is always to talk about houses. I just wonder whether that skews the thinking generally.

Lord Griffiths of Fforestfach: If you were given a clean sheet of paper and you were asked to write to the Government and say how you could speed up the planning process, what would it be? One housebuilder argued to me recently that a major constraint was the number of planning staff local authorities have. If that is as serious a problem as they claim it is, is there not a case for saying that there should be a special increase in public expenditure to the local authorities in order to make sure that planning staff are not being let go?

Chris Walker: That is absolutely right, and I agree with the diagnosis from the developers that I speak to. There is an issue with a lack of planners in planning departments and a capacity to deliver. There are bottlenecks in the system as a result of that. What is quite surprising, though perhaps we should not be so surprised about this, is that many developers would be prepared to pay higher fees and more fees themselves to have more planners in departments, if only they could. It does not even necessarily have to be about public money.

Dame Kate Barker: That is absolutely true. The cost of sitting and waiting before you can start is great. If the price was to pay somebody’s wages for a week to get them to sign off your conditions, you would be very happy to do it. The other thing is that it would help you to plan. When you are a big developer, you obviously have a number of sites and staff and you want to be able to know when you can move people from A to B.

Baroness Blackstone: I forgot to declare my interest, which I should have done. I am the chairman of a housing association that is also a housebuilder—Orbit.

Q4 Lord Monks: I want to throw another hot potato into our discussion, and that is the land value tax. Is this the way of shaking out some land for development? We are aware that Martin Wolf has written about this over a good few years now and advocated it. I am interested in the views of all of you on this subject. Do you think this is a way that would put pressure on developers to get on with those many areas where they have planning permission but sit on the land in the hope of some property inflation? If that is not going to work, what will work against this background of rising land prices, which, in many cases, make it economic to hang on to the land until you can get more for it?

Martin Wolf: Let me comment on this. There are a number of different reasons why we might want to change our taxation of land and property, not least that it is a fearful mess. It is difficult to just change one bit without thinking about some of the others. I see you list here the question about council tax, which is obviously a quite extraordinary thing.

On the specific issue of land tax, it seems to me that there are three reasons why one might be interested in pursuing this direction. First, it is simply a way of appropriating a substantial part of the value of land and there are good fiscal reasons why you would want to tax land rather than other things. For efficiency reasons, the more we can tax land rents, the lower we can push other taxes, some of which are highly distorting. There is this general Henry George-type argument. That is a fundamental change in the basis of our tax system, but it seems to me, personally, attractive.

The second reason is linked with what Kate talked about. It is another way of doing this thing and it is something I have been thinking about a lot and which to me seems central in this discussion. That is how you change the incentives for local authorities. Under our current fiscal arrangements, although they do seem to be changing rather rapidly in ways whose implications I do not fully understand, from the point of almost any local authority the net benefit, both political and economic—and the two are very closely related—of development of housing is negative. So why would they do it? They are not going to get any significant revenue gain from it. They are going to get an awful lot of grief from their existing residents and they are going to incur a very large number of costs associated with infrastructure and all sorts. So why should a local authority want to promote development? It is in its actual interest not to do so. One wants to think about taxes that will accrue to local authorities and that will adequately compensate them for their costs.

One very simple one, which Kate suggested, and is essentially a tax arrangement, is that you buy a property at current value and sell it at the future value. Land value taxes are just a way of annuitizing that sort of process. You could clearly associate those with local taxes. That is rather different from the Henry George-type thing, which is national. This is one way, and it seems to me an incredibly important basic aim of our policy, to motivate local authorities to get a return. By the way, one reason why residents might be happier to accept incomers is if their own taxes were to fall, because very large taxes would be imposed on the development itself.

The final one is indeed what Lord Monks has mentioned. It would be a way of stimulating use of land that is idle. It would increase the carrying cost of land. At the moment, interest costs are extremely low. Obviously, if you are a large developer in the current circumstances, there are some costs associated with holding land, but, if the appreciation of the land value is significant, it seems to me perfectly rational to wait for the development. It is not in the least surprising why people do that. I am not suggesting that is the only reason; other good reasons have been given here. A land tax or site value tax related to the value in its current planned use, obviously assuming that the planning has occurred, would be a very useful stimulus for development. I have been arguing this for about 15 years completely unsuccessfully.

That is how I see some of the core tax issues in this.

Dame Kate Barker: I do not agree with Martin on this. I hope it is a stimulating area of debate. I do agree with him on the first thing he said, however, which is that we ought to tax land more than we do and we ought to make reforms to the housing and property tax system. On council tax and other things, there is much more agreement between us. It is partly for equality reasons and the standard Henry George-type reasons.

Where I think it becomes more difficult is in taxing land in the right way to produce incentives for development. There are two proposals here. You mentioned one and Martin mentioned the other. One is that, when you give a permission, then you start a tax running. I hope you would only start it running when you had got the local authority to sign off. Maybe if they were to get the tax, this would be a good incentive for them to sign off. That would work well. I do not disagree either with the idea that more of the revenue that implicitly comes in if you are able to use more development for the public purse should be used locally. It is an extension of the section 106 idea.

One thing you need to think about is this. If you tax permissioned land, what does it do to your incentives? There is criticism about getting permission for a large area of land and building it out slowly. That may be true, but if you had this change and you taxed permissioned land, you would not ever want permission for 1,000 houses. You would apply for permission in little slugs, which would be relatively inefficient and would cost everybody a lot of money, but it would save you some money. That is the first thing.

The second thing is that it would raise the risk for developers if they have to pay tax and there is a risk that the market will turn. They will not want to build out so quickly, which would just get eaten into the land price. It would mean less money went to landowners, which we might regard as a good thing because it is landowners who generally get the money at the end rather than the developers. The landowners clearly get the residual after the developers’ margin. I can see why people think it would be a little bit of grit that would encourage people to build out a bit faster. Although I do not agree with it, I can see the attraction of it.

However, l find land in a plan really difficult. I will tell you why; it is an obvious reason. Say I am Thame district council in Oxfordshire, I want to build X houses and I allocate the land for it over a 10-year period. You could not possibly want to tax it all because you would not want them all built in the same year. You might then create a bit of an incentive for people to get in early, but the person who does not get their permission until the 10th year, because that is when the planner wants them built, would have had to pay tax on this high land value for what strikes me as a disproportionate length of time. During that time, the planning system might change and it might go out of the plan. Then what do you do? That is why I find it difficult to tax on its planned value. Martin wants to argue with me.

Martin Wolf: There are solutions to all these problems. I believe one could create a regime—and it is certainly one I would want—where you had presumptive permission. It could be one in which it would be perfectly possible for the council to say, “The following area has presumptive permission”, and at a certain point relating to the speed at which it wishes to see the development it says, “This is now designated for development and the tax date starts then”. It does not seem particularly problematic to me if the tax begins at the point at which the decision has been made that they now want to see the development. I am not particularly troubled by this. I think it could be perfectly well handled.

Dame Kate Barker: I have to say as a developer that if I owned a bit of land, I had it in a plan and the market had shifted and the town council suddenly wrote and said, “We would like you to build that now”, I would be a bit peeved.

Martin Wolf: Keeping developers happy is not my main objective. I believe it is pretty clear that almost anything we are going to do to improve these things is likely to make some developers very unhappy. We know this is the case.

Dame Kate Barker: That is true. Indeed, the proposition about taking the new land, which I do agree with, and using it for the public purse would suit neither developers nor landowners as a matter of fact. That does not mean I am opposed to it. It is in the more normal planning system I have a problem. I just think the land value tax is overplayed as a solution.

The Chairman: This seems to be an eminently sensible idea. Why has it not been taken up?

Martin Wolf: There are one or two countries that have tried it. There are so many reasons. There are very powerful interests against it; that is pretty obvious. In most societies, and certainly ours, landowners are extremely powerful people. The other aspect of it is very interesting and it gets in the way of almost all sensible, property-related taxes. It was Christopher who mentioned the point about people living in large houses with three or four empty bedrooms. One of the reasons for that is because you do not get taxed very much on owning this. If we raised taxes, to give an example, to a level that would encourage people to move down and liberate housing for young families, it would then be said that we were penalising Granny, who wants to stay in her house. People feel very strongly that taxes that are not attached to income or not easily payable against income are somehow wrong and immoral. That is a very powerful feeling and it gets in the way of what I see as rational taxation policy. I have to recognise that is a reality, although I think it is unfortunate.

Q5 Lord Turnbull: I declare an interest as a director of British Land, which has a small residential business. It is not particularly at the affordable level; it is mostly at the unaffordable level.

The Chairman: Presumably not completely unaffordable.

Lord Turnbull: By British people. My first question is for Christopher Walker. You talked about the business model of volume builders. Is one of the things we might do to try to bring into play people who have a different business model—ie, housing associations who might be margin satisfiers? They have to earn a certain margin for how they mandate to maximise volumes, subject to that constraint. Do not many of the things we seem to be doing at the moment, like the constraint on rents and the right to buy, which reduce their ability to pledge collateral and introduce uncertainty, mostly go against that?

Chris Walker: I absolutely agree with the sentiment. For example, let us just take some very high-level numbers. If we need to build 240,000 homes a year to meet our growing demand, many of the developers and developer organisations I speak to believe that under the current planning system and the current arrangements they will never build more than 150,000 or 160,000 a year. That automatically begs the question: where are the rest going to come from? Housing associations have an absolutely pivotal role to play in that. Housing associations cannot really be described as margin maximisers. In a sense, they are more volume maximisers, in that part of their charitable purpose is about having maximum delivery of affordable housing. As I wrote in my report last year on housing associations, I think the sector is capable of building 100,000 homes a year. That would plug the gap.

The magnitude of the challenge and the scale of the problem is so great that we need all the players to come back in. We need smaller and medium-sized builders encouraged back in. Over the last two or three decades, we have had the decimation of the number of housebuilders in the sector. It is quite staggering the decline in the number of builders that we now have. Of course, every time that we go through a recession, we have this huge ratcheting-down effect in capacity and the number of builders.

One of the things I would like to say about government policy—and obviously we have the Housing and Planning Bill—is that perhaps self-build and custom build will be one way of trying to encourage the smaller and medium players back in. We really do need them.

Lord Turnbull: Let me turn to a point that Martin Wolf made about local government. I have not fully digested what the Chancellor said last week.

Martin Wolf: Neither have I, and I am not convinced he has.

Lord Turnbull: It was about turning local authorities into bodies that have two streams of revenue; the business rate returned to them after 30 years and the council tax, which is their money. By the end of the Parliament, they are supposed to be more or less grant-free. It sounds as though that is a very major change in the incentive structure for local authorities. It may create a pendulum that swings so violently the other way that we will find the real problem is the lack of equalisation. At the moment, we have too much equalisation in the system, because, if you are successful, that money is just fed back into the pool and goes to Hartlepool or somewhere. In five years’ time, we will be worrying that those less prosperous areas will find it difficult to survive under this regime. If it is as he presented it, very briefly last week, it could be a very major change.

Martin Wolf: Yes. I have thought about it and I will comment on it briefly. There are aspects of this I certainly do not understand. This is what I understood from what I read, and Treasury documents are not always pellucid. There will be a quite complicated regime of controls on the rates councils may charge. They cannot change the business rate easily, but, as I understand it, there are mechanisms that will permit it too. There does seem to be implicit in it—it is not completely explicit—that, if they developed the business life of their area in such a way as to increase the rates, that would accrue in the first place to the local authority. That seems to provide an encouragement at least for commercial development. The same would seem to be true even now under the council tax. It is just such an inadequate tax.

However, it is clear, but not how, that redistribution among local authorities would continue, as stated in the document. Pretty obviously, if the entire business rates of Westminster went to Westminster, we would have a big problem; it would be absurd. It does seem to me at first reading—and obviously you would have to talk to Treasury Ministers—that there will now be a greater link between the development of the local area’s business life and the revenue accruing to the local authority, which seems to me very desirable. There are consequences and features of this, in particular the way the revenue will be reallocated among authorities, which are, to me at least at the moment, still very unclear. Under sufficiently aggressive reallocation, the incentive would be considerably attenuated.

Finally, the council tax does not fit in with the business rate regimes which it did once, obviously. We have a property tax structure for personal housing and a property tax structure for business, which is clearly going to create all sorts of strange anomalies, which I could not work through at this stage.

Q6 Lord Turnbull: I have a follow-up question. There was a reference to the Dieter Helm view that you have economy A, where you try to meet demand, and economy B, where you recognise that you are not going to try and meet demand. That means that between the two there are some people who would otherwise get a house to rent or buy who will not. We must have a view about what the tolerable minimum standards are that we are prepared to allow people to live in.

Martin Wolf: That is correct.

Dame Kate Barker: I would not attribute that to Dieter Helm, although I would attribute some environmental views. In some sense, the view about the fact that we could share the houses more fairly is more a Danny Dorling view—that we do not build any more but just share them around.

Over the last X years, we have built about 90,000 homes a year fewer than we feel there is demand for, but we do not see a million people hanging about the streets; where are they all? The answer is, of course, that the young people are all living at home with their parents as opposed to moving out into flats. Is this a tremendous social ill? I do not know. Although there are many people who are owner-occupiers—it is 8.1 million in England and Wales with two or more spare rooms—there are about 1 million people in social housing who are overcrowded. They are probably a little bit more overcrowded than they were. We have been quite good at using up the empty stock. It has come back into play to the tune of about 20,000 a year, so we have accommodated the shortfall. The question is: how much longer can we accommodate it and do we really want to do it this way? If you decide you are not going to build to demand but you are not going to tax, for the reasons that Martin gave—we really hate taxing property—what you end up with is a huge incentive for people who can afford it to buy space they do not need and you force the poor to huddle up. That is fine; that is a result. The question is: do you like it? I do not like it. I would either build more, tax, or do a bit of both. If you carry on doing nothing, you will have the poor very huddled up.

Martin Wolf: Owning a house bigger than you need is surely the most rational investment strategy for anybody in Britain who has the money. That is exactly what we are seeing. Mr Dorling then said that we do not use property well, which is completely correct but it is baked into the cake.

Baroness Wheatcroft: So owning two houses that you do not really need is an even better investment.

Martin Wolf: The Chancellor seems to have a view on that, but only if you buy them. It depends on what taxes we can impose. It is truly fascinating that the one tax we can impose without any real worry is stamp duty, but of course from the point of view of any economist it is the least efficient tax, apart from the fact that you can raise revenue, which from the Treasury’s point of view—and that, I do understand—is a pretty important feature of a tax.

Dame Kate Barker: It is quite flexible. It is quite a useful tax to have in your armoury.

Martin Wolf: But it has now become the principal.

Dame Kate Barker: I agree with you that it should not be the first one you reach for.

Q7 Baroness Wheatcroft: I want to ask about the existing Government interventions, particularly help to buy. Martin Wolf has been vigorous in his attacks on the results of help to buy and yet the Government remain committed to it and continue to do it. Would there be a more efficient use of Government help in the housing market? For instance, listening to what you were saying earlier, would it make far more sense for the Government to invest in providing infrastructure in certain areas, freeing up much more land and potentially creating a supply that would at least not push prices further and further up?

Martin Wolf: There are two profound questions. One of the most profound questions is whether the Government should have a strong view about the way in which the right to occupy a house is realised: that is to say, should they have a preference for home ownership and the owner-occupier vis-à-vis the rental sector? As I see it, this Government seem increasingly to have decided that they ought to favour owner-occupation. There are already very large incentives for owner-occupation inherent in our tax system because imputed rent is not taxed. That is a point I made in my thesis approximately 40 years ago and it has not changed. There is a very large built-in incentive and we have added further incentives over time through the treatment of capital gains tax for owner-occupation.

The Government are now increasing incentives further. I cannot see any good reason for this, but that is a fundamental question. One of my objections to help to buy is that it is oriented to helping that part of the income distribution which would like to buy. Here, we are not talking about people who want to be housed. Most of those people are young people in the middle to upper parts of income distribution. I cannot see for the life of me why they should be a high priority in the current situation. I do not see the sense in that. There is a fundamental set of issues there.

The second question is: would this sort of scheme help to deal with what we all agree in different ways is the fundamental problem, which is supply? It does not seem to me that insufficiently high prices—ie insufficient reward for building—can be the main reason why people are not building, given what has happened to house prices. A further pushing up of house prices by subsidising the purchase does not seem to me a very well-targeted incentive in the housing system. For these two reasons I have, indeed, been very critical of this policy. That does not mean that I do not fully understand the political rationale, because it is obvious.

Baroness Wheatcroft: We have not talked about being able to pass on the family home.

Martin Wolf: That is the inheritance tax thing. On that subject I am afraid words fail me.

Baroness Wheatcroft: Would anybody differ on that?

Chris Walker: I partly differ. Obviously, home ownership is clearly at the centre of the Government’s housing policy at the moment. Indeed, it has been at the centre of Conservative Party thinking for a long time. The fact of the matter is that most surveys and most polling show that most people want to, or aspire to, own. For example, the British Social Attitudes Survey showed considerably more than 80% of people wanting to own. It is a big problem for the Government because we have seen home ownership rates decline in this country in recent years. They have declined from about 70% in 2002 to just over 63% today. Much of that decline has been among young people.

If you take the subset of those aged under 35 within that, the home ownership rate decline is something from two-thirds to just over 40%. What you are seeing is a squeezing-out of young people from home ownership. It has become a generational equity issue as well. At one level, the Government are absolutely right to try and intervene on that. Of course, starter homes and shared ownership are obviously targeted at younger people under 40.

More generally, the fall in home ownership levels is more broadly symptomatic of a deterioration in affordability in a wider market. It is right at one level for the Government to intervene in tenure space, if I can describe it in that way. Ultimately, I do not think the Government can reverse that decline in home ownership until they start building many more homes and improve affordability in the general market.

Dame Kate Barker: I would like to look at it a bit differently, if I may. One of the things that I know some economists criticise is the taxing on buy to let. People say, “Why are we doing this? Should we not have a level playing field?”. I generally agree with what people have said, but on the whole it comes back to an equality question. If, as we have argued very clearly, we are not building enough houses to meet demand so the pressure on prices is ever upwards, there is obviously an incentive for anybody who has money to buy the damned things and people with money in the buy-to-let market have been advantaged over people trying to get mortgages because of the otherwise very sensible changes in the mortgage regime. I know a lot of people say the Government are creating an uneven playing field, but I would say it is trying to level it up a bit from an equality point of view. I would prefer them to do that and raise a bit of money by taxing buy to let people than by subsidising home ownership. That is where I generally agree with Martin.

The new build scheme was helpful when it was introduced, by the way, because supply was still in a difficult state and the mortgage market was then very tight. When it started off it did also have beneficial effects on supply. I am less positive about it as a continuing policy.

Baroness Wheatcroft: How would you feel if Government were to use their resources instead to prime the infrastructure for potential housing development or, indeed, to give grants to people living in large houses so that they could divide them in two?

Dame Kate Barker: I would prefer it if Government sold their own land a bit more cheaply and did not always sell it at the top price so that they were then able to use some of the infrastructure to build places. I have no problem with people dividing their homes into two, although, as we said earlier, this is a question of housing space in some sense. People do want more space. I thought you were going to say grants to help older people move, which I would also favour, although often they do not want to move because there is not a suitable house that keeps them in their community. The problem is that home is not just a physical thing; it is more than that when you have been there a long time. Personally, I agree that there are many better ways to use the money than on help to buy. I do not think there is a shortage of alternatives.

Q8 Lord Griffiths of Fforestfach: I have two questions. The first is to Martin Wolf. From society’s point of view—not the individual’s—are you totally indifferent between renting and owning?

Martin Wolf: Let me put it this way. I think, at the margin—this is perhaps a bit of a cop-out—my answer is yes. As I understand it, in the Victorian era—I am not an expert on this, but it is my understanding—approximately 90% of people rented and therefore by definition the properties were owned by people who lived off the rent. Would it be undesirable to go back to that sort of world from a social point of view, because it would profoundly affect people’s sense of whether they have a stake in society? I think that is the underlying thinking here: that they own something that is real to them, even if that was largely the result of expressed preferences, because it is a long-term contract; it is secure; and the rental does not change, as it did not in the Victorian era. I would probably be prepared to say that if that were the consequence I would begin to get worried. But, within the margins that we are now seeing, I am less worried about the fact that people cannot buy their houses.

The reason I am worried that people cannot buy their houses—and this is a real issue—is because there are such enormous privileges and benefits in owning houses. Because the tax regime is so explicitly and implicitly favourable to owning houses, if a very large proportion of the population is unable to buy houses, then we have a problem because it is a profound inequity. That does seem to be a problem to me.

The first best solution, of course, is to get rid of these tax anomalies since we are most unlikely to reintroduce Schedule A at a sensible level. I am not terribly happy therefore with the taxation of right-to-buy landlords. It does not seem to me a very big problem, although I would not have done it in the way that the Chancellor has proposed. I do accept there are some big issues. First, there is this stake-in-the-country thing. Secondly, and more importantly to me, there are just such large benefits in being an owner-occupier that if a relatively small proportion of the population receives those gains it will be perceived, and rightly, as entrenching quite an important unfairness.

Q9 Lord Griffiths of Fforestfach: Thank you very much for that. I now ask my second question. In the Summer Budget and in the Autumn Statement, there have been a number of changes in relation to rents for social housing. First, in the Summer Budget, they were coming down 1% a year for three or four years. If you had an income over £30,000, you were going to have to pay much nearer a market rent for social housing. In the Autumn Statement, it was said that housing benefit would be capped in relation to the amount you paid for rent. In relation to these changes which have been made to rents, what effect do you think it is going to have on the supply of social housing?

Martin Wolf: I am pretty clearly the wrong person to ask this, so I will ask Kate to deal with that. There are two issues here. I have not worked through the net effects of all this on the returns to social housing. That is obviously very complicated and probably depends very much on the particular social housing provider, the particular mix of tenants they have, the incomes and so forth. That is the first point. It is really quite detailed.

The second point, which does worry me very much with the recent developments in housing policy, no way unique to this Government, is that the constant changes and unpredictability in policy must make the lives of everybody trying to make decisions in this sector more difficult. I would imagine that must apply to social housing providers as well.

Dame Kate Barker: I have not done any of my own work on this either. I would use the OBR’s estimates on the ground that they have done the work. They said the cuts would reduce supply by14,000 units over the next five to six years. I have no better estimate than that. I have to say truthfully that, on the whole, I do not work very closely on the social rented sector.

As a follow-up to the comments Martin was making about the advantages of people having home ownership, the truth is that, if you think about the people in this country who are really struggling with housing costs at the moment, they are mostly people in the rented sector. They are not people in the house-owner sector. That is an effect of all the things we have been talking about.

I do feel uncomfortable with a set of policies that seem designed, as we are all saying, to be supportive of reasonably well-off people who are just on the cusp of buying and just need that little nudge to get them over the edge, at the expense of people who really are not in the buying area but are stuck in a rental sector that is becoming more and more difficult. The only positive thing I can say is that the move to tax individual buy-to-let but not so much corporates might improve the standards of the rental sector. You might get a more professional renting sector. Against that, I was unhappy when landlords lost their allowance for repair and maintenance. I would have preferred them to be inspected to make sure they had done the repair and maintenance. That would have seemed more helpful to me to raise standards in that sector, which are often too low.

Chris Walker: I do not concur with all of that sentiment. The Government are, in essence, changing their direction on affordable housing, and changing it quite fundamentally. It is going much more in the direction, as part of its home ownership push, of extending that home-ownership envelope and the home-owning democracy to households on lower incomes, including those who would have traditionally been thought of as social renters. You have the right-to-buy extension policy. You have shared home ownership and the announcement in the spending review of 400,000 homes, most of which will be for some form of home ownership or another. It is this move away from affordable housing as subsidised rentals towards affordable housing which is subsidised home ownership. It was significant in the spending review because for the first time more grant money will be spent on affordable home ownership products than on affordable rented or social rented products. Obviously, social rents were phased out for grants in 2010. For me that is a watershed. It is the Government saying, “We will no longer mass support submarket rental products through new grant money. We will only support home ownership”. That is a change of direction, but again it is about boosting home ownership and the Government saying, “We believe that home ownership should be available to a much wider pool of people than has traditionally been the case”.

Dame Kate Barker: I would just say that in the United States, when they did that, it did not necessarily end well. It is a slightly cheap point. And,alongside these policies we have made the support for people who fall into difficulties with their mortgages less good, which seems to me somewhat illogical.

Martin Wolf: It is so important. I am very worried about the social consequences of this. It seems to me that there are a large number of families with children on the edge. Their incomes are not necessarily very regular. Owning a house has large burdens associated with it. Large costs might arise for repairs you have to make and which you might not be able to meet. Shifting support away from rent in this part of society is, in my view, likely to prove an unworkable policy in the long run. The proof will be in the pudding.

Q10 Lord Teverson: I want to follow-up on a question. We had an evidence session with the Chancellor of the Exchequer a couple of months ago. Social housing was one of the areas we dealt with. It was one of the more contentious areas, and Baroness Blackstone asked a number of questions in particular. I got the impression from the Chancellor of the Exchequer, although it was not official policy, that one of the reasons that this was quite a good policy for reducing rents was because social housing associations have had quite an easy life, they were not performing as well as they should and they ought to have a bit of a kick to get on and fulfil what he wanted them to fulfil. I paraphrase completely, but I would be interested in your views on whether social housing associations have delivered what we should expect of them.

Chris Walker: There has been a concern, particularly around housing associations not being the best delivery vehicle for new affordable housing supply in this country. There are all sorts of things within that. Obviously, one of the biggest issues that the Government are grappling with is how they can drive more efficiencies in the sector. You have a sector that is made up of over 1,500 organisations, including a very long tail of very small organisations. If there is something within that which basically suggests that we do not have the most efficient structure within the sector, I think that is one thing and one reason why consolidation could be a good idea in the sector.

Another issue is that housing associations have been making very big surpluses in recent years. Last year, the housing association sector made a surplus of £2.5 billion. These are very large sums of money, two-thirds of which is paid for by housing benefit. At one level, one might say that the Government are right to be asking those sorts of questions of housing associations and about how they can do more.

Lord Teverson: Are these held as cash mountains? How are they held?

Chris Walker: Some of the money is held in reserve. In defence of housing associations, it is partly because there are so many uncertainties ahead. You have all the welfare reforms going on. Housing associations feel that they have to keep more of a buffer to protect themselves against those uncertainties. There are two sides to this.

Dame Kate Barker: I do not have terribly strong views. In the days when I was on the board of the Homes and Communities Agency, and before that the Housing Corporation, we were trying then to persuade people to invest more and make sure they used their money more efficiently. It seemed to me that, operationally, some of the associations are much more efficient than others. It is quite difficult to sort that out because in some sense they are not running businesses. On the other hand, many of them do very good work. They often have to deal with very difficult tenants. Private landlords do not have to deal with difficult tenants. Housing associations do, and it is quite right that they have to think about risk, and a number of associations ran into financial difficulties that had to be managed away during the crisis. If the whole sector got into difficulties, it would not be very clever. My recollection is that the evidence was that mergers did not generally make much difference, but you are right that there are a lot of very small ones. I do not think it is the small ones we are worried about. You should ask the G15, or whatever they are called, about their policies.

Martin Wolf: I want to make one very simple point. I do not have any particular views about housing associations; I do not know enough about them and it would be ridiculous to claim I do. I even did my thesis on British housing policy. It seems to me that the evidence we have is now absolutely unambiguous. We will need a sector that provides affordable rental housing. There is no doubt about it—absolutely none. This can be done through local authorities. We have decided that was not a terribly good idea. It can be done through housing associations or through private landlords with housing benefit. We are not very happy with the latter. It creates all sorts of problems, including problems for the Treasury. We do not want the local authorities, so housing associations is what we have. I fully concur with the Chancellor’s objective to make them as efficient as possible, but they are going to survive and I would guess that over a lengthy period they are likely to become more important rather than less for the structural reasons we have already discussed. Imagining in some way that this sector and therefore their clients will disappear seems to me pretty fanciful.

Q11 Lord Teverson: Perhaps I could lead on to ask about the Right to Buy, which was a commitment made during the election and is being fulfilled at the moment, through this strange voluntary mechanism rather than through legislation in the Housing Bill that is going through Parliament at the moment.

Do you feel this is reasonable and equitable? Certainly, when the Chancellor of the Exchequer was here, he said that it put such tenants on an equal par with council tenants of old, so it was non-discriminatory. Having said that, clearly it can be seen as a windfall gain for a very small number of people.

I would also be interested in your comments as to whether you feel this affects different parts of the country. I have been involved in a number of rural issues, and it is felt particularly that this could be more of a threat to rural areas than to urban. I would be interested in your comments on that side of this particular proposal.

Martin Wolf: I would make two points. I do not know about the rural versus urban. I would be interested in Chris’s view. I have written a column on this. I am on the record as saying it is an outrageous policy. It is pretty obvious that I would. I think it is expropriation and quite shocking. I have to stress, though not for that reason, that I am probably the only person left in Britain who thought the original right to buy was absolutely objectionable. I do not think public property should be given away to the fortunate few at submarket prices. That was the way Queen Elizabeth ran her public finances and I do not think it has improved since then. I am probably not the right person to ask.

In this particular case, the purpose of housing associations is to provide affordable rental housing. That is why they were created. That is why they have been supported and it seems to me that they should be left alone to do that rather than be encouraged to provide a windfall to a limited number of successful and happy incumbents. That is my view.

Lord Teverson: Can you be clearer?

Martin Wolf: Probably, but it would not improve my reputation.

Dame Kate Barker: I always think the great thing about giving evidence with Martin is that you can sound enormously moderate. I have to say I am very glad he said that; I agree with it completely.

Chris Walker: I completely disagree with that. Fundamentally for me, if you are talking roughly about the same subset of society, there is no difference between subsidising home ownership and subsidising rent. What is fundamentally the difference between subsidising someone through rent with social rent at 60% of market rates, which is roughly what it is at the national average, and giving somebody a 40% discount on buying their home? At the very high level there is no difference. They are both subsidies and they are both ultimately given for equitable reasons.

On the Right to Buy policy specifically, I think we should welcome it. We should welcome Right to Buy extension as a new funding stream for new build affordable housing through the one-for-one replacement mechanism. I do caveat it with that, because I am in agreement with Kate and Martin that the original policy, which did not have one-for-one replacement, was problematic. It certainly did see a significant reduction in the social housing stock. So long as we can do the one-for-one replacement and that can be met, then it is a new source of funding. It is a new source of money with which to build new replacement affordable housing. It is a contribution to our overall housing supply and for that reason I think we should be a bit more positive about it. It is innovative.

Lord Teverson: You mentioned one-to-one replacement. The most recent parts of right to buy, or the previous one, have never managed to get anywhere near that.

Dame Kate Barker: No; they have not.

The Chairman: We are rapidly coming up to 5pm and I do not want to keep you here past supper. Perhaps we could move on. If you agree with what the other speaker says—and on that particular question you clearly did not—then we can move on even more swiftly.

Q12 Lord Sharkey: I apologise that I am going to have to leave in a moment. I am not going to ask the question I was going to ask. Lord Forsyth will take care of that. Instead I am going to ask a question that probably has a very short answer. Listening to all of this, I just wondered whether there was any experience elsewhere, or any examples of successful approaches to speedily increasing the housing supply, that might help guide us. Is this a problem absolutely unique to this country? Has it ever been encountered before? Has anybody dealt with it in a way that contains some lessons for the future?

Dame Kate Barker: I am not sure I can think of anywhere that has very successfully increased their supply of housing more quickly. I am much more struck by the fact that these problems are becoming more widespread, partly of course because population growth is very great. The only country I have done any significant amount of work on is Australia. There is some literature on comparative housing markets. They all come from very different backgrounds. Martin has talked about the UK’s position not to like taxes on housing. That is not quite the same elsewhere. In other places, they are more willing. For example, people see council tax as paying for services. I think it is a tax for occupying that bit of land. That is a huge difference. The truth is that there is not huge evidence that people elsewhere do this very much better, although there is a great tendency to think local authority intervention might help stimulate some of the small builders, as Chris has already said and I agree with this. There is some merit in local authorities being more active in the land market and preparing what people call serviced plots, which they then sell off to small builders because that would help to get the thing going. That was done successfully in Germany and the Netherlands, and is an example worth copying. There is a lot to say if you start on international comparisons.

Martin Wolf: I would make two points. Looking at the comparative literature on price movements, my impression is that we do seem to be doing exceptionally badly compared with other European countries with comparable density problems in terms of the movement of affordability. That may partly be due to the exceptional role of London in our economy. That must be part of it, but I think we have to start from the assumption that we are an outlier.

The second point is that I would underline what Kate said. There is quite interesting evidence and the first time I came to learn of it was through Policy Exchange pamphlets written in the early 2000s by Oliver Hartwich, then at Policy Exchange. (?). I do not know whether you remember him. They did indicate that this set of incentives, working particularly in Germany but to a lesser degree the Netherlands, were more effective and that we could learn something from them. Certainly, the Germans have succeeded in avoiding the extreme bubbles and collapses that other European countries have had.

If we want to learn, however, about how not to increase supply, we could take a very close look at Spain or, if you want to get closer to home, Ireland.

Dame Kate Barker: Now Ireland have an undersupply, so it is amazing how quickly it can go from one to the other with a flexible population.

Lord Forsyth of Drumlean: I apologise for being late. I was involved with the European Referendum Bill on the floor of the House. I should also declare an interest as a director of a bank that lends to property companies. I also own some holiday letting properties in Scotland.

I wanted to ask you about the risk to financial stability, but I am sure the Chairman may do that if we have time. I want to ask you about the Government’s measures affecting Right to Buy, which I suspect you may have covered in an earlier discussion in the Committee. Do you agree with these measures?

The Chairman: I think we have covered that.

Q13 Lord Forsyth of Drumlean: I will ask my question about financial stability. To what extent do you think that the current housing market is a risk to financial stability? You have written quite a lot about this.

Martin Wolf: Yes. The answer is that, fortunately, we have a Financial Policy Committee in the Bank of England that is devoting an immense amount of attention and thought to this question, which was not the case prior to the crisis. The analyses seem to me to have been very professional, as I would expect of the people involved both on the committee and the staff. Our approach to this is orders of magnitude more professional than it was in the past. That is the first part.

Secondly, my sense of it would be that events that would make our housing market a serious threat to British financial banking stability would be extreme. They would be very large events. It would be some combination of a giant recession with a very large fall in house prices. The former would trigger the latter.

We are quite well cushioned on the house price point. As my friend, the former Governor of the Bank of England, used to point out, we were saved by our inability to build houses. The chances of a big house price collapse, given that supply is continually growing more slowly than demand, is not that high. It would have to be a very big recession. Remember that the last recession, which was the deepest we have experienced since the inter-war period, actually led to extraordinarily small losses on home mortgages. One of my favourite statistics that you probably know is that the British banks succeeded in losing more money on American mortgages than they lost on British mortgages.

This would suggest to me that the financial risk from the British housing market—I leave aside commercial property, which is something else altogether—is modest and manageable, barring some immensely significant world economic event. I can give you scenarios but they are not things that I would think sensible policymakers should plan for.

Dame Kate Barker: I agree broadly with Martin. The only area that is potentially a risk is London, of course, where you are subject to international funding flows. Most lenders, and the changes the Bank has made, ensure that no one is sufficiently exposed to London to be likely to cause a risk to financial stability, although it could cause a nasty cold.

Lord Forsyth of Drumlean: You do not think that a sudden rise in interest rates with high levels of mortgage borrowing and the effect on house prices could create a risk.

Martin Wolf: The suddenness of the rise would not matter; it is the level. Let me take an example. If you are imagining a scenario in which interest rates were to be 12%, which is an extreme, then we would have a big problem. We would have a very big problem. Nothing is impossible, but these are very extreme scenarios. I have looked through this, and if we are talking 4% or 5%, which would seem to me a reasonable extreme in the next cycle, I do not think that would create any serious problems. But of course there are levels of interest rates at which we would have an enormous crisis. We would have to imagine some immensely significant world event causing that. It is not impossible to do so when I look around at the world at the moment, but they would have to be very extreme events.

Lord Griffiths of Fforestfach: The alternative would be if we let inflation rip. Nominal interest rates would have to increase and then we would have to cut back on public expenditure, the money supply and so on.

Martin Wolf: If the Bank of England completely lost control of inflation and we ended up with 10% inflation and the Bank of England had to raise rates to the sort of rates we saw in the early 1980s with our current leverage, we would have a problem.

Lord Griffiths of Fforestfach: Or the mid-1970s.

Martin Wolf: Early 1980s.

Dame Kate Barker: I do not disagree with that. Obviously, the last crisis was a real financial stability crisis. Clearly, in terms of raising rates, you are doing it to slow things down in the market. It is hard to think of a circumstance in which you would have to raise rates so high that you caused a housing market collapse. I made the point earlier that one of the things that concerns me is that, even in a moderate housing market collapse, we have removed so much support from people who have mortgages.

The second thing I would say is that the Government’s exposure to the housing market, through some of the mortgage guarantee schemes, is of course higher than it was generally. We have created some new risks.

Lord Forsyth of Drumlean: What was in my mind was that we seem to have got into a position where we are holding down interest rates, which is inflating housing asset prices. We have got into a cycle where it is very difficult to get out because of the level of gearing attendant on that. Although the Bank of England has taken measures, it seems to me that it ought to be of concern.

Martin Wolf: I assume this is not a discussion of monetary strategy and I presume you will be talking to the Bank of England about this, but they are doing their best—it is a very interesting question whether it is sufficient—to control the leverage consequences in the housing market of their policies. They would argue, I think with some plausibility, that the monetary policy’s effect on the housing sector has not been that vast compared with some of the other asset markets that they are influencing. Again, we are not certain of that. There are risks here, but there does have to be a very large meltdown to start raising serious financial stability concerns, given the current capitalisation of the banking sector. I am not saying it is impossible, but it would have to be quite extreme. You have to then ask how cautious the central bank should be in shielding us against risk.

Dame Kate Barker: I think that is right. I would say two things. First, you have offered me the opportunity to make my favourite point about housing policy, which is that it is totally un-joined up between the Bank, CLG, Treasury and DWP. That has already been apparent from my comments on mortgage support. It is also apparent in the drive for home ownership at one end of town and the drive to keep leverage down at the other end, which do not strike me as self-evidently compatible.

The second point I wanted to make is that you said leverage has been increasing. It is true that house prices have been rising, but net mortgage lending has not increased terribly. I am quite sure there are, as there always are, some people who are overlevered and struggling, but the effect of the mortgage market review has very much limited that. I am with Martin, and I think that as a result of the FPC and the changes that have come in, the market is more resilient.

Lord Forsyth of Drumlean: Except with buy-to-let.

Martin Wolf: All the data show that the leverage of the household sector is currently below where it was before the crisis. The forecast from the OBR suggests that that will reverse, so by the early 2020s we might have reasons to be concerned about it, although the cushion from house prices will be bigger.

I want to underline Kate’s point, which is very important. A lot of the risk has been put on the Treasury’s books, which seems completely appropriate to me since it is the Treasury policy that is driving this and that is where it should rest. My memory is that the help to buy was £120 billion. It was something like that. That is 8% of GDP. If it all went wrong and the whole lot landed on the Treasury, it would increase public sector open debt by eight percentage points of GDP. It is not going to. That would bring us up to about 90 from where we are now. Would that be a cause for a major run on the gilt market? No. You can ask whether it is a sensible use of the Treasury’s borrowing power, but it is not going to bankrupt the Treasury. It seems to me that the risks are all manageable at the moment. I am aware that these are famous last words.

Dame Kate Barker: To respond to the comment about buy-to-let, you are right that potentially there is a little bit more risk in that sector. I think the Bank would admit that they do not have such good evidence in the buy-to-let sector of the vulnerability of landlords. That is another reason why there has been a bit of pushing against buy-to-let, but this is really a question for the FPC, which has done much more work on this than we have.

Q14 Lord Lamont of Lerwick: I apologise for not being here at the beginning. Like Lord Forsyth I was in the Chamber. I think I came in when you were expressing your approval of the extra stamp duty on buy to let. I am old enough to remember when we wanted to encourage more investment in the rented sector, when the rented sector was much smaller than it is now. Has not buy to let actually increased very considerably the supply of rented accommodation? It is something that has acted on the supply side.

I would also ask this question, and tell me if you have answered this before. It is very commonly argued that foreign buyers have very little to do with the market because it is very much a London phenomenon. I accept that, although I must say I was a bit startled as I went across the river the other day next to Battersea Power Station and saw block after block after block in which there was hardly a light on. It is difficult to believe that this has not had quite a big impact in London and perhaps a ripple effect elsewhere. Those are my two questions.

Lord Turnbull: They have not finished building the houses; that is why there are no lights on.

Lord Lamont of Lerwick: I did visit someone in one of the houses.

Dame Kate Barker: Of course, expansion is vital in the rented sector, but it has come along at the same time as the fall in home ownership. The question is: has the fact that buy-to-let landlords have put money in helped to expand supply. There, the jury would have to be out. Rather like the comment about help to buy, it was a helpful source of demand in the early stages of the crisis. I think now, as we discussed earlier, we have the inequality of enabling people who already have money to use it to put into a housing sector that will push up prices because we do not build enough houses. My view is that by taxing buy to let landlords a bit more you are swinging the pendulum a little bit back in favour of first-time buyers in a more rational way than giving them subsidies, which just pushes up prices.

There will, however, be an unintended consequence. You will find that some tenants have their tenancies terminated. There will be a difficult period of adjustment and we need to think about how we manage that.

Martin Wolf: I like buy to let for the reasons you have outlined but it is more problematic if we cannot increase overall supply. I did think that the private rental sector was far too small. A lot of people, particularly in London, who are going to be here temporarily, need flexible housing and this is exactly what we want. Furthermore, it makes a lot of sense for people to put money into housing as a form of pension because there are not that many other good assets. There are lots of reasons why you want landlords, so I am personally close to neutral on tenure. We have had this discussion already. The big issue is overall supply. We would not be worried about the tenure issue if we were dealing with supply.

The second question you raised is one that is close to my heart. We never talked about the reform of council tax, which is a horrendous system. If we did what I want, which is to have the council tax or some similar thing, obviously uprated to current circumstances, and continued to extend up the scale of home values up to £100 million-plus at a reasonable rate, which needs to be higher than the current rate because it is ludicrously low, and it was doubled on empty properties, you would see this problem solved very quickly.

I own a little property in Italy as a foreigner. I pay a much higher tax than a domestic person does and I think that is absolutely and utterly reasonable.

Lord Lamont of Lerwick: But is it a significant factor?

Martin Wolf: If you are asking what I would do about empty properties, I have no idea about whether overall in London that would significantly affect—

Lord Lamont of Lerwick: I was not so much asking what you would do about empty properties. I was just saying that obviously there is not a fixed supply of housing but there is a very inelastic supply of housing, and you have this foreign demand. We are taxing on buy to let one category of investors and it might be argued that it would make equal sense, in a discriminatory way, to tax foreign investors in property.

Martin Wolf: Would this be legal under EU law? I have no idea.

Dame Kate Barker: I have some sympathy for that.

Chris Walker: I have no problem with foreign buyers buying property if they are either living there or renting it out, but I think there clearly is a problem where homes and buildings are being left empty. I do see a potential role there for tax along the lines that Martin suggests.

Q15 The Chairman: Let me come to one final intervention which has been made, which is inheritance tax. It was touched upon earlier. I would like to couch it in a rather more general question. There have been a multitude of inventions, some small and some large, by Governments over the last two decades to try and improve the supply of housing. One would have to say that they have not been remarkably very successful. What would be the interventions that you would recommend that, in your view, you think might be successful.

Dame Kate Barker: We have talked about some of these on the way through. I have talked about support for new towns. I have talked about a move to have a more sensible set of household numbers in the plans that would reflect incomes as well as household projections. We have talked about the need to get smaller firms and self-build back in. I think all those would be very helpful.

The main thing that would make a difference is if we had local politicians who had better incentives, as Martin said, to say to their populations, “Actually it would be beneficial to us to have more people here”. Until people accept that, it will be very difficult to push up supply.

The Chairman: You have written about that and have recommended that. What has been the response?

Dame Kate Barker: In terms of incentives we have seen the new homes bonus. It has not yet proved to be a very effective incentive. I would go further—and again Martin hinted at this—and say that people living in a town might pay a lower rate of council tax. However, I have no illusions that in better-off areas—and these things often work better in poorer areas—it would necessarily have the effect. I live in a town where quite a large sum of money was raised to fight an appeal, which suggested to me that the price for accepting the new houses was quite high.

Martin Wolf: Most of the basic points have been made. You need the supply of land and housing permissions to build, which I think should be pre-emptive. The planning authority must have a strong incentive to do it and a reward for doing it. That can be done in a number of different ways. We have discussed several of them—through tax or essentially obtaining the gain. I would just add one thing that seems quite encouraging to me. Lord Turnbull has raised this. The changes that are now underfoot in the local government fiscal regime are potentially an environment within which, it seems to me, quite radical changes in the tax system and in the incentives for local authorities might reasonably be considered. If we were to construct a regime in which local authorities could see themselves gaining substantially at a time when there is essentially no, or limited, support from the central government for their activities from development, we are more likely to see development than under any other sort of regime. We have something of an opportunity.

I always felt that taking the business rate away from local authorities was a great mistake. The council tax was inadequate. Maybe we could think about fiscal regimes that encourage local authorities to act pre-emptively to expand land available for building and to gain benefit for their residents on that basis. If we do not do it, and do it quite aggressively, I do not think we are going to solve these problems at all. That is just a necessary condition. There are, of course, problems in the building industry that we have discussed.

Let me comment briefly on that because it was at the beginning. I am perfectly prepared to believe that right now, if we tried to create a regime in which we increased housebuilding to 300,000, we could not do it. It would probably take time. If we knew that that was what it was going to be, the industry would adapt of course. We fought a world war in five years. You cannot tell me that we cannot build a few houses within five years if we really want to. It is a question of making it credible to the industry that that is what is going to happen. There is no reason for them to believe it is credible because no Government has ever acted in a way to make it credible. That is the problem. If you did, they would respond, like any other business.

Chris Walker: Picking up on a couple of those points, I would certainly concur that new towns and new cities is part of the answer. Obviously there was the Wolfson Economics Prize, which looked at this issue. More recently I have explored the issue of garden villages with Lord Matthew Taylor. That is a system where you have locally-derived, small, new settlements through local consent. The problem, of course, with large-scale garden cities is that all too often they have to be imposed top down. You only have to look at the Heathrow third runway to realise the political problems with that. New settlements and doing new development in a different way in this country is really important. I also think that devolution could be a significant opportunity. The devolution of stamp duty to the London Mayor and whoever will be the Mayor of the Northern Powerhouse could be a real opportunity and incentive in terms of giving local areas more incentives to increase housing supply by being given control of their taxes. They are just a couple of my thoughts.

Q16 Lord Layard: I must apologise to everybody that I was not here earlier. Maybe this has been covered but, from what I just picked up, would you agree that the shortage of housing land is the central reason for the shortage of housing and for the high level of house prices?

Dame Kate Barker: Yes.

Martin Wolf: Yes.

Lord Layard: In which case that is a central issue that has to be addressed. Can it be addressed without addressing the issue of building on greenfield sites, and in particular building on the sites where people want to build houses on the edges of our great built-up areas? That is where people most want to build new houses and to live. That is the way in which a built-up area has expanded historically over the last two centuries. We now apparently have a philosophy that says you must not expand an existing built-up area and if you do anything new it has to be somewhere else. I wonder if that makes sense. What people want, as we know, are green fingers. They do not want a green belt that they do not visit; they want green near where they are. There is no difficulty in expanding the existing built-up areas with green fingers left in among the expansion. How do you respond to this picture of basically solving the housing problem by allowing our big built-up areas to expand into the green areas? Much of it is arable and not particularly valuable land, but the house price differential between agricultural land and building land is so extreme that there is clearly something inefficient about the allocation. Do you see that as the way forward or not?

Dame Kate Barker: I notice that you are nicely dancing around avoiding the words “green belt”. The green belt is a perfectly sensible policy because you do not want to have too much urban sprawl. I do not think anybody would wish to go back to the time when we had a lot of urban sprawl. I do not have a strong view as to anything being a silver bullet. We have talked about new towns and new villages. One of the things I agree with Matthew Taylor on when he argues for garden villages is that the way in which we develop now, which tends to be little bits on the edge of towns, leads to a kind of suburbia that is not necessarily all that pleasant to live in, even though quite a lot of people will live in it reasonably happily. I am more sympathetic to garden villages or big urban extensions, as was referred to by Christopher in the context of the Wolfson Prize. We will have to do stuff on the edge of towns as well. The idea that we can do it all through new stuff or densification of old towns is not right. You can clearly densify quite a lot.

You have commented on things you have seen in London. I was very startled the other day, taking a bus down City Road, to see how much development had been built. Clearly London is going to end up as a denser city, and at some point we will have to answer the question as to whether we want to have a dense London city, a slightly bigger London with transport or bigger towns in places like Hertfordshire with good transport in. We do not answer these questions terribly well. The removal of the regional tier of government sadly means that we answer them even more badly.

Lord Turnbull: Does our dependence on the green belt not prejudice the answer?

Dame Kate Barker: I know, but if you do not say it you are not being very honest about the answer you are giving.

Martin Wolf: I have written about this. I exist to make Kate sound reasonable, as she pointed out. I have never seen the point of the green belt. My answer to this is that if we had had a green belt policy in 1850 we would not have London, and I find London infinitely more interesting and enjoyable than the alternative. Retrospectively, would we really want to put back all the greenfields we have swallowed up in the process? I do not think so; we have plenty of them. Most of the country is fields and, as Lord Layard said, most of them are not particularly beautiful.

I think it is clear that part of the solution is to allow some building in the green belt. It is a necessary part. It is probably not the whole solution. A great deal of it around London is not very distinguished or very usable. We view it as almost sacred. I find it very puzzling. This is something that does have to be opened up.

However, I do understand that as soon as this is put forward a vast number of people and organisations, which I do not need to mention by name, will get absolutely hysterical about the desecration of the English countryside and the terrible consequences thereof. I do think we have a fundamental problem. We have a country with a growing population and a growing economy, both as a result of forces we cannot control and some of them which are very desirable. The consequence of that is that the demand for housing, including space in housing, is going to rise and it will have to be satisfied somehow. Some of that is going to include making our big cities bigger. By the way, London right now is one of the world’s smaller big cities, not that I am recommending China as the model. We can expand London and it will be absolutely wonderful if we do it in the right way.

Dame Kate Barker: There is a great map that shows cities expanding in London. As a historical footnote, the first green belt was introduced by Elizabeth I, but sensibly it was then expanded.

Chris Walker: We are going to have to build up or out, and we are probably going to need some combination of both. I agree that there is no silver bullet. We absolutely need to have a sensible debate about the green belt. Most of it is not green; most of it is brown. I will just finish with a statistic. If we built on 10% of the green belt inside the M25, we could build 1 million homes on it. It is worth thinking about.

Martin Wolf: One of the things people do not understand is how much an extra mile on London adds to the area of London. It is enormous. You have to remember that it does not require very much to build a lot of housing.

The Chairman: Thank you very much indeed. That was a very stimulating discussion. It has got us off to a very lively start in our inquiry. Thank you very much for being with us today.