Revised transcript of evidence taken before
The Select Committee on Economic Affairs
The economics of the UK Housing Market
Evidence Session No. 2 Heard in Public Questions 17 - 40
Witnesses: Toby Lloyd, Betsy Dillner, Duncan Stott
Dr Peter Williams, Professor Steve Wilcox
Members present
Baroness Blackstone
Lord Griffiths of Fforestfach
Lord Lamont of Lerwick
Lord Layard
Lord Monks
Lord Sharkey
Lord Teverson
Lord Turnbull
Baroness Wheatcroft
________________
Toby Lloyd, Head of Policy, Shelter, Betsy Dillner, Director, Generation Rent, and Duncan Stott, Director, PricedOut
Q17 The Chairman: Ms Dillner, Mr Stott and Mr Lloyd, can I welcome you to the Economic Affairs Committee? It is our second meeting on the inquiry into housing. Thank you very much for your written submissions. We would like now to explore some of those and you can add some more colour. There are three of you. In the interest of efficiency, if somebody has already said what you think, a nod will suffice and we will try to capture that nod. Thank you very much. Perhaps I can start. Over the last decade or so since 2003, the increase that had prevailed over the previous 100 years in home ownership has declined and private renters have increased to fill that gap. Is that a matter of concern for you?
Duncan Stott: Thank you very much for the invitation this afternoon. PricedOut is concerned about the ability of first-time buyers to get on to the housing ladder. The fact that the vast majority of UK citizens want to be home owners suggests there is a great deal of unaffordability in the housing market. It does suggest to us that the affordability of housing is an incredibly large problem and home ownership rates declining are symptomatic of the fundamental problem of what people are expected to pay for their first home and how much they are earning. The gap is too large and it is due to grow over the next five years. So, yes, it is a concern because of what people want from the housing market.
Toby Lloyd: I second that. It is a concern, both because, as Duncan says, it is not what people want, but also because the private rented sector as it is currently constituted is really not fit for purpose for huge numbers of people who are forced to rent privately at the moment. They are increasingly spending on average over 50% of their income in London to secure a home that is often in poor condition with minimal amounts of security and fundamentally unaffordable, rendering them unable to save up for a deposit. So as things are currently constituted, yes, that shift is very worrying.
Q18 Lord Lamont of Lerwick: There are many different ways of looking at this. If you look at it from the point of view of political philosophy or philosophy, you might argue that home ownership is the most desirable form and many people want it because it gives people a sense of security and it has appeared under political rubrics like “property-owning democracy”. On the other hand, if you look at it purely as an economic question, leaving aside that, one might have argued that the degree of home ownership that we had in this country got so high that it was an inhibition on mobility throughout the country. Can one really be so certain that it was not a good thing that the private rented sector developed so much?
Toby Lloyd: I would agree that there is absolutely a case for rented housing to provide individual and overall economic flexibility. However, the private rented sector as it currently is, is not what people want and is not what they can afford. Unfortunately, the economic argument falls down when people are spending more than 50% of their income on an insecure home. The instability and insecurity is extremely damaging for them. Remember that the vast growth in private renting is not among mobile young professionals but families with children who are finding it very difficult to put a child through school with six month tenancies and are unable to save for their pension or for a deposit on a home. The economics of an economy in which a huge number of people spend so much of their income purely on paying the rent do not look that good, either.
Betsy Dillner: I would agree with all of that. It goes back to what Toby is saying: the private rented sector is unfit for purpose. We are tenure neutral as an organisation. The growth of the private rented sector is not in and of itself a terrible thing, but we do need to make sure that it is fit for purpose for the people that are there. Very often it is unaffordable; it is left in worse condition than any other tenure and we want to make sure that the private rented sector is a place where people can live their lives and right now it just is not.
The Chairman: Are there any changes that you would like to see in the private rented sector that would make rental much more attractive?
Betsy Dillner: There are some very easy changes that we can see in the law for increasing security of tenure. As Toby said, there are now 2 million children living in the private rented sector and, at the end of assured shorthold tenancy, a tenant never knows whether or not they have a good landlord or a bad landlord. They have two months’ notice and they have to uproot their lives. We would like to Section 21 reformed so that if a landlord has a legitimate reason to take back possession of the property they would pay the tenant three months’ worth of rent to compensate for that upheaval of their lives. That would also then disincentivise unscrupulous landlords who are doing it solely for bad purposes. There should be more accountability and professionalisation in the management of properties, both through landlords and letting agents. There should be some more investigation into ways in which we can put controls on the unaffordable rates of rent.
The Chairman: That would all seek to give a greater security of tenure and certainty over the medium term.
Betsy Dillner: Absolutely, but it is also about having flexibility and having security of tenure that represents the variety of people who call it home. Certainly, there are still going to be students who only want it for nine months out of the year. So it is retaining that flexibility for them and for the tenant, but also for the families that are going to be there long‑term so they have that security and peace of mind that they can make it a home.
Toby Lloyd: We have advocated five-year tenancies, during which rents would be uprated only by an index link to CPI inflation.
The Chairman: Five years compares with the current average length of tenancy of what?
Toby Lloyd: The standard is six months or 12 months.
The Chairman: Is that the length of the tenancy agreement or is that the length that people tend to stay in that rented accommodation?
Toby Lloyd: Actual tenancy length tends to be approximately getting towards two years on average, but the point is that when you are in a tenancy like that you never know. Security is partly about knowing that you are not going to be thrown out at a moment’s notice. Even if the average is longer than six months, you are constantly on a two-month or possibly three-month notice period.
Q19 Lord Lamont of Lerwick: Mr Chairman, can I apologise for the fact that last time I arrived in the middle of the session? Because I arrived in the middle of the session I never referred to my entry in the register of interests, which I believe one should do at the beginning of an inquiry. If I can go through it, I am a director of a firm of architects; I am an adviser to a small property company and also to a finance company. Those are the ones that are relevant, but I apologise for not having mentioned it before.
The Government appear to be moving from subsidising renting to subsidising home ownership. Is this not a completely counterproductive approach given the problem of unaffordability, which you have referred to as affecting both the owned sector and the rented sector? The reason there is not adequate demand is because the prices are so high. People are priced out at that level. To give help to the buyer is merely to delay the process but to nonetheless give it a kick towards more unaffordability.
Duncan Stott: Ultimately, at PricedOut we represent people looking to buy and, therefore, we look primarily at the housing market, covering 83% of homes, the privately owned homes. We still want to see greater housebuilding and a greater subsidised sector. Whether it is affordable rent and now increasingly affordable home ownership, that has a crucial part to play in increasing housebuilding levels to the level we need to see.
Lord Lamont of Lerwick: Surely you are making it unaffordable rather than affordable by the subsidies that have been given.
Duncan Stott: For people who are not able to access the subsidies, yes. If you provide access to credit, as many of the Help to Buy schemes do, particularly mortgage guarantees, all that money will pour into the existing housing stock and that can only push house prices up, making it much harder for people to get on the housing ladder if they are not able to access the scheme. So yes, it is good for the people who are able to access the scheme. It is not a good move for the country and most of these Help to Buy schemes have the same problem at their heart. Some of them are tethered to new-build only, but still developers are constrained in how much they can build by the planning system, by the land markets and so on.
Lord Lamont of Lerwick: Last time we were told that there was such tightness in the supply of suitable labour to the housebuilding industry that builders needed a rise in house prices in order to get the labour that was necessary for an increase in housebuilding. Have you looked at that at all?
Toby Lloyd: It is certainly something we have looked into. It is just another indication of the sheer dysfunctionality of our housing supply system that we can honestly have a situation where builders can be making such record profits, house prices can be so astronomical and they can still say, “We cannot find the labour at a price that makes sense”. This clearly demonstrates that this market is failing spectacularly and that significant intervention is needed to make it work better.
The short answer is that there are two things that really drive up the costs of housing. The first is the supply of credit and demand—effective demand. As you say, pumping up credit and pumping up the availability of subsidy on the demand side does not help that equation at all. The second part of it is land prices. What really determines the cost of housebuilding and housing supply is the price of land. If we could get land into the system at a far cheaper rate, you would find that there is a break-even point for housebuilding at a far greater scale. Unfortunately with the current way the industry is set up—again, it is no fault of their own; they are quite rightly profit-maximising firms—developers are in the business of maximising the returns on the land they buy. That means that they have an absolute requirement to not build too many homes and not to lower the price of the homes that they sell. So unfortunately, until we are prepared to intervene strategically in the land market in order to get more land into the hands of people who are prepared to build housing at lower cost, we will not solve that affordability conundrum.
Betsy Dillner: If the Government continue to subsidise the market for home ownership instead of the market for social housing, essentially you are subsidising an industry that is fairly capable of sorting itself out and, again, is completely disincentivised from building the amount of housing that would bring housing prices down. In the end, you are just going to be subsidising low-income housing though housing benefit. If there are not enough social homes available, those people would then get pushed into the private rented sector where you are then subsidising market-rate rents in a private rented sector that is not fit for purpose and insecure for some of the most vulnerable people in our society.
Toby Lloyd: It is a perfectly legitimate aim of public policy to support people into home ownership and if the Government choose to use subsidy to do that that is their prerogative and, as Duncan says, is very welcome for some people. However, when that is done at the expense of housing for people on low incomes it is undermining the overall housing and economic health of the country. Unfortunately, that is what we are seeing. It is not an increase in subsidies. It is a direct shift of subsidy from homes for low-income families to homes for better-off people on incomes of up to £90,000 a year in order to just tip them over the margins into home ownership a little bit earlier. While that may be a laudable aim, it must not be at the expense of genuinely affordable homes.
Q20 Lord Sharkey: Could I ask you two short questions about affordable homes? How successful was the coalition’s Affordable Homes Programme in providing low‑cost housing? How affordable is affordable rent? If it is not affordable, would you change the way it is calculated? I say that because in London you would require a minimum pre‑tax income of about £40,000 a year to qualify unless you lived in Kensington and Chelsea, where you would need £80,000 a year to qualify for an affordable rent.
Toby Lloyd: We have always been firmly of the view that affordable rent is not a satisfactory product for that very reason. To call it social housing is to stretch the use of the word “affordable” beyond any kind of meaningful level. The Affordable Homes Programme, which has subsidised affordable rent, is therefore a failure because it has built a lot of homes that are not really affordable to anyone. I would also question whether as a mechanism for getting homes built that was the right measure.
Lord Sharkey: But it did succeed in getting homes built, did it not?
Toby Lloyd: It has built some homes, although not even that many. Inevitably, whenever you change the rules on the programme you get a two-year hiatus in which very little is built and then a big bulge as it works through, and we have just seen that big bulge coming through. However, we are now changing the rules again so you can expect to see another fall-off.
Betsy Dillner: It has completely skewed the public debate on it because when we talk about affordable homes we are not talking about what is affordable and we think that it should be tied to local incomes. NUT recently did a survey of newly qualified teachers in London and they said that about 67% believed that they would not be in London teaching in five years’ time because they did not believe that they could afford it. It is going to have catastrophic effects on our low-income workforce, let alone middle-income workforce, if they cannot find a way to sustain themselves as single people, let alone as families, in the high-demand areas such as London, Oxford and Cambridge. It is not just a moral argument of forcing people to pay unaffordable rents but is going to have a devastating consequence on our labour market.
Toby Lloyd: It already is. Places like Oxford are really suffering already from the economic consequences of being unable to attract and house middle-income workers.
Duncan Stott: One thing to bear in mind is that affordable homes plans have traditionally been delivered by housing associations and sometimes councils. They are useful additional people to build homes on top of the homes that the private sector can deliver. That is welcome because we need to get housing numbers up. One thing that worries me about the change that is happening in the Affordable Homes Programme is that, while it is welcome that the amount of money going in has significantly increased in the Autumn Statement from just a few weeks ago, the subsidy per house has gone up significantly, too. On the previous affordable rent scheme you were typically getting £19,000 as a subsidy per household. Now it will be going up to around £38,000, so we are nearly doubling the amount of subsidy going to an individual house and household. It seems like this is a very expensive way of not delivering many more homes than would have been delivered under the previous scheme, which is a shame because I do not want to be too miserable about seeing more money being spent on housing, which we desperately need.
Q21 Lord Teverson: Perhaps we could move on. Before we do that, I forgot to declare last week that I rent an individual unit in south Devon as a landlord. To stay on the social housing side, in the summer Budget immediately after the election it was announced that the original pledge in the coalition Government was going to be changed and, rather than increasing at above inflation, social housing rents would go down 1% from 2016 to 2019. That is excellent news for social tenants. I am just interested to understand what you think are the wider implications of that. Is that good news or will it mean, as one social landlord said to me, that the investment programme of their particular social housing corporation will decline? How do you see that and how will it affect in reality the building of social housing in the future? Are the projected figures down to a scare story or are they real?
Toby Lloyd: I am afraid that they are very real. Lowering social rents is a good thing for social tenants and the steady increase in social rents over the last 20 years has not been a good thing either for tenants or for the housing benefit bill. So lowering the social rents cap in and of itself is a good thing. However, the manner in which it has been done is extremely damaging. The announcement came less than 18 months after a 10-year promise to increase social rent by RPI plus 1%, on the basis of which housing associations and councils were busy borrowing money and planning housing supply. They now have a massive hole in their budgets, not just for new housebuilding, a lot of which will be killed stone dead, but even on their existing housing revenue accounts—managing their existing stock. So while getting social rents down over the long run is a good idea, to do it in this heavy‑handed way as a surprise and tearing up previous deals has already impacted on the credit rating and the borrowing ability of associations in particular, and it is having a really damaging impact on the future supply of affordable housing.
Betsy Dillner: I would agree with that, but the fact that the Government have reduced rent in the social housing sector indicates that they are not really worried about the impact that it has on low-income housing supply. We would like to see the principle of intervention on lowering rents extended into the private sector.
Duncan Stott: I have a very quick point. It seems that this will create a saving in housing benefits. Would it not be wonderful if that housing benefit saving was directly used to build more social housing so that that potential supply gap was filled? It strikes me that increasing the cost of social housing to the tenant increases the cost to the taxpayer and then decreases the available funds for other things such as housebuilding. That would strike me as a better balance.
Toby Lloyd: I would absolutely second that. If my answers seem contradictory, it is because we recognise that increasing social rents is not a particularly good way to forward-fund future social housing supply. It is the way it has been done for a long time and therefore pulling away that rug has been damaging. However, it is clearly not a particularly sensible or efficient way to do it. It is far better to give direct grant to housing providers and I would much rather see lower social rents, but compensated for by an increased grant to provide new homes.
Lord Teverson: Does that pressure perhaps force social landlords to be a little bit more innovative than they had been in the past?
Toby Lloyd: To be honest, social landlords have been under huge pressure to be innovative anyway. The blizzard of changes to the landscape in which social housing providers are operating is now so intense that it has gone beyond any nudge towards innovation. Of course there is always scope for more innovation, but I am not sure that this is the best way to achieve it.
Q22 Lord Griffiths of Fforestfach: I will ask two questions. First, do you support or do you oppose the extension of Right to Buy to housing associations? Secondly, what would be your comments on the specific policy the Government have announced as to how they want to do it?
Duncan Stott: Ultimately, if people want to become home owners that is great, but the cost of this policy is huge. The housing associations look like they are going to be largely compensated for this, so the cost of each additional home owner driven through this scheme is going to be approaching £100,000 per household in London and around £79,000 elsewhere in the UK. That strikes me as such a large amount of money that there must be better things to do with it to help each and every household on a wider basis. It also creates winners and losers. If you have been fortunate enough to get yourself into a housing association home, for which there are large waiting lists, you may question the justice of whether these people deserve home ownership any more than people who are stuck renting.
Betsy Dillner: We disagree with it. We mostly disagree with the sale of council stock to pay for the discount. We will see it hollow out communities that would otherwise be in expensive areas. We are also worried about the likelihood of that being replaced anywhere soon. So we are very concerned about that and disagree with it.
Toby Lloyd: I would agree that in principle Right to Buy is fine. There is absolutely nothing wrong with people, including social tenants, being given the opportunity to buy their homes. The problem is the way in which it has been operated since it was started, in that the social stock that was lost has not been replaced. Unfortunately, the new extension, despite some assurances, does not look like it is going to be replaced in anything like equivalent tenures. The Government have insisted that there will be replacement, although it now transpires that that seems to mean that a home somewhere might be built in some other tenure at some point in the future rather than replacing what is being lost, namely a low-rent home in an expensive area. So while Right to Buy itself is alright, the way in which it is being funded and the extension is being funded is particularly damaging. This is the forced sale of council housing—which is what this is, it is not Right to Buy. This is selling council houses on the open market and we know thatmany of those will go to buy-to-let investors, not to owner-occupiers. Forced sale in order to fund Right to Buy is particularly pernicious because it means we will lose two social homes for every one sold.
Lord Griffiths of Fforestfach: I recognise that, but if you think Right to Buy is okay, what changes would you suggest the Government should make to what they have announced that they intend to do?
Toby Lloyd: We need an absolutely iron-clad commitment to genuine like-for-like replacement in the same area in the same tenure. Ideally, I would like to see those replacement homes built before they are sold off. It is always very easy to say they will be replaced at some point in the future. It is a huge amount of money that is being siphoned off. We would like to see the forced sale of council housing to fund it scrapped entirely because there is no justification for destroying existing affordable housing, which is so desperately needed, in the places where it is most needed, which are expensive areas. We need to see the funding mechanism scrapped and, if the Government want to subsidise social tenants to become home owners, they need to find the funding from elsewhere, not from within the social housing stock.
Betsy Dillner: That is right. I would agree with everything you have just said.
Lord Turnbull: You used two phrases there—“helping people to buy their homes” and then “building houses like-for-like in the same area”. Is it not all rather pointless? Should the aim not be to help them buy a home, and if you are building in the same area they could buy another property there without requiring the forced sale and replacement of the housing association home? How much importance do you attach to the fact that it is their home with their all their decorations in it et cetera or a home of a similar type in a similar area?
Toby Lloyd: I can see there is an argument for people who have lived in their social home for a long time wanting to own that particular home. That has certain benefits for community stability and continuity, but you are quite right that ultimately we should not be fetishising that to the extent that we destroy the social housing stock in the places where it is most needed.
Baroness Blackstone: Can I just ask whether you think the size of the discount that is being proposed by the Government is acceptable? Could it not be quite a lot lower and still give an opportunity for some housing association tenants who can afford it to buy their house or their flat if that is what they want to do? It is the size of the discount that is particularly surprising and produces huge inequities, in that many other people do not get a discount at all when they try to buy a house.
Toby Lloyd: I would agree that it does pose problems of equity. However, again, to be honest, if the Government are prepared to find the money from elsewhere then that is up to them. The problem for us is that that £100,000 discount is being found by selling off existing social housing.
Q23 Baroness Wheatcroft: Generation Rent said in its evidence to us that on starter homes it felt that the discount should be held in perpetuity to stop people making windfall gains. Would you say the same about housing association purchases, for instance?
Betsy Dillner: Yes. There are also some concerns. In starter homes you are limited in selling off that property for five years because, as we have seen—and Inside Housing did a lot of really great research on this—the Government have then subsidised the very laudable aim to try to get people who are eligible for social housing into home ownership. We see then that in the second generation of that purchase it goes into buy‑to‑let landlords and you have then decimated the stock of social housing for low‑income workers and you are then subsidising a private landlord’s purchase and you are not seeing that discount go in perpetuity to the people it was intended to help in the first place. It is not good for the Government’s budget at the same time. That gets into some tricky territory about who you are allowed to sell it to and, if you just keep that discount in perpetuity to landlords, are you then just discounting the purchase and then subsidising through housing benefit? In general, the way in which the Government have created a package of undermining social housing and the long‑term viability of social housing in this country is a problem and it needs to be addressed.
Lord Monks: In the same territory, if I can just probe a little further on Help to Buy, do you think it is targeted at the right people?
Duncan Stott: First of all, there have certainly been four schemes and there is probably a fifth on its way, the way it has been going. We have had Help to Buy equity loans, Help to Buy mortgage guarantees, Help to Buy ISAs and now Help to Buy shared ownership, which is the same thing as shared ownership. There have been some slight changes in who can access it and when you can follow on with it. I just disagree with all the schemes. When you do not want a scheme to exist, it should not be targeted at anyone. That is basically the way that I would see it. It is the wrong approach. When you create a subsidy for demand in a housing market with already too much demand you are just going to push prices up.
The political context of this is that the Conservatives have a target in their manifesto, which we intend to remind them about as much as possible, to double the number of first-time buyers by 2020. That would mean 600,000 first-time buyers in 2020. For us, the correct way of achieving that target is to engender a culture of house price stability, to have no more house price inflation and create market reforms that make that change in the housing market. Earnings would increase, house prices would stay the same and more people would be priced into the ordinary housing market. Help to Buy does exactly the wrong thing. It will create some home owners in the short term. Everybody else will be in a much more difficult position and the housing market will have become more dependent on taxpayer subsidy.
The Chairman: What measures should the Government take to hold down house prices?
Duncan Stott: First of all, they should build more homes. They should review the property tax system; it is a total shambles. They should stop subsidising lending and, in fact, keep a tighter eye on lending because when it is looking like it is out of control it can pump up house prices and cause a gap in the boom and bust cycle. Thankfully, the Bank of England has brought in its mortgage market review controls, which are on the home owner sector, and we know they are looking quite strongly at buy-to-let as well. So there is good progress in that field, but we are still building half the number of homes we need per year and property taxes create all sorts of unwelcome distortions in price as well.
Baroness Blackstone: Could I just ask whether it would have been better if the Government had put more time and effort and thought into promoting shared ownership? They say they are in favour of it. It is a question to all of you really. Would that resolve some of the problems that you have identified in the Help to Buy scheme?
Duncan Stott: There are some improvements to shared ownership that have come through with Help to Buy. We have previously been quite critical of shared ownership because people found themselves quite tied into it. When they are looking to move on, it is harder to sell a share of a home rather than a home. You just go to an estate agent to sell a home. It is much more complicated with a share. Broadening this out so your second purchase can also be a shared ownership is an improvement. It feels like, though, there is still going to be the element of rent in shared ownership. We have seen poor examples of some housing associations using the service charges on shared ownership housing, and increasing them particularly on the shared owners because they have a more stable financial position. When housing associations find themselves a bit short of money, service charges are quite an easy target. We have had notable examples of people getting in touch with us saying, “We thought it was the answer. We thought it would give us our own home and it has certainly not turned out to be”. So there are problems. It looks like housing associations are identifying these and bad practice is slowly coming out of the system. But previous generations got ownership and our generation gets shared ownership. It just seems like our generation has gone backwards and it feels wrong. Why has the housing market just got so wrong that ordinary people cannot afford a home like other generations could?
Q24 Lord Turnbull: You have three categories of people: people in the private rented sector, people in the social rented sector and people aspiring to own. Where is the social harm greatest of those three? Who would you prioritise?
Betsy Dillner: Sorry, can you explain social harm?
Lord Turnbull: Who is having the hardest time out of those three groups?
Toby Lloyd: Private renters.
Betsy Dillner: I would expand that to say private renters on the very sharp end of the market.
Toby Lloyd: Who are the very ones who—
Lord Turnbull: Betsy, I noticed you are hinting that you thought if there was anything wrong with the 1% cut in rents it was that you thought it should be extended. Does that take us to the words “rent control”?
Betsy Dillner: Yes, it does.
Lord Turnbull: Defend that in the longer term.
Betsy Dillner: I know that the prevailing argument against rent control is the concern that landlords would exit the market and that would further exacerbate the supply crisis. That is the prevailing thing that says that is just what would happen. Our view on rent control is that it will take us many years to sort out the supply crisis in this country and, in the process, private renters are going to be stuck with private rents that take up far too much of their income and that is a drain on the economy. So we would like to see further investigation into various types of rent control and proper economic modelling to say, even if landlords do exit the market, is that necessarily a bad thing? We do not want it at a rate of knots because that would create a further deepening of the housing crisis, but nobody is ever having that conversation or doing the deep economic modelling to say whether there is a model that would work for the London market, for the UK market, and the learning the lessons from the way in which rent control works in other places but finding a unique way of limiting the harm done to private renters.
Lord Turnbull: How does a buy-to-let landlord exit the market? He cannot take his house and take it home with him.
Toby Lloyd: No, the point is they put it on the market and it is then bought. It could be either by a landlord who does want to operate in that new environment, and there are plenty—after all, the Government are keen to encourage institutional investors into the sector, many of whom are much more comfortable with a more regulated, longer-term, more stable model of renting—or they sell it to a first-time buyer or someone who wants to live in the home, which again is a goal of public policy. So the fear of landlords exiting the market is greatly overstated. For all that, Shelter is not calling for traditional old-style rent controls.
Lord Turnbull: Is the danger not that they exit the market but that they exit the maintenance of the property?
Toby Lloyd: Frankly, plenty of landlords are terrible at keeping up their properties anyway and the idea that we have to raise rents in the hope that they might choose to spend a bit on keeping their property up I am afraid just does not work. The proper way to get landlords to improve their properties and maintain them to the legal standard they are required is proper enforcement of the law and, unfortunately, that does not happen enough. The main argument against rent control is not that landlords would exit or that if they did it would be a disaster; it is that, unfortunately, when you set hard rent caps, old-school rent controls—and it is worth saying at this point that the UK has a rather unfortunate history in this territory. Prior to 1998, we had the most heavily regulated and hard rent-control regime that the world has ever known, as far as I can tell. Following 1998, we had the most deregulated rent regime that the world has ever known. That rather polarises the debate in this country and we tend to assume that it can only be one extreme or the other. Everywhere else on the planet has a much more sensible balance somewhere in between those points. So our model of five-year tenancy with the market setting rents at the beginning of tenancy but index‑linked controlled rents during tenancy is just one example of what is known as second-generation or softer rent controls.
Lord Turnbull: Another thing is to move into the other section of renting, the expansion of social renting, whereas at the moment we have a policy of reducing that. There are two benefits to that. One is that by and large they are better landlords and, two, they run a different business model. They do not run this model of eking out the sales. If a registered social landlord has a piece of land they will by and large develop it.
Toby Lloyd: Absolutely. That is why we are desperate for the Government to invest more in genuinely affordable, low-rent, secure homes. Because. Because the real solution to the private rented sector’ssector’s problems is to create better options for people, that they want. We did the largest survey of private tenants that has ever been done in this country and I can tell you that precisely 6% of them rent privately because they value the freedom and flexibility of private renting. The vast majority do not want to be in that tenure. They do not find it appropriate. It is just that they have no other option. The best way to improve private renting is to create the other options that people do want.
Betsy Dillner: And making the private rented sector fit for purpose.
Lord Griffiths of Fforestfach: You are basically arguing for rent control. You are also arguing for longer tenancies. You are saying that the UK is an extreme case. Can you recommend us looking at the evidence in any countries where the market is working extremely well and you have longer tenancies and some form of rent control?
Betsy Dillner: This is a difficult question for us to answer. I used to work in housing in New York City and they have about five different forms of rent controls, all operating alongside each other—and, quite frankly, New York City is not affordable for their low-income workers. It is not working for New York, so why would we expect it to work here? The housing market in Berlin is different from the housing market in London. There are ways in which we can learn from other countries to say that the sky is not going to fall in if we have rent control, but it is important that the Government come in and say what the most appropriate way is that works within the housing market that we have and how they can assist in minimising the pain for people in an overinflated rental market, and help us achieve our longer-term goals of having an affordable roof over people’s heads regardless of tenure.
Q25 Baroness Blackstone: Turning to housing supply, you have all agreed that one of the really big issues is that we are not building enough houses. How much importance do you attach to reform in the planning system to achieve a greater rate of housebuilding than we have at the moment? Do you think it is very important, not terribly important or somewhere in the middle?
Toby Lloyd: In all honesty, it is somewhere in the middle. It is overstated, sometimes, the extent to which planning is the biggest obstacle to housing supply. It is not. There are those who would argue that given the lack of supply and high prices, clearly, from a market perspective there must be the dead hand of the state somehow impeding the market. You do not have to look far in the housing system to find that—you blame the planning system. However, I would say it is the other way around. The reason we have a dysfunctional land market and dysfunctional property market is not because we have a planning system. We have a planning system because property markets and land markets in particular are inherently dysfunctional. That is why every country in the world, including many which are even more enthusiastically free‑market‑embracing than our own, have if anything more rigid planning systems than ours. There is a simple mismatch between the nature of land markets and the rest of the economy, and particularly people’s wages and their ability to house themselves. That is why even very ardently free-market countries like Singapore have extremely rigid planning controls and extremely rigid land market interventions, because they recognise that, left to its own devices without planning, the market simply does not deliver housing at a number or a rate that people can afford.
There are things you need to do to planning to improve it, undeniably, particularly around the process and the time it can take. However, if anything what we need is stronger and better planning, not less of it. Unfortunately, the debate about planning reform always comes back to cutting away red tape and what that tends to mean is just increasing land prices, because it increases the profit margin that landowners can make and that developers can expect. Really what we need is the planning system to be stronger and therefore writing down land values to a level where development can proceed and build homes at an affordable rate because it is the land cost that really determines the unaffordability of housing, and it is the planning system that, operating properly, should determine the land cost.
Duncan Stott: I would slightly edge away from Toby a bit. There is always a planning system in any sensibly-run country, but the way that the British system works is quite heavily restrictive. We are in new NPPF territory now, so we have a strategic housing market assessment that comes up with an objectively-assessed housing need. This is based on demographic projections that often turn out to be wrong. Very recently, they have now been adjusted for affordability, which is good, but affordability should be at the centre of how housing need should be calculated. When you look at a really expensive area, just looking at the demographics does not tell you the screaming market signal that far more homes are needed in this place.
So there is not enough emphasis put on affordability when the housing numbers are being produced. Then the housing numbers are routinely missed. Often not enough planning is granted to meet that target. Then the number of planning permissions that are granted do not all turn into completion. At every stage through the system, fewer and fewer houses get built compared to what should have been built. So we end up with this chronic undersupply, which has been a problem in the UK housing market since the early 1980s and we are reaping the high housing costs of that. There are still fundamental problems even after the new NPPF has come in with the way that housing need is calculated and then delivered.
Q26 Baroness Blackstone: Can we rely on greater development of brownfield sites in our big cities and higher-density housing in them or do we have to move out into the green belt in order to create more land availability?
Duncan Stott: There is space for about 450,000 flats on brownfield sites in London. We need to be building, I would say, far more than that over the next 20 years. We have to be looking at greenfield sites and that is presumably going to be in the green belt because we do not want to be building on parks and publicly-used spaces. Green space is good, but we are protecting scrubland and land that is quite near train stations and disused airfields. I am glad to see last week there was some movement on the green belt. We seem to be protecting exactly the wrong things often because in the outer London boroughs you see playing fields built on while the green belt is protected half a mile away. It is a crazy situation and there are problems throughout.
The problem is that this is all decided by local authorities, which are elected by the local population, who tend to have an interest in not having any more houses built. Then the local authorities also look at their finances and do not see much benefit to houses being built either. So there is an inbuilt political desire to not build that many houses.
Toby Lloyd: I would agree with that. I should stress that the green belt has been a very successful policy for what it is intended to do, which is prevent urban sprawl. That is a laudable aim and it has worked well. It therefore does need to be reviewed as and when cities need to grow. Oxford was mentioned as a prime example of a city that clearly needs to grow and is now overly constrained by its green belt. However, if you do that simply by removing green-belt restrictions all you will do is create a speculative frenzy as those bits of land rocket in value because the uplift is absolutely astonishing. The difference between a £4,000 per acre piece of agricultural land and housing land could be at least 100 times. That value could be supporting infrastructure, affordable housing and a whole host of community benefits. If you just remove those restrictions all you do is enrich the landowner, who will be extremely grateful and very glad to pocket the money and why not? Good luck to them. But you will not get the community benefit and the affordable housing that we need if you all do is remove those planning restrictions. In that sense, the green belt is a fabulous opportunity because it is doing precisely what planning ought to do. It is restricting development and controlling land values. If you remove it, you therefore need to make sure that you capture that value created and use it for community benefit, not for windfall gains for a lucky few.
Baroness Blackstone: Let me just push you then. Do you put the new housing on brownfield sites in cities and create greater density?
Toby Lloyd: Both. I am afraid the scale of our shortage is so great it is not an either/or. There is no magic silver bullet to our housing crisis. We need supply from all sources, which includes brownfield sites in cities where they are available; it includes densification of the suburbs; it includes redevelopment of some places that are run down; and it also includes greenfield sites in some places. Particularly when greenfield is released, we owe it to posterity and to our communities to make sure that the value created is genuinely channelled into community benefit and affordable housing, not just enriching a handful of lucky people.
Lord Lamont of Lerwick: Could I just ask if you would enlarge on what you said about planning? The phrase you used was “control land values”. Do you really believe that that is possible and could you enlarge on that?
Toby Lloyd: It is precisely what the planning system does. A piece of land that has planning permission to be used only for agricultural purposes is worth approximately 100th of that same piece of landwhen it has planning permission for residential development. That is what planning is supposed to do.
Lord Lamont of Lerwick: You were just talking about the trade-off with agriculture. That was to your point, was it?
Toby Lloyd: It is most stark in the difference between residential use and agricultural use, but it is also the case when you talk about brownfield land. Remember, an awful lot of brownfield land is schools and employment uses. It is not all just vast, open bits of land not being used for anything in city centres. We all live onon brownfield land, after all. It is any bit of land that has been developed at some point in the past and most of it is not vacant; it is being used. For example, every school would be far more valuable in market terms if it was allowed to be built as housing and you could get rid of the school. But society needs schools as well and, therefore, it is the job of the planning system to ensure that some bits of land do not go purely for the use that generates the most money but to uses that the community requires. Where it is released for profit-making purposes we need to ensure that the community claws back a sufficient proportion of that so that we are not just building unaffordable homes.
Q27 Baroness Wheatcroft: Would you say that part of the answer to the housing shortage, given the impact of land prices, is to go taller—and a lot taller than planners currently encourage? I would be interested to hear all your views on that and whether taxation could be used to encourage that sort of development and whether there are any other sorts of taxes that you would advocate to eventually increase the housing supply.
Duncan Stott: Yes to taller buildings, absolutely. There is some dispute about how tall you go until you do not get any more homes. There are better people, architects for example, who can discuss that. You will still hit nimbyism whichever way you try. If you try to build outwards, the people who like the view of the field complain. The people who feel like they going to lose light and things will complain if you try to build upwards. There needs to be some way through this. It feels like the only way that would-be buyers of these homes ever get their voice heard in the planning system is via the developer who builds them. That is not necessarily the most direct way this could be done. Typically, nimbys present the argument as the developer versus the local community. It is obviously about more than that; it is about how we build homes for ordinary people to live in. Build upwards, build outwards. Build, build, build.
Toby Lloyd: With regard to tall buildings, yes, of course, sometimes there is real scope to increase density and to increase heights: fair enough. There are limits to it. In many parts, particularly in our inner cities, you could argue that if anything we have gone too far that way in some places. I know some people feel very strongly that building too many point blocks is socially disruptive and does not work well for the wider community. Again, it comes back to the interaction of the land market, the economics of development, mediated by the planning system. If you buy a piece of land at a price that effectively reflects permission for a five-storey block and you get permission to build a 50-storey block on that, you have made an awful lot of money for nothing. If you do that, you should be required to make a decent contribution back to society in the form of affordable housing and other infrastructure. Unfortunately, at the moment that gain is just a windfall.
Baroness Wheatcroft: What about other sorts of taxes that might encourage the supply? Martin Wolf, for instance, is a strong advocate of land tax.
Toby Lloyd: There are a lot of good arguments for moving the system in general towards a more land-value-tax approach, but there are a lot of complexities in that as well. One measure that we have called for that would be relatively simple would be to say that where a developer has planning permission to develop and after a certain period of time nothing happens—and, as Duncan has alluded to, a lot of sites with planning permission do sit unbuilt upon—council tax and business rates could be levied as if that property had been built, because that would provide a spur and an incentive for themfor them to build the homes that they, after all, have been given permission to build.
Baroness Wheatcroft: Just finally, do you have views on the Government’s proposals to take the family home up to a certain value out of inheritance tax completely?
Toby Lloyd: I am afraid that it is just another demand‑side subsidy and it is ultimately damaging. As Duncan has alluded to, the whole property tax system is part of the problem here, in that we massively tax-favour property investment over and above everything else. It is the only form of investment where you effectively pay no tax on unearned gains: and then we wonder why people choose to overinvest in that that particular asset class. It is inevitable. We do need to look seriously at trying to rebalance the tax system away from that, but I do appreciate that there are real complexities in doing so.
Lord Layard: I just want to go back to your previous discussion about how to trap the social value created when the use is changed. If you take a greenfield site—that is easier to think about—and you change its use from whatever it is to development land, what do you think of the system, as I understand it, in the Netherlands where essentially the municipality, local government, pays the undeveloped price for the land and then sells it off at the developed price? Do you think that is a system we could—
Toby Lloyd: Absolutely. That is exactly thethe system that has historically worked extremely well in this country as well. We have just lost the art of it. It is the system that for example the Duke of Westminster uses in Belgravia—long‑term stewardship of land assets that you do not sell, which gives the landowner a vested interest in maintaining quality and reaping a long‑term income yield from it rather than a short‑term capital gain. It is the same model that the Victorian and Edwardian pioneers of the garden city movement used to build Letchworth Garden City, and that is still delivering huge surpluses back into the town every year. It is also the model that the Government used in the post‑war era to build new towns. It acquired land at agricultural prices and reinvested the profits in providing services and repaying the debts. It is a perfectly simple model. The Dutch do it extremely well. We have just lost the art in the last 40 years.
Q28 Lord Lamont of Lerwick: Have any of you made any estimate of the effect of overseas, particularly non‑EU, buying of investment residential property in this country and the effect on supply? The Government have formed the view that there is too much buy-to-let investment in this country and that this is crowding people out of the market. By parallel argument you could apply that to foreign-investment buying. I know it is a sensitive subject in view of Britain as a location for inward investment and an open economy et cetera, but I think I am right in saying that Civitas has made a study of this and it came to a conclusion that this was having an effect very much on the London market.
Toby Lloyd: It is something we have looked at. It is very hard to get real data in this area, so there is a lot of anecdote and story, but because the property industry and, particularly, the land market are so opaque it is extremely difficult to get real, hard evidence. However, the anecdotal evidence suggests that it is a massive phenomenon, not just of foreign investors buying homes but buying homes particularly off-plan and then selling them on. The question is whether that is a real problem or not. The industry would say that this is providing forward funding for development and without it they would not build the homes. There is clearly a problem there that if you just pulled away that source of funding, a lot of these developments would not go ahead at all. That is the fear. However, it does raise the question of what we are building for. Are we building homes for people to be able to afford and live in or are we simply providing an asset class for international elites to stash their cash in? That does raise some serious questions. It is not, however, to my mind, entirely clear how much of a genuine problem it is outside of certain high‑end developments, along the Thames particularly.
Lord Teverson: Perhaps I could ask Mr Lloyd a short question. This is a similar theme, but we seem to have concentrated a little bit on urban issues. I come from a rural coastal area with high tourism and high prices in comparison with wages. On second homes in particular and problems of rural housing, is there anything specifically we should learn about that area, too?
Betsy Dillner: The changes in the tax system that we have seen in the Government Spending Review of higher stamp duty on second homes and buy-to-let mortgages are trying to disincentivise that, so they are trying to work through that. The other thing about longer-term tenancies is important because finding a suitable, affordable replacement home very quickly and very often within rural communities is quite difficult. We often talk about this as an unscrupulous landlord, but longer-term tenancies that allow rural renters to know that they can stay in that small community longer-term takes that stress away from longer-term renters as well.
Toby Lloyd: I would also make a plea for the entirely laudable exception site regime, which has been vital in providing much-needed affordable housing in rural communities. Unfortunately, again, that is being fatally undermined by the starter homes policy. Exception sites are where a local landowner is persuaded to give up a piece of land for housing development that would not otherwise happen because it will be affordable housing in perpetuity for that community. If generally well‑meaning local landowners, who can see the problem in their towns and villages and want to help, now see that these homes will just be snaffled up by first-time buyers and the subsidy entirely creamed off and sold off, presumably to investors, in five years, that supply will dry up, too. We urgently need to preserve the ability to build genuinely affordable housing in rural places and to stop selling off the existing stock. We are about to lose a huge amount of our genuinely affordable homes from precisely those areas because those will count as high-value council homes and they will be sold off forcibly.
Q29 Lord Layard: I want to ask about empty homes, which are often raised as a cause of the shortage for people. If you look at the numbers, it looks as if this is exaggerated in the public discussion. I am finding that certainly fewer than one in 100 homes in London is vacant for over six months, but it can be an offence in particular cases. What do you think should be done about it and how big a problem is it?
Duncan Stott: I would suggest that it is not that big a problem. I would agree with your assessment, largely. You also need some empty homes in the system. If there are no empty homes then no one can move home. You need some gaps in the system so that housing chains can complete, so that needs to be borne in mind as well. There is an example of a council, Islington, which has been very keen to operate on this. It has found that about 3% to 5% of their new-builds are finding themselves significantly empty, particularly in the southern end of Islington where you are on the fringe of the City and you have people looking at this as an asset rather than as a home. It is a problem, but not a big one. Let us see what happens with innovative little schemes from local councils and if that helps let us do more of it.
Betsy Dillner: We certainly welcome Islington’s approach to this. The only time in which the empty house issue in London is a problem is in the luxury market. That comes back to the foreign buyers and people who buy in cash. If you can say to those buying speculatively to keep it empty that there are consequences to that, you might disincentivise somebody who is purely speculating and not using it as a home. If they are going to buy it and then rent it out then you are addressing the issue of people needing a home. It does stoke demand for that high luxury development if the only people that are going to be able to afford it are people who are purely doing it as a piggybank. It might address that.
The places in which empty homes are a bigger issue are up in the north. That is not a problem with the housing crisis; that is a problem of economic development. This goes way beyond the remit of Generation Rent, but if we can find a way of taking demand off the south‑east by investing in proper economic development in the north, there are places in which we can put empty homes back into use and put families back in them. There are a lot of really fantastic community programmes where you get ex‑offenders getting skills to renovate those homes and then being able to access them as a home. That is not an issue of it causing the housing crisis, but an innovative solution about how you take pressure off high demand areas and into places where empty homes are a problem.
Toby Lloyd: I would agree with that entirely.
The Chairman: I thank all three of you very much for a very helpful session. Thank you very much indeed for joining us.
Examination of Witnesses
Dr Peter Williams, Cambridge Centre for Housing and Planning Research, and Professor Steve Wilcox, Centre for Housing Policy, University of York
Q30 The Chairman: Dr Williams and Professor Wilcox, thank you very much for joining us. The estimate of the number of houses that need to be built over the next five years, from the information we have seen, ranges from about 1 million, which is the Government’s target, to up towards 1.5 million, which is the Town and Country Planning Association’s target. It would be interesting to hear your thoughts on the number of houses needed but, in particular, whether that range of housebuilding over the next five years is achievable.
Dr Peter Williams: Thank you. It is a very complex issue, as you will appreciate, and the context is one in which supply is really a demand‑led market and we have to recognise that housing supply is going to be constrained by other factors like, for example, new mortgage market regulation, Financial Policy Committee interventions and so forth. Therefore, even if we can have bold targets in terms of output, it does not necessarily mean, with a speculative demand‑led housebuilding industry, we will see that supply follow. One of my concerns would be recognising that and recognising the volatility of the market, which itself suppresses the capacity of the housebuilding industry to achieve supply. That combination of demand and volatility provides an important context that limits the supply response.
As to the numbers, it will be a stretch. The 1 million is probably a minimum estimate. You can argue about how big it should be and there are people who would argue even higher than 1.5 million, but the fact is we are building only about 170,000; we are some way behind that and there is obviously a backlog. The extent to which we have to meet that is another matter, but there is a backlog that has been sitting and there are various estimates around that, so I think it will be a very stretching target. However, I do wonder, given that it is demand‑driven, whether people will be able to afford what they need in terms of generating that supply, despite all the array of Government measures that have come in.
The Chairman: When you say “volatility”, you refer to price volatility, but also possibly regulatory and government initiative volatility.
Dr Peter Williams: Certainly all of those, but I was referring particularly to price volatility, which has a big impact on builders.
Professor Steve Wilcox: I ought to start by saying I am no longer a professor; I am retired. I do not want to be here under false pretences. I am trying to be retired, but not being very good at it.
The target figures of the 1 million or something over 1 million are essentially from the latest set of household projections. They have already been superseded by the latest population projections, which suggest the figure should be rather higher, but again, as Peter Williams has indicated, to get much higher than about 230,000 a year you have to start making some assumptions about dealing with the backlog, even if it is only the backlog for the years since 2012 and that, in a sense, is a separate issue.
There is also this circularity between household formation and the number of houses we provide, in that households cannot form if the houses are not there for them. Therefore, underpinning the household projections is a notion of a housing standard in terms of separate dwellings for those who wish to have them, whether or not the market is going to enable them to do that. In the crudest terms, essentially, if we do not supply the 200,000‑plus dwellings a year, fewer households will form; there will be more sharing, more young people living at home with their parents and more concealed housing. However, there is an enormous elasticity, in a sense, in terms of household behaviour to accommodate what are marginal additions to the total stock in any one run of years.
In an ideal world, if you want to maintain those housing standards and the opportunities for younger people to obtain housing on their own, you have to look somewhere in that region of 200,000‑plus a year. Obviously, we are a long way off that and although many of the measures that were in the Autumn Statement were very welcome, when you look at them as a whole, it is difficult to think that they are necessarily going to get us to the level that the household projections would suggest would be ideally required. If you look back, the only time we have achieved those kinds of figures is when we have had not just a very active private market and growing owner-occupation but a significant contribution in terms of new social-rented housing. In a sense, what happens after the houses are built in terms of the future is another thing, but to get them built you probably need to be advancing on all fronts, if that is what you really want to achieve.
The Chairman: We have heard evidence that the housing construction industry simply does not have the capacity to up its level of annual housing to anything like this. Is that the level implied by 1 million or 1.5 million houses over the next five years? Do you agree with that?
Professor Steve Wilcox: I would agree with that in the sense that this is not something that is immutable and cannot change. However, year on year, you are going to see, at best, only a 10% to 15% increase over the previous year, because you have to rebuild the skill and the expertise. It can be drawn in; it is just not immediately available today.
The Chairman: Getting those skills back into the industry is likely to push up prices and if you simply build the number of houses needed to meet the demand as assessed, it is going to lead to even more expensive houses. Is it possible to contemplate breaking the cycle of ever‑increasing house prices or is that the economic model that is going to continue to determine that?
Dr Peter Williams: I struggle on that. You are right that skills and materials shortages will massively constrain the housebuilding industry’s ability to respond. I personally think we have to look outside the housebuilding industry for the supply response in addition to it. Obviously, those costs would suggest that to meet all those requirements we would have to pay more— wages, materials suppliers and, indeed, off‑site manufacturing, which itself is constrained by the volatility of the market. Therefore, all those things probably do have some price. I suspect there would be some efficiencies over time, where prices would not rise inexorably and, therefore, supply would begin to respond without a huge price response, so I would probably be slightly more cautious than you on that.
Professor Steve Wilcox: I am inclined to be cautious as well, in the sense that there is not a lot of evidence that there is a premium in the market for the prices of new dwellings, including dwellings that are now being built at a much higher energy efficiency level. In effect, all the costs that might be incurred from trying to get the new buildings done, including with the higher energy efficiency, get factored back into land prices. Ultimately, it is the market that determines the prices at which the builders can sell their properties and there are upward pressures on prices anyway as a result of undersupply in the longer run. However, I do not think labour costs can be very much of an independent factor in prices.
Dr Peter Williams: This is why we need more competitive pressure around the housebuilding industry, with other suppliers potentially being part of the mix.
Baroness Wheatcroft: Dr Williams, you seem to be suggesting that there would be much more scope for modular housebuilding, industrial design. Is it surprising that we seem to build houses very much the way we have built houses for a very long time?
Dr Peter Williams: It is not, although I think that is the appearance rather than the reality. Underneath it, housebuilding has improved enormously in terms of what is in the homes; it is just they are not sold. Many builders would recognise that they undersell the product they are currently building. It is very different from previous buildings. I personally believe that if they sold it better, they would find a bigger demand for it and that itself would stimulate them to build more, so I think they are not very good at doing what they should be doing.
Baroness Wheatcroft: What about the modular style of building, factory‑led?
Dr Peter Williams: It is part of the mix. I am not suggesting for one minute that all of us will suddenly rush out and buy modular homes. There is clearly a long history of failure in this, but other countries show that it can be done very successfully and it does have potential. We have just failed to get over that step, as it were, to get it off the ground in volume.
Q31 Lord Griffiths of Fforestfach: You talked about the lack of competitive pressure. If you look at other sectors of the British economy, you see that they have not liked, for example, foreign companies coming in too much, because they threaten them. We have heard evidence from various people and, as an economist, maybe I am sceptical, but my first thought is to wonder whether there is a tacit cartel here among the large companies where they are hoarding and need not be explicit at all. What more could we do? Should we have an investigation of that or could we have a policy for encouraging more foreign firms to enter the market with maybe new ideas such as Baroness Wheatcroft suggested?
Professor Steve Wilcox: I will come back to part of the proposition that you started with, the question of whether we have a cartel of large builders. There are issues about competition, but there is also a natural caution within an industry that needs to build and sell properties very rapidly in a short period of time and wants to be confident that there is the effective demand for the houses they are building in that short period of time. There are concerns about the adequate supply of mortgage finance and if you are a builder and you are doing a new product virtually every year, you want to ensure that you have a business that is sustainable over a run of years. Therefore, I could understand them being cautious about wanting to peak their building too much in any one year, particularly if they are then uncertain about where we are in relation to the medium‑term future. There is an element of caution as much as cartel in that.
In terms of whether an influx of companies from overseas would make a difference, I am not so sure, because you have to have a clear understanding of the market in which you are dealing if you are going to make a significant intervention. Housing markets are very local markets, so whether that could be a significant difference I am not sure. One thing that could make a difference is a growing awareness over the years that the housing supply we need in the future needs to address the fact that we are an ageing society, and more housing needs to be built specifically for older people, both those who are independent and post‑85 with more requirements for care. That is an area that the new housebuilding market has been quite poor in responding to. As I have had it explained to me, it is partly because when, as older people, we eventually move into some form of supported accommodation, we rarely do it on a planned basis—it is often in response to a crisis at some point in time—so builders are reluctant to do much in the way of building accommodation specifically for the elderly, because they cannot be sure of the consistent flow of demand in the marketplace. Obviously, there are some companies, like McCarthy & Stone, which operate very effectively in their particular niche of that market, but if we can find ways of growing that sector of the market that could make a very useful contribution. Also, frankly, building housing for the elderly is less likely to raise nimbyist responses than some other forms of housing.
Dr Peter Williams: Just briefly, if I may, there have been four reviews of the housebuilding industry in the last decade—Calcutt, Lyons, Barker and the Competition Commission—so it has been looked at quite closely. Skanska did come into the UK housebuilding market exactly in the model that you suggest and, unfortunately, exited because it found it not profitable and too complex.
Q32 Lord Layard: I want to ask about the planning system. In your review, you express doubts as to whether the existing system could deliver the number of houses that we need. We would like to know what you think would be the changes that could bring us to the number that we need. For example, can you imagine any system delivering enough houses that did not give a very much bigger financial reward to the local authority awarding the planning permission, like, for example, the Dutch system we were discussing or some other system that provided a real current flow incentive? It is important to distinguish between taxes, where the yield is downstream, and an incentive at the time of giving the planning permission to provide the flow of funds to the authority in return for that unpopular action.
Professor Steve Wilcox: Although you have kindly referred to my review, by which I think you mean the UK Housing Review, I hasten to add I did not write that bit of it last year. However, I think you are entirely right. How you can incentivise the provision of planning is vital. There is not only the example you mentioned. There is also an example in Switzerland, where the local taxation that flows from new housing is kept in its entirety by their equivalent of local government and that provides a far more effective incentive. Quite clearly, the pressures there are at the moment on local government finance are such that local authorities would be looking very keenly to incentives and so I think there is potential there.
All this goes back, in a sense, to what the previous speakers were saying. There is a finite pot of potential land value gain from bringing land into housing use. If you are going to provide far more effective incentives for local authorities, in one way or another, it either has to come out of any pooling of council tax revenues available for other areas or it has to come out of that land value. There are obviously constraints there, but your essential premise, which is to find more effective financial incentives to promote making more land available at the local level, could make a contribution, but only a contribution. Planning too often gets the sole blame for undersupply of new housing. It has to be not just that there is planning permission; there has to be effective demand for housing in that locality.
Dr Peter Williams: The new homes bonus has taken us part way down that path, but I think most people would accept that it is not enough of a stimulus, albeit it is building up. Secondly, on the planning resource at local authority level, I see some authorities now looking to charge for their planning activity, which seems entirely sensible to me. However, it has been much starved of resource and there is a high expectation that the level of planning reform continues. In the Housing and Planning Bill more expectations are being layered on to local authorities at a time when their resource is being curbed. It is an important issue without doubt, but it certainly is not just a planning problem.
Lord Lamont of Lerwick: Some people have suggested to us that planning permission is quicker with smaller developments and that a greater number of smaller developments would, overall, mean a greater supply of housing. I can see you disagree with that.
Dr Peter Williams: No, I do not know. I simply do not know.
Lord Lamont of Lerwick: You were here when the previous witnesses were talking about planning and the effect of planning on land prices, and one used the phrase “controlling” prices. Did you agree with what he said?
Dr Peter Williams: Personally, I think it is highly problematic. There are a range of countries that do the forward purchase, like Canada, Switzerland, the Netherlands, but controlling prices is quite difficult.
Baroness Wheatcroft: I wonder whether you could elaborate on what you were saying about encouraging land to be brought forward. Would you go so far as to penalise developers who did not then build on the land that had been brought forward?
Dr Peter Williams: I do not think either Steve or I would pretend to be planning experts, so I would not wish to mislead you. I understand the general principle. I can see why people reach towards it. The reality is that big-site developments can often take a very long time and I know that from previous engagement with Thames Valley Housing. Even there, where we were a willing developer, it would often take three to four years to develop the site, for all sorts of reasons, whether it was community consultation or discovery of some new environmental limits on the site—things you just did not know and could not anticipate. If you then had a fixed point at which, after three years, you were penalised, I think many people would say that was punitive. Whether there is a compromise there somewhere in terms of the time that should elapse—I am guessing after five years—but even at Thames Valley we had some sites that went on for eight years before we were able to get development under way, for all sorts of reasons. Rights of way is another classic: trying to access difficult sites and securing rights of way took for ever. I am with the principle, but I think the practice would be rather harder.
Baroness Wheatcroft: Interestingly, last week, our two witnesses were divided. Martin Wolf, in principle, was for it and Kate Barker, practically, was not.
Dr Peter Williams: I think Kate is well informed.
The Chairman: Can I just come back to the planning departments of local authorities? Are they sufficiently resourced to carry through the workload that is implied in the level of housing that has to be built?
Professor Steve Wilcox: It is very variable but, by and large, I would think no. One thing that has being going on in local government in terms of responding to budget cuts over the last few years has been that a lot of senior experienced staff have been retired or retired a little earlier. I play five-a-side football with my key local planner, so I know all about it from him. So there are issues there. One of the key issues in many local authorities—and again there are honourable exceptions—is that within planning departments there is not always a sufficient understanding of development finances. In terms of negotiations with developers around Section 106 and so forth, understanding what really is viable at various phases in the market and what is a reasonable thing to push for without putting the development off because it is not viable, you have to have quite a canny understanding of development finance to be able to be robust without being too robust in those negotiations. As I say, there are honourable exceptions, but that is an area that has never been a strength in planning departments.
Q33 Baroness Blackstone: I wonder if you could tell us to what extent you think the Government’s Help to Buy scheme has improved the supply of housing.
Dr Peter Williams: I have specifically been involved in the evaluation of the Help to Buy scheme with Christine Whitehead and Ipsos MORI and we have just completed the report. I am probably limited in what I can say. It is a complex analysis. Clearly, you can identify the number of people who have used the Help to Buy scheme, but the question you have to ask, and indeed answer, is how many of those could not have entered the housing market without it. Clearly, it is not the total. The whole aim of the scheme was to be a market‑based response designed to stimulate housebuilding activity rather than being a route of entry into housing for people who were having difficulty accessing the housing market. The starting point was about supply and part of that was about recovering the balance sheets of housebuilders, re-stimulating the mortgage industry to think about it and giving consumers and the market generally more confidence. When you look across the array of issues that were trying to be evaluated, I would say on all of those counts it was relatively successful[1]. The narrow increase in output—those houses that would have been additional that would not have been built had it not been for the scheme—is somewhere between 15% and 20% of the total output. The CLG estimate originally was about 25% and we find it lower.
Baroness Blackstone: To me, that does not sound like success.
Dr Peter Williams: It is success because if you take all the other factors that were being put into place around the scheme, around confidence, boosting balance sheets, restarting activity, et cetera, they were a huge success, without, I might say, the negative of what many people anticipated, which was the increase in house prices. There is no material evidence to suggest it was a major stimulus to house price increases. It certainly helped stabilise them in markets outside of London, but it did not stimulate them in any substantial way. There have been some limited analyses, but I do not think the evidence is supported.
Professor Steve Wilcox: In itself, it may have been considered a modest success, but the bigger picture is that even with Help to Buy it is still now far more difficult for first‑time buyers to get hold of a mortgage not requiring a significant deposit compared to anything over all the years from deregulation of the mortgage market at the beginning of the 1980s right through to 2007. Some 30% or half of all first‑time buyers were buying with 95% up to 100% loan-to-value mortgages; that is, less than a 5% deposit. That was the norm for a whole generation. It was not, in itself, a contributing factor to the 2007 boom because, if anything, average deposits during that period were getting larger. Yes, there were some excesses at the margins that we all know about, the 100%‑plus mortgages, but they really were at the margins. They were not fundamental to what was happening in the housing market pre‑2007.
Not least because of Basel III as well as policy in the UK, we have now entered a regime where not only do we have far more meticulous income assessment on mortgage provision—the days of self‑assessment are gone and that, I think, everyone would welcome—but we have left in place, even with Help to Buy, a far greater difficulty for households to access home ownership without access to a significant deposit. Even a 5% deposit, not just in London, is quite a chunky amount of money if you do not have parents or friends you can rely on to assist you with that. The evidence from the assessment that was made by the FSA of the risks associated with 95% to 100% mortgages relative to 1995 is that the higher risk associated with that was really at the margins—and even then, ideally, their data should have been unpicked rather more than they were. Even with all the initiatives that people worry about in terms of whether they will have an inflationary impact on prices, we have a far more restrictive mortgage market than we have had for almost a whole generation. That is as much of an issue in trying to increase supply as anything around planning.
Dr Peter Williams: Just to illustrate that, if I may, for the sake of argument, there are around 300,000 first-time buyers in a year. Something like half are parentally assisted. Of the remaining half, probably 75,000 are assisted by the Government. That gives you a sense of how small the pool of people is who are unassisted, parentally or by government, entering the market.
Professor Steve Wilcox: These are households that can afford to pay the mortgages; they just cannot raise the deposit. It is not just a balance sheet barrier; we have a wealth barrier now in term of access to home ownership and this is a new thing for the current generation.
Q34 The Chairman: The Governor of the Bank of England has said on a number of occasions that he is very concerned about the housing market. He is obviously particularly concerned about it in so far as it relates to banking institutions, but is there any evidence that buyers are stretching to a point they are taking a very considerable risk, particularly in the light of if and when interest rates go up?
Dr Peter Williams: The evidence is that, for example, people have been paying down their mortgage debt and the household indebtedness ratios, which the Bank worries about, have come down. None of that says there are not still huge risks remaining in the system and, Lord Hollick, you are right that, quite clearly, the governor and Bank officials generally see the housing market as a major potential source of instability. They have, however, honed down particularly on the buy-to-let market as their source of concern, an area that I know you, yourselves, have been interested in. However, the Bank’s analyses around that are partial, so the Bank can put a story together that looks quite plausible about risk and vulnerability, but, equally, you can match it on the other side, which says by and large things are looking slightly better and more stable. It is trying to balance the two and the Bank tends to, I think, veer towards it being potentially a high‑risk area, buy-to-let in particular.
Lord Turnbull: Coming back to the question of capturing the development value of change of use, am I right in saying that we have had two goes at this since the war, in 1948 and 1970?
Dr Peter Williams: Yes.
Lord Turnbull: I do not know exactly how they worked, but the idea was that the seller of agricultural land got some premium and then quite a large chunk of it went to the state and that paid for the infrastructure. Am I right in saying the reason they failed is that people just sat on their hands and waited for the next election?
Dr Peter Williams: Yes, and I think that is very sad. I fall back on the Mirrlees review, which looks at land tax and property tax and, very sensibly, says that it is a very complex political issue and it all needs a full and thorough investigation to see where you could go, because the politics of it are the key point, in that it gets into place, it is then overtaken by events and then it falls out of favour.
Lord Turnbull: This indicates that this is a subject a bit like pensions, in that you have to work probably over many years to get a political consensus.
Dr Peter Williams: I agree.
Professor Steve Wilcox: Absolutely.
Q35 Lord Turnbull: On taxation, one of the things that annoys me most is when particularly our beloved Prime Minister says things like, “You should not tax people’s hard‑earned savings”, when most of those savings are the value of housing, with people in the south‑east probably getting a gain in their net wealth probably in excess of their salaries. You can look at inheritance tax as a perfectly rational part of a system in which it is a deferred capital gains tax; you do not pay it until you die and there is an estate and it is recovered. However, what we are seeing is even that is being nibbled away at. Can you see any prospect that we could develop the kind of consensus that I have been talking about, that it is perfectly reasonable to capture, on a delayed basis, some of the capital gain of housing?
Professor Steve Wilcox: I wish I could. There is a rational case for reviewing property taxation, particularly property taxation for owner-occupiers, the benefits of which accrue to existing long‑established owner-occupiers, but then that gets factored into house prices and that then becomes an additional barrier for new entrants to the market, so all the advantages are at one end. There are a range of policies around in terms of taxation on capital gains and on inheritance that operate quite smoothly in other countries, but they have required political consensus to operate. You can look at Sweden, where they apply capital gains tax for owner-occupation, but there is always a rollover arrangement, so while households are moving, if they are reinvesting, it does not become liable at that point. It is only at the point that they exit the market, either to move into renting or when we all exit the market, that the capital gains tax then comes into play. However, it is very difficult without a political consensus.
There are small measures that one can take in terms of taxation, looking at the extent to which council tax applies and the levels of council tax. Again, there have been various reviews of that, but we do have a system of banding of council tax that is compressed relative to market values: that is, it is a less onerous tax for high‑value properties than it is for low‑value properties. In a sense, that is another, if you like, fiscal advantage in favour of higher-value properties.
Lord Turnbull: Can you dredge into your history? Am I right in saying that the gradient of tax to the value of house is less than it would have been under the continuation of rates?
Professor Steve Wilcox: I am sorry, I do not have that figure to hand, but I certainly know the current regime is far less onerous on higher-value properties.
The other thing on council tax is there is the provision automatically for a 25% rebate for people living on their own, which is, in effect, an incentive for under‑occupation. Obviously, it applies to a lot of elderly people, but again you can set arrangements up so that if you change those arrangements there would be a rollover arrangement where it is paid only at the point that people leave the property, rather than having to pay at the point where they do not have the income to pay. There are a number of small measures you could introduce that will not change the world but will be helpful steps in the right direction.
Dr Peter Williams: Supply can solve only so many things and taxation has to be part of the overall reform of the housing system. There are ways over the long term that you can make adjustments—we saw that with mortgage interest tax relief—that, phased out over the cycle, can be done. We have seen modest adjustments to council tax in other countries and, indeed, stamp duty tax in other countries and now in England. There are things that can be done that do not demolish the world as we know it, but over time—back to the nudge analogy—you begin to change the way people behave.
Lord Turnbull: The other proposition is that the tax system is going in the wrong direction and there is an argument about mansion taxes and taxation of higher dwellings. The Conservative Party won the election. It made a genuflection in that direction by the increase in stamp duty; it did not accept it in the annual taxation regard. Is this not part of the thing that is a big distortion? If you live in your house for 25 years, you do not pay this and if you happen to move, often for perfectly good reasons, you end up paying some pretty colossal sums. Should we not try to get stamp duty back to where it was as a taxation on transactions, incorporate and basically take a small amount of money from a lot more people a lot more often?
Dr Peter Williams: You mean an annual property tax.
Lord Turnbull: An annual property tax, which is what council tax is.
Dr Peter Williams: Yes.
Professor Steve Wilcox: I entirely agree.
Dr Peter Williams: In a sense, that was where the Joseph Rowntree Housing Market Taskforce, of which Kate Barker and I were members, got to. It reached that conclusion along with adjustments to council tax, so it is possible.
While we are on the matter of tax, clearly one of the issues most recently is the 3% stamp duty levy on individual investors, where circumstantial evidence does begin to point to a degree of frenzy in the market. We only have to think back to the unfortunate events of 1988, with the advance announcement of the withdrawal of mortgage interest tax relief, which also then led to a degree of frenzy in the market over the subsequent five months and a house price boom. There are some issues here about how tax instruments are introduced to the market and changed.
Lord Turnbull: Am I right in saying that that 3% applies to individual buyers, not corporate buyers?
Dr Peter Williams: Yes, it does.
Lord Turnbull: Can individuals not “corporatize” themselves rather easily?
Dr Peter Williams: They are still very significant as buyers in the market.
Lord Turnbull: If they are paying the 3% levy, then they can set up a company.
Dr Peter Williams: That is not a costless or an immediately easy thing to do and lots of people will think about whether they should do that. That transition is not an easily achieved one.
Professor Steve Wilcox: That will probably happen after April.
Q36 Lord Griffiths of Fforestfach: The Chancellor announced in the summer Budget that the Government will reduce the rents charged to social housing tenants. What would be your assessment of the impact of this on the supply of low‑cost housing?
Professor Steve Wilcox: Clearly, that is taking away a resource from housing associations and local authorities that could be used for investment going forward. Obviously the reason the Government have done it is in terms of short‑term impact on housing benefit costs. At the same time, in terms of affordability, social rents have been increasing at either RPI or CPI plus 0.5% or 1% way back for the last 15 years. That policy was premised on average earnings increasing by about that much over inflation every year and, in fact, it was a relatively cautious policy to try to keep rents roughly in line with movements in earnings or even a little below. However, over the last seven or eight years, we have seen earnings going the other way in real terms and social rents have continued to increase ahead of inflation, while earnings have been falling behind inflation. Therefore, there is a legitimate reason for raising a question about whether that continuation of above-inflation rents was a sensible policy or a policy that should have been reviewed. Obviously, it has been very sharply reversed and in the short term it will take a lot of money out of housing association and local authority coffers and that, quite inevitably, will impact on their capacity for new investment, both in terms of new build and for local authorities, in particular, in terms of investment in improving the standard of their existing stock.
Lord Turnbull: If it is in line with earnings, have they not done this at precisely the wrong moment, because real earnings are now starting to rise again?
Professor Steve Wilcox: Marginally. They are rising by about 1% against CPI, but they are only just about at pace with RPI, so it partly depends on which inflation measure you are using, but, yes, they are moving back in the right direction, I entirely agree.
Q37 Lord Teverson: Staying on social landlords and Right to Buy for housing associations, a few months ago, the Chancellor told us that this was particularly important because it was non‑discriminatory to the people who were in council housing, effectively. I would be interested in your feelings about that, but I would also like to come back just quickly, Professor Wilcox, on a similar theme about social housing. You pointed out very well—and we have a number of graphs that illustrate this in our own briefings—that, in the past, when there has been sufficient housing supply, it has been a mixture of public as well as private housing. What I would like to ask you about that is: if there was the political will—and clearly there is not at the moment—could that be solved by local authorities and housing associations, if they were sufficiently financed, getting back into that? Are there the resources, the land and everything else? Could that be replicated back to the 1950s or is that a dream that has well gone by even if there was the political will to do it?
Professor Steve Wilcox: If I can start with that first. Quite clearly, at the moment they do not have the resources to do it, not least after the changes on rent that are going forward. However, in terms of whether they could do it in principle, I would paraphrase Harold Macmillan. When he took over after Nye Bevan and continued the programme of council housebuilding and the target of 300,000 dwellings a year, he said, “We can build the houses now and we can put the rents up later”. I paraphrase to say that you could take the view that you could require the public sector or social sector, in one way or another, to build the houses now and you can always sell them later, so there are a number of ways you can go about that.
Moving on to Right to Buy, I have long been a heretic in terms of having a view on Right to Buy that does not seem to appeal to people of any political persuasion. It comes from having done an economic analysis of Right to Buy, essentially focused on the point that when you have a right to buy you are making a sale to a sitting tenant who has security of tenure at a sub‑market rent. That property does not have an open-market value, so to talk about the discount as being a discount from an open-market value being the effective economic level of discount, those are two totally different things. You can quibble with the details, but the analysis I did suggested, in broad terms, that the economic value of a sale to a sitting tenant would be something like 30% to 35% of open-market value. In other words, if you looked at the sales at that level of discount, it would represent a reasonable return to the public sector and, for every three buildings you sold, you can build two replacements now and then you do not lose those properties from the market. The people who buy them still live in them. They are just called owner-occupiers rather than tenants, but they are the same households that were allocated those dwellings on the basis of housing need and the evidence was, on average, they continued to live there for about another 15 years. Therefore, what you have is a loss of re‑lets in 15 years’ time, on average, against the sales today and if you put together the two new lets you have today, the 15 years of occupation by the three people who have purchased in the intervening years and the loss of three re‑lets in 15 years’ time, as a package, if you do Treasury-discounted analysis and so forth, that stacks up.
Therefore, what I would say in terms of the policy on Right to Buy, whether it is for local authorities or housing associations, is there is not a problem in terms of value for money for the public sector if you can get reinvestment from it, and that is obviously very useful, as long as the discounts are at a reasonable level in terms of economic value. We seem to be tossed between political views that, on the one hand, think Right to Buy is evil or, on the other hand, think that it is quite acceptable to have discounts of something like 70%. I have to say I do find it rather bizarre being in the situation where, on the one hand, it is being suggested that it is quite appropriate for someone to have the Right to Buy at a discount of 70% if, on the other hand, they are a tenant with a reasonable income. They will have to pay a market rent on the property under pay to stay because it is not proper for them to receive a subsidy in terms of a sub‑market rent. There is a little inconsistency there.
Dr Peter Williams: Clearly, one key issue in what Steve has just said is that 100% of the receipts come over to the landlord rather than are lost inside the Treasury’s coffers. I do think associations and local authorities certainly have the appetite—whether the capacity, as Steve has said—to significantly increase output and to become a major player in the supply mix and that is probably utterly justifiable.
The Chairman: Have the Government been made aware of your calculation and how have they reacted to it?
Professor Steve Wilcox: It is something I wrote about 10 years ago and certainly civil servants in the relevant departments are very well aware of it, as indeed are the civil servants in Scotland, where they have decided to abolish Right to Buy. Actually, the modernised Right to Buy in Scotland, which was introduced in about 2000, had about 30% discounts and was a model of a balance between providing households with choice and something that is quite sound in terms of public finances. Sadly, though, in Scotland they have rushed straight from Right to Buy to modernised Right to Buy and now to abolishing the whole thing, although the civil servants are well aware that there are disadvantages financially to the sector in terms of removing potential access to receipts from abolishing Right to Buy, in the same way as there are losses to the public sector from excessive discounts.
The Chairman: On your calculation, what was supposed to be a 30% discount is, in fact, a 70% discount. If you mark to market, if I can put it that way, the local authority or the housing association would receive twice as much money.
Professor Steve Wilcox: Yes.
The Chairman: Interesting.
Q38 Lord Sharkey: Since the summer, the Government have made changes in the buy-to-let residential sector: restricting relief to the basic rate of income tax, the higher SDLT on additional residential properties and capital gains tax has to be paid within 30 days of completion. Are these good ideas?
Dr Peter Williams: It is a problematic set of interventions in the sense that if you put it in the context of why people are active in the buy-to-let market, it is partly very low savings rates, the funding-for-lending scheme drove down rates and the bank base rate driven down. People were looking for return because of poor pension fund performance, so there are a lot of people who have gone to property, as it were, because of the context in which they themselves were put by others, not by their choice, and clearly that has encouraged buy-to-let. It is worth stressing that—again, the calculus is difficult here—buy-to-let makes up only about 30% of the private rented sector. The rest is funded by commercial mortgages and cash, and as much as Government and the Bank may seek to control the buy-to-let market as the competitor with first-time buyers, it clearly is only controlling part of that market. Therefore, there is some danger there of overemphasising the degree of control, which they do not have.
Lord Sharkey: The Chancellor said he would consult on exempting corporates and larger landlords from the imposition entirely. Would that not change the architecture of the buy-to-let sector entirely? It would drive out, effectively, the kind of people you were first talking about.
Dr Peter Williams: Yes, and it is not clear exactly why that new “two legs good, four legs bad” argument has emerged: that individual investors are bad and corporate investors are good. The implication that I draw from it is that they are more likely to make a contribution to supply because, do not forget, most buy-to-let investment is buying existing properties and, therefore, it is cannibalising the existing stock rather than adding to it. Corporate investors are more likely to generate new build, but even there it is relatively small in total. It is also said that they might be better landlords—the evidence for which is quite weakly developed, but it is possible. So I do not fully understand the switch between individual investors and corporate investors and nor do I fully see the evidence that supports the view that it is only individual investors who are competing with first-time buyers. Again, the evidence base around some of these interventions is very poorly developed.
Professor Steve Wilcox: There is one point to add in that. I agree with Peter Williams. The tax changes that have been brought in are rather messy, because in many ways the taxation of private landlords was textbook about how you tax any other kind of business. However, there is an issue in terms of if you have a notion in the market that you want to provide younger households with open and free choices about whether they want to go into owner-occupation or whether they want to go into private renting, one of the issues confronted is a very uneven mortgage market. The predominant buy-to-let mortgage product is an interest-only mortgage, whereas essentially you have to get a repayment mortgage or its equivalent if you want to become an owner-occupier. In other words, a first-time buyer has to contemplate paying out something like 50% more than a private landlord would in terms of buying the same kind of property. That is a very uneven marketplace in terms of providing household choices and, to some extent, the tax changes that have been suggested will counterbalance that a bit, but, frankly, in a very messy way. Looking more closely at more balance in terms of the regulatory market for both buy-to-let and first-time buyers might have been a more appropriate advance, although that too is not without its difficulties.
Lord Sharkey: What is the net effect of having a relatively large buy-to-let sector? In what sense does it help first-time buyers?
Dr Peter Williams: A smaller buy-to-let sector?
Lord Sharkey: No, the sector itself.
Dr Peter Williams: Does it help first-time buyers, having a buy-to-let sector? Not immediately. There is an issue about the rent levels, but if it has brought better quality accommodation to people while they are waiting or trying to save to be a home owner, I guess that is a positive. Many in the buy-to-let sector would say that, far from being negative, they have made a significant contribution in terms of improving the quality of the private rented stock and have done something to give people more choice in the private rented stock. One of the dilemmas in this sort of model between choice and constraint is that there are many people who rent better than they could buy, and it poses quite a difficult choice for people: they can live nearer to where they want to work or are working and they would have to live further away in poorer property if they chose to buy. Therefore, I do not think we should see it entirely as a constraint; it is also about choices.
Q39 The Chairman: If the objective is to create a more level playing field between first-time buyers and buy-to-lets, have the Government’s recent measures gone far enough to achieve that? If not, what additional measures would you suggest should be introduced?
Professor Steve Wilcox: I doubt they have gone far enough but, frankly, we will know in due course what effect they have had, as Peter Williams suggested. In the short run, we may see an upturn in buy-to-let purchases to get in before the stamp duty changes come into effect. Therefore, it will take a little time to settle down. Ideally, in the long term, we would completely recast housing finance. We would reintroduce mortgage tax relief for first-time buyers against what used to be the old Schedule A tax on the use value of occupation of a dwelling, and we would introduce capital gains tax for owner-occupiers. That would balance the market properly between the tenures, but you would still have to then come back to the issues around mortgage market regulation and the imbalances in access to more advantageous forms of mortgage finance in one sector compared to the other.
Dr Peter Williams: That is because obviously a policy choice was made between the regulated owner-occupied market and an unregulated buy-to-let market. That was the way policy went in terms of the split between the two, buy-to-let being seen as more commercial and unregulated by the FCA and the mortgage market owner‑occupiers are regulated. That has a big implication. It strikes at all the things that Steve was saying. Fundamentally, Lord Hollick, this is an under‑researched and under‑evidenced area and you would expect two academics or former academics to say exactly that.
Q40 The Chairman: Let me chance my arm a little then, just to finish off. The Government have an ambitious target of 1 million houses—some would say that is not enough. What measure or group of measures would you advise the Government to introduce in order to have a reasonable shot at achieving their target over the next five years?
Professor Steve Wilcox: Picking up on something that was said towards the end of your last set of evidence, I do not think there is a single silver bullet. You have to look at a whole range of measures to begin to get there and you will only get there incrementally. At the end of two or three years, if we get towards 200,000 or 200,000‑plus that would be welcome, but it needs the planning measures and it does need some more stimulus, one way or another, to promote more building in the social sector to complement everything that can be done in the private sector.
Dr Peter Williams: I would agree with that and I do not think there is a single measure at all. There are some structural things. Housing is a hugely complex market and it does require, to the extent that we can achieve it, cross‑party consensus and long‑term plans, and both of those are absent. We are still prey to short‑term initiatives and we have seen an awful lot of them and they seem to be still coming. We are not at the end of the policy announcements on the push towards home ownership. There is going to be more stimulus activity around that over the coming months—I am guessing, in the Budget next year. There is a lot still to come and I do not think some of those have been joined up enough in the way that they should have been. There are some big issues above the delivery which we are still a long way from and that we obviously hope your inquiry can help to address.
The Chairman: Do you think there is merit in devolving responsibility far more boldly to, for instance, the northern powerhouse or to metropolitan areas, letting them do what they think is appropriate in their area and have a range of measures to achieve those objectives?
Dr Peter Williams: Because housing markets do not respect local authority boundaries, it has to be sub-regional and metropolitan planning around those issues, but of course that does not address the questions of welfare and taxation that sit out with these. Thus, although when you look at Wales and Scotland, which have gone off and started to do things quite instrumentally around their housing systems, they are still, I am afraid, impacted by the taxation measures and the welfare reform measures that emanate from Whitehall, which are very difficult then to overturn, because those are part and parcel of the total.
A final point from me, if I may. We have to recognise how the costs of this are borne not only by individuals but by Britain’s competitive economic position. If we have a failing housing market, we are damaging our position in the global economy. That argument is massively understated in the way government approaches these issues.
Professor Steve Wilcox: Yes, if you want to push things down more to a more localised level, then you come back to the issue that was raised earlier about incentives, because you will need incentives at the local level if you want the numbers overall to stack up. The other thing, going back to an earlier point I made, is trying to think a bit more about how we can put forward the need to build additional accommodation for older households as part of the mix. Again, it is not a silver bullet, but it is something we have not been doing enough of.
The Chairman: Of course, we cannot write a self‑interested report, but I think that is of interest to many of our Members. Gentleman, thank you very much indeed.
[1] . Based on the DCLG definition of additionality, the Department’s estimates of additionally were that 25-50% of help to buy purchases were additional. This compares with our evaluation report estimate of 43%.