What are the causes of the housing crisis and what can be done to solve the problem?

1. Introduction It is a common belief that a housing crisis exists in the UK: there have been vast increases in house prices coupled with there not being enough homes for people to live in. This report will explore the issues of increasing demand for housing, a reducing supply of new homes and the consequential increase in property prices.

Housing output in the England As the graph shows, the trend rate of output of permanent dwellings has fallen since 1970, where output was 307,000, to 1914-15, where output was just 124,000. This has led to a lack of supply of housing, meaning that the equilibrium price is far higher than affordable for the average house buyer in the UK.

Housing prices in England The UK has always had notoriously high house prices due to its position as one of the most economically-developed countries in the world, however in recent years the average house price in the UK has soared. Between June 2014 and June 2015, the average house price increased by 5.7%; making the UK the second most expensive country to purchase in property, behind Monaco. 1

Areas of Research During my project, there was a clear focus on four key areas of the crisis, researching both the causes and what can be done to solve the problem. The four areas are as follows:

• Does a housing crisis exist in the UK?

(2015) Through the Roof. The Economist [Magazine] 26th September. Available From: http://1

www.economist.com. [Accessed: 5th November 2015].

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• Are foreign investors to blame for the housing crisis?

• Is the housing crisis caused by an undersupply of housing?

• Would developing the Green Belt help to solve the housing crisis?

2. Does a housing crisis exist in the UK? The first thing that needs to be addressed is whether the housing crisis even exists. With housing costs as high as they are, it would be very hard to argue that there is not a housing crisis of some form or another.

Rental Property The price of rental property has remained, for the most part, stable. Of course, it is always expected that there will be some kind of price increase due to background inflation, which is what has happened; however if we compare the increase in price for rental property to that of purchasing a property, the difference between them is vast. The increase in house prices (which is what the media and politicians believe to be the main symptom of the housing crisis) is greater than any other G7 country. Such a change in the cost of buying a house with a proportionately tiny change in the cost of rental implies that the relationship between demand and supply for rental properties may have remained relatively stable. This view is believable because more and more property is being purchased as buy-to-let, with buy to let mortgages become increasingly popular. Of course, if more people are purchasing homes that have previously been available for households to buy for the purpose of renting them out, then the supply of houses to purchase will have declined; eventually pushing the price up, but not for rental. Because of this lack of supply and the fact that the supply for new housing is inelastic because there are many different components required to construct a new house including buying the land, acquiring the labour and the actual building of the property, people will tend to look elsewhere as they will perceive the increase in the price of owner occupied property to be disproportionate. Of course, the first place that they will look is to the rental market where there is a fresh increase in supply due to all of the new properties that have been purchased with the aim of renting them out to people who do not want to or cannot afford to buy a house.

If this increase in demand for rental property is matched by an increase in supply, then we should theoretically see that the pr ice of rental property will not increase by as much as is expected. This is shown on a supply and d e m a n d d i a g r a m . T h e increase in supply is shown by the shift from the supply

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curve “S1” to the supply curve S2” it is clear that the average price of rental housing hasn’t actually increased because the supply and demand have risen proportionally to one another so despite the quantity demanded increasing from “Q1” to “Q2”, the price hasn’t increased above “P1” . 2

Because there hasn't been a significant increase in the price of rental property, some economists believe that there may not be a housing crisis as people can still afford to live somewhere and so there is no issue. This may be true, however when companies cannot continue to retain staff because the staff cannot afford to live in the vicinity of the office that is in a business hub, it is hard to argue that there is no crisis of sorts.

The geography of the housing crisis Of course, it can be said that the housing crisis only affects small areas of the country, however that would not appear to be the case. If one were to take a map of the UK and mark on the areas that may be perceived to have a housing crisis; they may be shocked at the size of the areas that would be shown. Expectedly, London is the area where the housing crisis is most acute, however areas all over the country have housing crises of their own. For example most of the south east and some of the south west are in some way affected, with counties such as Kent and Cornwall experiencing extremely high levels of demand. Many areas of the north, especially surrounding business centres have seen more demand as many large firms base their satellite offices there. Further south too, in Cardiff there is a shortage of supply and little is being done to solve the problem, with very few houses being built as developers see that building property in Wales is far less profitable than developing property in a similar town in England, be it Bristol or Birmingham.

Social effects One thing that deserves to be mentioned are the invisible effects of the crisis that have a greater effect on the social structure of the UK than the economy as such. It is clear to see that the demand for houses is not directly linked to the number of people, but to the number of households that are formed. The reason that this is a negative effect of the crisis is because new households cannot be formed by people that are in a long-term interpersonal relationship due to the price of housing being too expensive for younger couples to manage to afford. Because of this inability to be able to afford housing, it means people are living in properties where the social structure is much like student accommodation for many years more than would be expected. In London especially, it is not unusual to find a group of young individuals living together well past the age of thirty, despite not being related. There is no doubt that this is bad because it delays the formation of families. This could, in the most extreme case cause a slowdown in economic growth when the population is ageing to an extent where supporting the elderly takes an inordinate amount of resources.

Stewart, J. (2016) Interviewed by Jake Smith in person. 3rd February 2016.2

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Concluding Remarks From this information, it is clear that there is a crisis. With housing as expensive as it is, it means the only ways that first time buyers are typically able to afford property is by moving to an undesirable area, or by having wealthy parents that are willing to help them with the deposit, as this is the hardest sum of money to gather together. Additionally, there are simply not enough houses available for people to live in. This means that even if the buyer has the money available to afford the house, they simply cannot find a place to live. The main cause is because people do not want to sell their properties as in current stagnant economic conditions, the home is the only investment that is appreciating at a good rate.

3. Are foreign investors to blame for the housing crisis? As stated previously, the UK’s housing stock is the second most valuable in the world. Because of this, it makes it a hugely popular investment for investors from across the world. The media and the government like to blame the housing crisis on these foreign investors that reduce the supply of housing for British people that have a genuine need for housing however many leading think tanks and economists believe this cause to not be the case for the majority of the UK.

Geography of investment In fact, Central London is the only area of the UK where foreign investment may have a tangible impact on the price of houses in the local area. In Westminster, 10% of properties are owned by firms based in tax havens. This level of investment is undoubtedly high, but it is hard to dispute that beyond the realms of the most desirable parts of London there is very little foreign investment. In Islington, which is still well within greater London and is within a six kilometre radius of Trafalgar Square, foreign investment in housing is just 1.3%; this proves that foreign investment on its own is not enough to cause the entire housing crisis.

Negative Impacts One issue that may arise from foreign investment in London is that many of the most desirable houses in the capital are left empty for most, if not all of the time. It is said that if you look at some of the most desirable blocks in the capital when they should be lit at night, large sections of the building will be in complete darkness; this is because these properties are purchased by investors and then never lived in as the amount of money that they receive from the rent isn’t enough to make it worth renting the property out to others. The reason that this is an issue is because most households in London rent their homes instead of buying them . The large number of houses that are purchased in London for the purpose of 3

investment reduce the supply of available rental property in the region.

The increase in the general price of property in London is well demonstrated on a supply and demand diagram. The initial equilibrium level of price and quantity is at the point “(Q1,P1)”;

(2012) Most families in London now rent rather than own homes. The Evening Standard [Online] 3

Available from: www.standard.co.uk. [Accessed 1st February 2016]

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this point was prior to there was such a high demand for housing in London from both domestic and international investors as both the quantity and the price are low. As property in London was realised to be a tax-efficient, fool-proof way to make money for people based abroad, the demand for the property would have increased from the demand curve “D1” to “D2” which shows that at the same price, the demand for the good (in this case housing in London) is higher that it was previously. Because there is more investment in the limited quantity of property available in London, and there is no replenishment of the stock, it will reduce the number of properties that are available on the market, reducing the supply of properties. This reduction in supply is shown by the inward shift in the supply curve from “S1” to “S2” which shows there is less available stock of houses at the same price. From the diagram it is easy to see the three equilibrium prices that are on the diagram; starting at “(Q1,P1)”, shifting to “(Q2,P2)” and finally settling at “(Q3,P3)”. With every change that happens in the market, the price of property (both rental and owner occupied) increases. This process is ongoing and is very good for investors that already own properties in London, however for domestic residents that require property near the centre of London, the increase in price is hugely damaging.

Positive Impacts Many of the large housing developers based in London will argue that in order for there to be any new properties available in London, there have to be wealthy buyers who have the resources to be able to purchase a new property without the need for finance. This is because, unlike many homes outside of London, the nature of tall towers packed with flats on top of each other means that the whole structure has to be completed in order for people to be able to move in and generate revenue. To construct towers of flats requires a huge amount of initial capital that developers frequently cannot afford to pay out. This means that foreign investors are a vital part of the purchasing population because they are the people that help to finance the initial development. Some may wonder why domestic buyers cannot finance the building and the reason is simple: most people who buy property in their home country are buying a primary home and so take out a mortgage out to finance it. This may not sound like an issue, however most initial mortgage deals only last six months and so by the time the tower is built (which can take on average two years), the mortgage will have expired and so the developer is taking too much of a risk because they have no guaranteed capital to fund the development.

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Concluding Remarks It is worrying that international investors are buying up large swathes of the capital, with the effect of increasing property prices in areas where the need is the greatest because of all the commerce that is based there. On the other hand, it may be considered unfair to blame the housing crisis on foreign investors, like the media do. This is because they only invest in very small areas of the UK; namely London, as well as some investment in Oxford and Cambridge, because they are such well known cities. This means that, although they do drive up the price in certain areas, most of the UK remains mostly unaffected by their presence.

4. Is the crisis caused by an undersupply of housing?

The Barker Review In 2004, the Barker review was commissioned by the then Chancellor of the Exchequer, Gordon Brown and the Deputy Prime Minister, John Prescott with the aim of trying to find out what the cause of the housing crisis was then. In 2001, only 175,000 houses were built, which was the lowest figure since the Second World War; Kate Barker, the author of the report believed that the vast undersupply of housing was what was the main factor causing the crisis. It may seem surprising that twelve years later in 2016, there has still been little done to try and resolve the problem and the number of new homes built in the UK has fallen since 2004 (admittedly the financial crisis did jeopardise the number of new homes in the UK, but very little progress has been made since we have emerged from the recession). It also seems that very little has changed since the report was written as those in the housing industry still refer back to it to because it is still such a relevant document as the undersupply still exists.

Current Supply of Housing The agreed number of houses that are required every year is 240,000, which, when compared to what is currently built seems like an impossible challenge. Even the government’s target of one million homes in the next five years seems like an impossible target when in 2015, only 167,000 homes were started. This means that something clearly has to be done to solve the problem. Since 1978, the number of new homes built each year has not exceeded the target of 240,000 . This shows that the undersupply of housing is not 4

just a recent phenomenon, but one that has been ongoing for many years. In 2002, housing economist John Stewart wrote one of the first reports acknowledging the existence of a housing crisis . He stated that its cause was the vast lack of housing on the 5

market. Simply the fact that there have been reports that have been written over ten years ago should imply that the housing crisis has existed but little has been done in order to solve it.

(2015) Live tables on house building: permanent dwellings started, by tenure and country. Office for 4

National Statistics. [Online] Available from www.gov.uk. [Accessed 4th February 2016]

Stewart, J (2002) Building a Crisis, Housing Under-Supply in England.5

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Local Authority Housing One of the causes of the undersupply is that local councils have not built many homes in recent years. In 1970, local authorities but 130,000 new homes each year; nowadays they build a mere 2,000, with most of the building of new property by local authorities being done by a select few authorities with little geographical spread. Because of this lack of supply from local authorities, it has meant that the council houses that were bought by their occupants during Thatcher’s leadership have never been replaced. This is one of the worst effects of the housing crisis because it has meant that those with the most need for a home are unable to get one. Council house waiting lists are often several years which means that people who struggle to afford to live are left moving between bed and breakfast premises as these are the only place that the local authority can afford to place them.

Not only is this bad for the residents as it is incredibly disruptive and the rooms that they end up living in are far too small to have a normal existence, but it is also bad for the local and national government. This is because the costs of thousands of bed and breakfast stays is extremely high, especially when the money could instead be put towards building new affordable and council-owned properties. As the money that would be used for this building is in fact being spent elsewhere, it means that the housing crisis is getting ever more prevalent. This is due to the demand increasing without a relative increase in supply. Unless something is done, the demand for housing association and council property will get so high that to reach a suitable equilibrium between supply and demand once again will take many years.

Concluding Remarks The reason that the undersupply of housing is such a key factor is because it affects all the different types of property, both privately-owned and social housing. The only category of property that isn’t affected to the same extent is private rental due to the reasons detailed earlier where the increase in demand has been met with an increase in supply.

5. Would developing the Green Belt solve the housing crisis? Because of the vast increase in housing demand coupled with a weak response in supply, it has been suggested that we develop the Green Belt.

What is the Green Belt? The Green Belt is an area of land that cannot be built on easily because of the regulations that apply to the area; it occupies 1.6 million hectares, which is equal to 13% of the UK’s overall land area . The original purpose of the area was to prevent “urban sprawl," where 6

one city tends to merge into another to form a large metropolis. In principle, the Green Belt is a good idea because it prevents urban sprawl. This is damaging due to the effects that is has on productivity as well as the use of resources — spreading out development causes an

(2015) Through the Roof. The Economist [Online] 26th September. Available From: http://6

www.economist.com. [Accessed: 5th November 2015].

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inefficient use of land and could limit future development due to the lack of appropriate land remaining to develop. In reality, the Green Belt is far from the image that its name portrays - beautiful green fields 7

that enhance the local environment. Much of the Green Belt is, in fact, intensive arable land and golf courses; both of these land uses have very little environmental value and so it can be argued that the development of the Green Belt could have less impact than people think because as there are already disruptive activities that go on within it.

Why hasn’t the Green Belt been developed? One of the issues that is faced when the subject of developing the Green Belt is raised; either in local or national parliament is how contentious an issue it is. When the issue of developing the Green Belt is ever brought up, many voters begin to revolt because they believe that it will have a large effect on them, which we know not to be true because the current uses are already disruptive. This means the issue is often avoided by the government. This, of course is negative as it means that the issue never goes away. For example, very little has been done to adapt the Green Belt since its incarnation and the current government has no plans to adapt it, so using the Green Belt as a way to tackle the housing crisis will, at the earliest come into effect in 2020, by which time the crisis could be far worse. A recent report by Savills has predicted that by the end of 2020, the house prices 8

within a commutable distance of London will have risen by an average of 23.35%, marking a vast decrease in the affordability of the already highly sort after prime market in and around London.

Benefits of developing the Green Belt If the Green Belt were to be developed, it would go some of the way to helping to resolve the crisis. It has been calculated that if all of the Green Belt within a ten minute walk of a train station was allowed to be developed on, it would create the space needed for one million new homes . This area, which accounts for 3.7% of the Green Belt would have very little 9

impact on the environment as it is near a train station, which is likely to have some form of existing development nearby. Another argument that has been put forward for developing the area around train stations is that with imminent completion of CrossRail. Areas around London that have previously not had particularly strong links into London are now being linked into the capital. This in itself will increase the demand for property in the area because people that have to commute will now see the area as a potential place to live, whereas before it has not been. An example of an area like this is Iver, in South Buckinghamshire. Despite the area having had a train station for all the time in living memory, the trains are infrequent and so commuters will have

Pirie, Madsen. Dr (2015) Re-examining London’s misnamed Green Belt. Adam Smith Institute. 7

[Online] Available from: www.adamsmith.org. [Accessed 17th January 2016]

Cook, L: SAVILLS. (2015) Dusting Off the Crystal Ball. Residential Property Focus (2015 Issue 3). 8

[Online] Residential Research (2015 Issue 3) p. 8-9. Available from: www.savills.co.uk. [Accessed 9th February 2016]

(2016) A Garden of One’s Own: Suggestions for development in the Metropolitan Green Belt. Adam 9

Smith Institute. [Online] Available from: www.adamsmith.org. [Accessed 17th January 2016]

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had to plan their journey well in order to get to work on time. With the advent of CrossRail, there will be more trains linking to stations in London other than Paddington, which will certainly increase the number of people seeking property in the area. From the map of Iver, it is clear that the Green Belt will heavily restrict any future development that is required to take place there. This situation is the same all around London; where, as well as it causing the house prices to rise, it also means that large infrastructure projects, such as CrossRail are not used to their full capacity. This means there may not be a good multiplier effect which is bad because the initial increase in aggregate demand caused buy the increase in government spending is not then matched by a larger increase in gross domestic product.

Concluding Remarks Of course, it could be said that the Green Belt only affects 13% of the country and so shouldn't have a large effect on the housing crisis, and this view may well be true; however because of its nature and aim of preventing urban sprawl to make sure that there is enough land so the UK can support itself, it means that the Green Belt is located around towns, where development is needed. This means that despite the Green Belt only being 13% of the UK’s overall area, it is an important 13% where the regulations need to be relaxed in order to encourage development and increase the supply to tackle the current undersupply of property.

6. Conclusion Overall, it is clear to see that the housing crisis is a simple supply and demand issue; over many years the undersupply has become more prevalent and the issue has not be assisted by a vast increase in demand. The main causes for this lack of supply lies in regulation and with the large developers in the UK.

Causes of the crisis The bureaucracy surrounding house building means that planning permission is frequently declined. In the last thirty years, the UK has built less homes per capita than any other European country, at about forty units per 100,000 inhabitants. This is hugely detrimental and causes the house prices to be wildly inflated because of cost-push inflation. It is said that 35% of the house price in London and the south east is directly attributable to the planning restrictions that are imposed . The effect that this has can be shown on a supply 10

Niemietz, K. (2015) Unaffordable housing: Causes, consequences and solutions. Institute of 10

Economic Affairs. [Online] Available from: www.iea.org.uk. [Accessed 14th January 2016]

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A map showing the Green Belt around Iver, the dark green

shaded area is the existing Green

and demand diagram. As more homes are bought it reduces supply from “S1” to “S2” because the quantity is not being replenished. This shift in the supply curve causes there to not only be a lower quantity of homes demanded but also for there to be an increase in price from “P1” to “P2”. The increase in price is especially detrimental because it means that the price of property in London vastly increases, which prices people out of the capital and the south east . Th is e ffec t happens elsewhere, but to a lesser extent as there is less demand from around the world than there is for property in London. The increase in demand also comes from other areas separate from international investment. The changing demographic, with more people shifting to living alone, e.g. because of the increase in divorce. This means that more homes are needed because people that aren’t in relationships seek to live alone and so instead of having multiple people living under one roof, the ratio of people to properties is reducing.

Solutions to the crisis

Foreign Investment It appears that there is a range of things that can be done to help solve the problem. In London, foreign investors need to be vetted to find out what purpose they are buying the property for. If they are legitimately going to live in the property, then they should pay the normal market price as this is the only way of keeping property in London competitively priced. If their reason for buying the property is to rent it out to make a profit, then the international investor should be required to pay a higher tax than would be levied on a domestic investor on the rental income. If, following the initial vetting of the investor, the property is found to be empty, an ever increasing tax on the property should be imposed as this would become an always-increasing disincentive to own a property in London All of these procedures tend to reduce the demand on housing, which of course is beneficial as it reduces the equilibrium price. Also any revenues that are made through the scheme should be reinvested into building local authority homes because of the vast deficit caused during the Thatcher government’s right to buy scheme. On top of this, the money raised would be a good way to reduce costs for developers by preparing brownfield sites for development and potentially subsidising builders’ costs. The issue with this, however is that

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the house builders may take advantage of the lower costs and use the subsidies to increase their profits.

Green Belt It appears that the time may have come for the Green Belt to be revised. Currently, all it succeeds in doing is preventing the building of homes at a time when as many homes as possible need to be brought to market. The idea of allowing development within a ten-minute walk, or half mile radius of a train station in the Metropolitan Green Belt would be an effective way to provide up to a million new homes around London. On one hand this would be a good thing to do because it would mean that the full capacity of the area surrounding London could be reached and it would be a good way to ensure that CrossRail was used to its full potential. Also, it would be a good way to vastly increase the supply of housing around London. This would be the main benefit to improving the housing crisis because the increase in supply would not only solve the main cause, but also alleviate the main symptom of the crisis; the affordability of housing. The downside of the crisis will be that the infrastructure in certain towns will not be able to cope with the increase in people moving there. For example, in Amersham, South Buckinghamshire; many of the facilities are already very crowded. The rush hour trains, for instance, do not have a spare seat, and many restaurants and cafes are very crowded. It is hard to imagine what the town would be like if all the land within a ten-minute walk of the station were to be developed. To solve this problem, the areas for development would have to be chosen very carefully. Some areas that are further from a station may be better suited to than those areas that are very close to stations. Alternatively, the infrastructure could be bolstered so that it could withstand the increase in users. For example, trains could be made run more frequently, roads widened, and even satellites towns built outside of what is already there. Of course, the glaring issue is the sheer cost of implementing these changes. Even if it can be worked out that one million new homes can be built, the additional costs of facilitating this new change would be enormous, with road widening and an increase in services inevitable. That is why the Green Belt within a ten-minute walk of a train station should be developed. However, these are sensitive issues and therefore an independent panel should be set up to deem whether development would be feasible or necessary.

Additional Measures A bedroom tax or a subsidy for people with spare rooms to move away could be used to help increase the housing supply. This is because it will become a more affordable option to move house and downsize as there will be a subsidy for doing so. Alternatively, with a bedroom tax, it will become less affordable for people to remain in their current home and so the only way that they could afford to live would be to downsize. Although forcing people to leave their house may seem like a harsh way to correct the housing crisis, it may be the only way to resolve it. This is because if people remain in their current dwellings, then there will be no change to the supply of housing and so the market will never refresh. Because of the severe nature of this method, a tax on extra bedrooms

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should be a last resort; however on the other hand, the revenue raised from the scheme would help a great deal in providing funds to help encourage development. All in all, any way to increase the number of homes for sale on the market will help substantially in resolving the housing crisis. This is because it is clear that the crisis is caused by a vast undersupply of housing in relation to the current demand. Whether the methods used encourage people to relocate to areas with a lower demand for property or involve building new homes where the demand is high, something has to be done.

If action is not taken imminently to solve the problem, the effects could be catastrophic; with prices rising further every day. Too much longer with the same stagnant growth in house building will lead to more people living on the streets or in temporary accommodation. Even those in a permanent, stable home will see their disposable income after housing costs fall to poverty-like levels.

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1. (2015) Through the Roof. The Economist [Magazine] 26th September. Available From: http://www.economist.com. [Accessed: 5th November 2015].

2. Stewart, J. (2016) Interviewed by Jake Smith in person. 3rd February 2016.3. (2012) Most families in London now rent rather than own homes. The Evening Standard [Online]

Available from: www.standard.co.uk. [Accessed 1st February 2016]4. (2015) Live tables on house building: permanent dwellings started, by tenure and country. Office

for National Statistics. [Online] Available from www.gov.uk. [Accessed 4th February 2016]5. Stewart, J (2002) Building a Crisis, Housing Under-Supply in England.6. (2015) Through the Roof. The Economist [Online] 26th September. Available From: http://

www.economist.com. [Accessed: 5th November 2015]. 7. Pirie, Madsen. Dr (2015) Re-examining London’s misnamed Green Belt. Adam Smith Institute.

[Online] Available from: www.adamsmith.org. [Accessed 17th January 2016]8. Cook, L: SAVILLS. (2015) Dusting Off the Crystal Ball. Residential Property Focus (2015 Issue 3).

[Online] Residential Research (2015 Issue 3) p. 8-9. Available from: www.savills.co.uk. [Accessed 9th February 2016]

9. (2016) A Garden of One’s Own: Suggestions for development in the Metropolitan Green Belt. Adam Smith Institute. [Online] Available from: www.adamsmith.org. [Accessed 17th January 2016]

10. Niemietz, K. (2015) Unaffordable housing: Causes, consequences and solutions. Institute of Economic Affairs. [Online] Available from: www.iea.org.uk. [Accessed 14th January 2016]

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