It is now common wisdom that the reluctance of banks to lend has crippled the World economy, hence the so-called “credit crunch”. The economy’s over-reliance upon credit fuelled a rapid expansion of both consumer and corporate debt – a reliance that proved such a burden; it eventually led to its collapse. This unsustainable growth in consumer and corporate debt was itself fuelled by the astounding rises of property prices.
Homeowners’ new-found wealth provided confidence and financial stability for the middle class and demand for excessive credit from the banks. First-time buyers, lacking the necessary financial capital, sought mortgage deals requiring ever smaller deposits to secure them. In 1998, the average house price in the UK was £68,000, ten years later, that figure had reached £178,000.
According to estimates, there are between 220,000 and 230,000 new households being formed annually; the population is increasing, while the average size of households is declining. A range of demographic factors have been cited as factors contributing to this, such as increasing life expectancy and more divorces. Couple this, with the inability of the construction industry to keep abreast with demand; at present more than eight out of ten construction firms report skill shortages. Many developers also cite the complex planning laws as a deterrent; refusals for planning permissions in major housing developments increased from just 15% in 1996-1999 to 25% in 2002.
Social housing waiting lists have rocketed by 55% over the last five years, but new research by the National Housing Federation suggests that rising unemployment and repossessions will cause the number of households on waiting lists to jump from 1.77m in 2008 to a record high of around two million in 2011 – a rise of some 200,000 homes in just three years. This means that the number of people on social housing waiting lists will have doubled from 2001, when there were just over one million households waiting for a social home. Around 80,000 of the expected new households on waiting lists over the next two years will be directly attributable to the downturn. The other 120,000 households will join because of the lack of affordable housing across the country, with some commentators saying that England has a shortfall of around one million homes. The National Housing Federation is also predicting that house building will slump by 50% during the next financial year from 140,000 to 70,000, as private developers mothball hundreds of projects.
Over the last 30 years, the UK has experienced a long-term upward trend in real house prices of some 2.4 per cent per annum. According to the Barker Review of Housing Supply, to reduce this growth figure to something comparable to that of the EU as a whole (1.1%), would require an additional 120,000 homes per year. This suggests that to maintain growth at an acceptable level, the UK would have to build somewhere between 260,000 and 300,000 new homes per annum.
The newly formed 2020 Group of building bodies, councils and unions, say that providing new housing will meet an "urgent" demand, and help to maintain construction industry jobs. The 2020 Group, formed by the National Housing Federation (NHF), the housing charity Shelter, the Local Government Association (LGA) and the Trades Union Congress (TUC), estimates that there will be 450,000 job losses in the construction industry between 2008 and 2010. It advocates spending some £6bn in order to stimulate the market, attempt to meet the Government’s own housing targets and safeguard jobs in the construction industry.
Group chairwoman Kate Barker, a member of the Bank of England's Monetary Policy Committee, said house building offered "excellent value in terms of sustaining economic activity" and was "urgently needed".
The 2020 Group says its recommendations would save 30,000 jobs in the industry, as well as thousands which support the industry, including in building materials, furniture and white goods. This would preserve construction jobs and apprenticeships which would help prevent a loss of key skills. Investment on this scale would enable house builders to continue to invest in housing supply, reduce the risk of a housing supply shortage once the economy recovers, improve cash-flow and reduce risk for developers and suppliers currently experiencing severe financial pressure and increase labour market mobility by providing more affordable and social housing. They also argue that Government would profit from the investment as the creation of jobs would lead to increased revenue from taxation.
There is an urgent requirement for measures that will help address the current recession, yet also preserve capacity for the longer term. Financial investment from local and national Government will be crucial until the mortgage market is able to find a new equilibrium and confidence returns to private construction firms. Whilst the considerable pressure on public funds cannot be ignored, the long-term value offered from investing in housing offers an opportunity too good to miss.
To provide this short-term increase in supply, there must be additional funding for social housing investment. If featured as part of an economic stimulus, it would drain the flooded social housing waiting lists, as well as preserving the ongoing capacity of the construction sector, reducing the predicted loss of construction industry jobs and improving the ability of the industry to deliver quickly once economic conditions improve.
In order to capitalise on the current lower land values, a program must be in place to fund land acquisition, thus ensuring the availability of suitable land for development in the recovery period to come. There is also a case for extending the life of planning permissions. This way, housing developments put on hold due to the recession could be reinvigorated quickly. Together, these measures would help to ensure that there is a sufficient supply of land ready for development once the market recovers and avoid the need to re-invest time and resources in the planning process for developments.
There must be public sector investment in infrastructure projects in order to protect jobs in the industry. The Government has already committed to a number of large public infrastructure projects such as Cross-rail and have bought forward funding for the Building Schools for the Future project. Yet this could be taken further, with direct investment in infrastructure development that would both support capacity within the construction industry and enable the delivery of new housing. This infrastructure investment would include both transport links and the public facilities needed to support new housing projects. Priority should also be given to existing and new regeneration projects, where the changes in the market have rendered their development unviable. Additional finance to stalled projects will preserve and create employment opportunities, whilst also addressing long-term housing needs. Regeneration is a long-term project that could suffer extensively, if investment was to dry up.
Aside from genuine concerns regarding a lack of skills useful to the construction industry, there are broader issues about the retention of skills in planning departments, especially in light of emerging policy which aims to reduce the number of minor applications. It is vital that planning departments are able to deal with any eventual upturn in major applications in the recovery period.
In recent years new developments have been required to meet a number of new regulatory requirements, many of which focus on quality and environmental standards and the social infrastructure needed to support new development. However, over the longer-term, these may impact on the viability of development. There must be moves to streamline and prioritise builder’s obligations, whilst seeking to balance the need for quality and high environmental standards, without compromising viability of development. If development is to revive, then some of the currently proposed regulatory burden may need to be re-considered. Government should also expedite its programme to simplify both the national planning policy framework and the secondary legislation for the processing of planning applications. This would provide a clearer policy framework for a more positive approach toward development management and reduce unnecessary complexity and burdens for all parties engaged in the process.
UK house prices rose by 2.6% in May compared with April. The rise came after three successive months of property price falls. The annual rate of decline has now eased to 16.3% from 17.7% in April. This latest data serves as a timely reminder that the problems with housing stock in the UK have not evaporated.
The economic and social costs of failing to act are too profound to ignore.