The government has dodged a bullet on planning reform. A year after they were first trailed, plans to make housebuilding easier look set to be shelved. With them goes perhaps the last attempt to revolutionise housing supply for a generation.
However, nobody should shed too many tears as the last rites are read over supply-side housing policy. The politics was always fraught — but the economics was worse.
Proponents argue that a radical overhaul of the present system could boost housing supply, cut prices and thereby revive anaemic rates of home ownership, making Britain a property-owning democracy once more. Yet on closer inspection, none of the steps in this argument stack up. The approach would have had no impact on home ownership and little effect on affordability.
First, evidence that the existing regime is holding back supply is surprisingly weak. The number of units granted planning permission has outstripped the rate of building by about 100,000 each year for at least the past decade. Meanwhile, it’s in London, of all places, that the largest stock of outstanding planning permissions is found, with many years of supply as yet unbuilt.
Even if planning reform did accelerate supply, it wouldn’t change the game. Hitting the government’s target of 300,000 houses per year might cut prices in England by about 10 per cent by the mid-2030s. That’s not to be sneezed at, but it wouldn’t even reverse the increase in prices in the past year. Before the pandemic, there were 1.2 million more houses than households in England, a surplus that has doubled in the past 25 years. Early signs suggest that surplus has continued to grow in the past 12 months, yet prices have jumped by 13 per cent.
In truth, it’s impossible to build our way back to anything like the affordability levels of the late 1990s. As global interest rates plumb new depths and as pandemic-stricken households stash ever more savings, the macroeconomic forces behind high house prices are too strong.
Even if this was all wrong and planning reform could make a significant dent in prices, would that crack the home ownership problem? Unfortunately not. While high prices make deposits harder to accumulate, the availability of credit for first-time buyers matters more. And when economic skies darken, banks direct lending away from risky first-time buyers and towards people with more equity: landlords. Just as houses get cheaper, first-time buyers get locked out by banks demanding larger deposits, as happened after the financial crisis, when prices and home ownership rates both fell together.
If we want home ownership to hit the 70 per cent level of the mid-2000s, the problems don’t lie in insufficient houses but in who gets the ones we have. Changing that means redirecting lending towards first-time buyers using tools like regulation, taxation, credit guarantees and subsidies to make relatively risky customers more attractive to lenders. The help-to-buy makeover will have some effect here. A permanent housing finance institution helping low and middle-income families to get on the ladder would put rocket boosters on ownership rates.
A concerted home ownership drive isn’t without risk. Is it right to encourage young people into property, when a rise in interest rates from their present lows could wipe out their life savings? So other policy interventions are just as pressing. In particular, it’s difficult to see any solution to the housing crisis that doesn’t involve beefing-up protection for private tenants, making renting a safer and better long-term option for families and increasing social housing provision.
With radical planning reform ditched, we now have the opportunity to focus on more effective, and less controversial, solutions to the housing crisis. The government should take it.
Editor's note: This article was originally published in The Times on September 13, 2021