The Queen’s Speech fired the starting gun on an almighty row within the Conservative Party about planning reform. Proponents argue that only a radical overhaul of the current system can revive anaemic rates of home ownership and shore up the Conservative vote by making Britain a property-owning democracy once more. But the Tory shires are revolting.
You don’t have to be for or against planning reform to see that the government is taking quite a gamble with its traditional supporters for what it sees as a big electoral prize. But what makes the politics more surprising is that even if the government gets its way, its plans will have no impact on home ownership.
A slew of recent commentary asserts that planning reform is the key to raising home ownership. The steps in this argument are rarely explained, but it’s based on three rickety hypotheses: home ownership is low because house prices are high, because insufficient houses have been built, which is in turn because the planning system is a supply bottleneck. All three assertions are weak at best. Together they’re hopeless. Let’s look at each one.
First, is planning the problem? Evidence that the current regime is holding back supply is surprisingly weak. Last year 372,000 units were granted planning permission, but only 244,000 net additions were made to the housing stock in England. Nor was that an aberration. The number of permissions granted outstripped net additions by almost 100,000 per year on average during the 2010s. Meanwhile it’s in London, of all places, that the largest stock of outstanding planning permissions is found, with many years’ worth of supply as yet unbuilt. The data on planning permissions isn’t perfect (as Neal Hudson explains here), and these are rudimentary calculations, but it’s nevertheless very hard to make a compelling case that planning is holding us back. In practice developers will only build at a rate the market will absorb new supply, as the Letwin Review explained.
But even if planning reform did bring forward tens of thousands of extra homes each year, would that change the game on house prices? Not any time soon. Among economists there is a large degree of consensus about how prices respond to additional housing supply. On typical assumptions about price sensitivity, and ONS projections of household growth, hitting the government’s target of 300,000 houses per year might cut prices by around 10%, in today’s money, by the mid-2030s. That’s not to be sneezed at, but it would also only be enough to reverse the increase in prices we’ve seen in the past year. Whatever way you look at it, a supply boom is not going to change the game for Millennials and the government shouldn’t pretend that it will.
Yet even if it did somehow make a dent in prices in the coming years, would that crack the home ownership problem? Unfortunately not. Prices are of course a factor in home ownership rates as higher prices mean buyers need a bigger deposit. But they’re not the most important one. What matters more is the availability of credit for FTBs. When economic skies darken banks become risk averse and direct lending away from risky FTBs and towards people with equity: landlords. Paradoxically then, just as houses get cheaper, would-be FTBs get locked out by banks demanding even larger deposits.
As a result, rather than falling when prices increased and rising when they fell, home ownership has tended to follow prices in three phases over the past 25 years. Despite rapid house price acceleration between the mid-90s and the mid-2000s home ownership rose to record highs (albeit it was drifting down on the eve of the financial crisis). From 2007 to 2013 house prices fell by over 21% in real terms, yet home ownership collapsed by more than 6 percentage points to 63%. Then from 2013 until the pandemic house prices grew strongly and home ownership began to recover in the final years of the decade.
Reduced prices would obviously be good new for FTBs, but it won’t necessarily produce more of them. Ultimately, they will always need credit to buy houses and be the first borrowers to be turned away in uncertain times.
So the home ownership case for planning reform is badly flawed. Existing rules don’t seem to be the problem. High supply rates won’t shift prices much any time soon. And home ownership rates are more sensitive to sentiment in, and regulation of, the mortgage market than price levels. The government risks alienating its supporters without solving the problem.
If we want to see home ownership hitting the 70% achieved in the mid-2000s, the problems don’t lie in insufficient houses but in who gets the ones we already have. Changing that distribution can only be achieved by policy actively directing lending towards FTBs using tools like regulation, taxation, credit guarantees and subsidies to make relatively risky customers more attractive to lenders. The government’s Help to Buy makeover is therefore more likely to have some effect, as George Osborne’s predecessor scheme did, though the impact is likely to be modest. To really put rocket boosters behind home ownership the government could go much further, towards a permanent housing finance institution helping low- and middle-income families get on the ladder.
A home concerted home ownership drive isn’t without risk. Is it right to encourage young people into property when a rise in interest rates from current unprecedented lows could wipe out their life savings? Would it not be better to press ahead with badly-needed plans to beef-up protection for private renters, making that tenure a viable long-term option for families?
But if home ownership is the goal then such an agenda would be far more in tune with a Conservative party that’s long since shed its ideological commitment to free market orthodoxy. Unlike the ill-starred planning stramash that lies ahead, it would actually work. And, who knows, it might also win them some votes.