Analysis

The hardship and injustice inflicted by our housing crisis has a number of dimensions:

• Those unable to access home ownership face far higher housing costs – both as a proportion of their income, and in absolute terms.

• The unearned windfalls arising from house price appreciation have tended to reward those who are already well off, and overshadow the fruits of hard work. For 10 out of the last 20 years, the owner of an average house in London has reaped more in annual price growth than the average full time UK worker can earn in a year.

• The higher house prices and rents have crept, the more our communities have become segregated on socioeconomic lines, with poorer households priced out of areas with good schools, clear air, jobs, parks, transport links and so on.

• Even where households appear to be living in ‘affordable’ accommodation, making ends meet often requires other compromises - such as putting up with damp, mould, cold; spending longer on the daily commute; living in overcrowded conditions - that take their toll on health, child development and life chances.

Subsidies for low income private renters (housing benefit) and for first time buyers (Help To Buy) are not long term solutions to these problems. They may benefit the primary recipients, but on aggregate they increase effective demand in the market and thereby push house prices and rent prices even higher. To address the injustices of the housing crisis we need to tackle the root causes of inflating rents and house prices, which over the past two decades have been driven more by expansions in effective demand than by shortages in overall supply.

Demand in the housing market has been inflated by two key developments. First, seismic changes in the UK mortgage market – including the lifting of various restrictions on banks and building societies, the growth of securitisation, and the lowering of the Bank of England base rate – have dramatically increased the supply of cheap, easy credit, and thereby boosted purchasing power available to all buyers. Second, the increasing treatment of homes as financial assets, by global and domestic elites, as well as ordinary households seeking security in retirement, has put enormous upward pressure on prices . Most significantly, “Buy To Let” investors have benefited from a highly advantageous fiscal and regulatory environment in their bidding war with first time buyers.

Unless these demand-side drivers are brought under control, increases in the supply of homes for sale will do little to improve affordability. According to the government’s own model of house prices, building 300,000 houses every year for the next 20 years, would only reduce house prices by 6% by 2038. That is not to say that house building is unnecessary. Any expansion in the social housing stock would be a lifeline to the 1.2 million people on the social housing waiting list, and would slowly reduce pressure and improve tenant bargaining power in the private rented sector. Falling private sector rents would, eventually, feed through into lower house prices.

But we should not expect such results to be either significant or swift - partly because there are major skills shortages in the building sector, partly because there is a huge backlog of housing need, and partly because, as discussed above, there are a range of other more powerful forces, besides supply shortages, putting upward pressure on house prices.

It is perfectly possible to bring these inflationary forces under control through the reforms summarised in figure 1. Perhaps the most popular and immediately realisable of these are those measures designed to strengthen tenants’ rights. These reforms make sense on their own terms - since the constant threat of rent hikes and evictions is having a detrimental effect on the health, relationships and life chances of millions of people - but they have the added benefit of dampening demand from Buy To Let investors, and therefore removing one of the key drivers of house price inflation.