The contradiction in the government’s housing policy

Daniel Bentley, 22 October 2017

Sajid Javid made some encouraging noises on the Andrew Marr Show today but, as well as the constant disconnect between the briefing and the substance in this particular policy area, there remains a contradiction in the government’s approach to housing that remains troubling. On the plus side, he sounds more ambitious than ever in terms of supply, suggesting that the aim should be for ‘at least’ 275,000 to 300,000 new homes a year. (He suggested this had been the number he used in February’s white paper but in fact that only acknowledged a need for 225,000 to 275,000.)

He also raised the prospect of ‘taking advantage of record low interest rates’ in order to ‘borrow more to invest’. Note that he did not refer to investing in housing per se, but ‘in the infrastructure that leads to more housing’. It’s an important distinction that suggests he is thinking primarily not in terms of a new council building programme but in how to unlock market development in new strategic locations. If he is smart about it, he will be thinking about earning the initial investment back by capturing the land windfalls that it generates. Thomas Aubrey at the Centre for Progressive Capitalism has just set out in a report precisely how this could be achieved in, for example, the East West Corridor between Oxford, Milton Keynes and Cambridge.

But while the ambition to improve supply is encouraging, there is a confusion to the government’s objectives. Javid frames the housing crisis in terms of the price of homes, which are eight times average earnings. This, he says, is due to decades of failing to build enough homes while demand has been increasing. ‘What is ultimately going to solve the housing crisis… what’s really going to make the difference is we need a big increase in all types of home including regular unsubsidised homes and that is at the heart of this,’ he told Marr.

This is a simplistic analysis at best. There are very good reasons for increasing supply — chief among them reducing the underlying cost of housing, ie rents. But as a tool for reducing house prices, which are more to do with low interest rates and the attractiveness of property to investors, its impact is likely to be limited except in the very long term. It is possible perhaps that an explicit government commitment to flooding the market with new homes would cause investors motivated by capital growth to withdraw their money, with prices dropping as a result. But this is incompatible with a continued reliance on price-led market housebuilding and in any case ministers have no intention of doing this.

Here lies the contradiction. Despite framing the problem in terms of prices (allied to a concern about declining levels of owner-occupation), the last thing ministers want is to fight the next election against the backdrop of a house price crash, which would have all kinds of political and economic ramifications even if it might play well with younger voters. Hence the allure of the Help to Buy programme, which was recently awarded another £10 billion. By lending mostly first-time buyers more than commercial lenders are prepared to, this allows market-led output to increase a little without the need for a correction in prices. In justifying this extra support for Help to Buy today, Javid said that it was to create ‘confidence’ in buying and building more homes. This is short-sighted at best, and possibly reckless.

There are plenty of critics of Help to Buy who have pointed to the foolishness of stimulating demand in an already-overheated market. But it also a perfect illustration of the confusion in the government’s objectives. While complaining that prices are too high, and implying that they are going to do something about them, ministers are at the same time encouraging young people to have confidence in the current market, leverage themselves up and invest in property at those same prices. The government really needs to be clearer about what, precisely, it is trying to achieve.