There’s plenty in the government inbox, but here’s yet another issue ministers are going to have to grapple with urgently: housing.
Over the past year, the stock market has fallen. Since January, the FTSE 100 is down 7%. More worryingly, the FTSE 250 – which might be a better measure of the UK economy as it has fewer global companies – is down 27%.
The housing construction sector in particular has taken an absolute hit. Share prices of the four largest homebuilders by volume in the country all fell. Berkeley, the fifth largest company, did slightly better as it has a different model, focusing on high quality homes in London. But collectively, these five companies have seen their market capitalization drop from £32.7bn to £16.4bn – in other words, cut almost exactly in half.
Why did this happen?
There are many small explanations (siding, potential house price drops, etc.), but the main one is that the market expects these companies to build fewer houses in the coming years, and therefore earn a lot less money.
It’s a perfectly rational expectation. Whenever the economy goes into a recession or interest rates spike, housing construction tends to fall. It happened in 1987 and 2008 – and like the work of the Center for Political Studies shown, the sector generally takes much longer to recover than the economy as a whole (see below).
Higher interest rates mean it’s harder for people to get mortgages on homes. They also mean fewer transactions, which correlates almost perfectly with housing construction. After all, if people buy a lot of houses, builders tend to build more because they can be sure of a sale.
In short, even with the help of stamp duty reductions in the mini-budget, we are likely heading for a slowdown in housing construction. This will be particularly bad for SME builders, who typically don’t have the cash to ride out downturns, as this chart shows.
As several people have pointed out, this will also affect affordable and social housing, as much of it is funded through development taxes, or requires developers to build some of the affordable housing as part of the project.
I must point out that – on the stock price measure – we are nowhere near where we were in 2008 (see below). Nevertheless, the markets very clearly expect less housing construction.
This is where the government comes in. They said they wanted to build more houses, but also that they wanted to replace “top-down Stalinist housing targets” with better incentives for councils and communities.
Better incentives are always good, but the fact is that the current system is built on these “top down goals”. There is a wide range of possible reforms, such as scrapping local plans and requiring councils to identify a five-year land supply; make them voluntary and not mandatory; the weakening of the town planning inspectorate; change the presumption in favor of sustainable development; rework calculations on housing needs, or try to push all new housing to brownfields and investment zones.
Many of these options could be characterized as “abolition of top-down objectives”. But many of them would also knock home building off a cliff. Already councils suspended local plans waiting to see how much easier it will be for them.
And even if you argue that the new investment zones will take the new homes, there is a risk of dismantling the existing housing system before these zones are in place.
All of this would not only aggravate the housing crisis and strengthen the power of the big house builders, but would indeed hit the economy very hard. In 2010, an article by a real estate agent Savills and Oxford Economics calculated that building 100,000 additional homes a year could increase GDP by 1%. I haven’t calculated the numbers, but it’s pretty obvious that if you end up building, say, 50,000 fewer homes a year, the economy will be proportionally hit – enough to offset the impact of much of supply-side reform. in the Growth Plan, and maybe even most of it.
Equally important, it also means that we will build fewer houses at a time when we need to build many more, as the housing crisis destroys the lives of millions of people. It is widely accepted that the housing system needs to place greater emphasis on community consent and greater local control over what is built. But we must ensure that whatever new measures are introduced, Nimby’s votes do not give an even stronger veto.
Ultimately, if the government makes construction even more difficult, at a time when rising interest rates are already chilling the sector, it will affect growth, reduce opportunities and hurt people’s lives.
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