The Decline Of Home Ownership Will Not Be Reversed Until Housing Is Plentiful And Cheap

17/11/2016 15:54

The decline of home ownership, and the eye-watering cost of housing for anybody who didn't get on the property ladder before the boom, is fast becoming one of the defining issues of our time. Never mind the headline rate that owner-occupation has has slipped from 70.9 per cent to 63.6 per cent of households since 2003: this is mostly being felt by 25 to 34-year-olds, among whom it has collapsed from 58.6 per cent to 36.7 per cent. The large majority of under-35s now rent, if they don't still live with their parents, and their prospects of becoming an owner-occupier at some point in the future are shrinking fast.

Some observers are quite relaxed about this trend. They shouldn't be, if for no other reason than this: real house prices have risen by more than 150 per cent in 20 years, far outstripping wages, and so a wealth gap is opening up between the propertied and the property-less that we have not seen for many decades.

On this decline of owner-occupation the Labour-commissioned Redfern Review, chaired by Taylor Wimpey chief executive Pete Redfern, this week reported its findings to shadow housing minister John Healey. It deserves credit for flagging up the essential, and to many counter-intuitive, point that simply boosting the supply of new homes will do little on its own to increase home ownership. This is because, even if housebuilding output reached the frankly fantastical level of 300,000 homes a year (last year's output was 189,650), demand for housing is so great that the downward impact on prices would still be tiny. This needed to be said, and there is no doubt Redfern's is an important contribution to the debate. But when it comes to unpacking the issue, and charting a way forward, it as remarkable for what it leaves unsaid as for what it says.

First, it is true that excessive demand is at least, if not more, culpable than under-supply for the staggering house price growth of the past two decades. The point is easily misunderstood, as it was by the odd headliner write, but it is no less true for that. It was explained at length by Peter Saunders in his recent Civitas book Restoring a Nation of Home Owners. The trouble is, Redfern puts this down to growing household incomes, rising employment and low interest rates with not a mention of the buy-to-let boom which has significantly increased the number of people - and massively increased the amount of money - chasing for-sale properties since the mid-1990s. About three million homes have been absorbed into the private rented sector over the past 25 years, the vast majority the result of a shift in tenure from owner-occupation and the social rented sector.

In this sense, there is no crisis of home ownership at all: it has been so rewarding for an older generation of buyers that many decided to snap up second, third or fourth properties to let out. In doing so, they have displaced a generation of would-be first-time buyers. (The new growth of institutional investment in new-build rented properties, so-called 'build-to-rent', is the welcome exception.) To those who say this new class of landlords has done Generation Rent a favour by providing homes they could not afford to buy, it is worth pointing out that this process has corresponded very closely with the decoupling of house prices from average wages since the 1990s. To a large extent, by gobbling up homes that would have been there anyway, the private rented sector has created the demand it purports to meet. In understanding why growing numbers of people cannot afford to own their own homes, it is impossible to ignore the role of those who now own them instead.

The second piece of the puzzle that is strangely overlooked is the dysfunctionality of the current private sector-led housebuilding model, which ensures that homes are only built and sold at such a rate that they do not undermine existing market prices (except, occasionally, by accident). As described by Sheffield Hallam University researchers Tom Archer and Ian Cole in an excellent new paper this week: 'The failure of the private housebuilding sector to build in sufficient quantity is not some kind of temporary aberration, while the exigencies of the 2008 financial crisis work through the system. This failure is of long standing and is indeed integral to the business model that major housebuilders work with.' Why? Because the major developers are land speculators before they are builders and so any glut of supply sufficient to reduce house prices would destroy their own bottom line. Naturally they are careful to avoid this, and you can't blame them for that, but it will be impossible to improve affordability for first-time buyers without overcoming this dynamic.

Redfern doesn't address this, and so he doesn't offer a solution to it either, beyond the suggestion that a Housing Commission should be set up to try to find a cross-party approach to improving long-term housing supply. Instead his prescriptions tend to focus on supporting first-time buyers get by in a dysfunctional market rather than tackling the dysfunctionality. These include helping people save more via Lifetime ISAs, retaining Starter Home discounts and extending the life of Help-to-Buy loans beyond 2021, albeit while narrowing the eligibility criteria more tightly to first-time buyers. All of these things are superficially attractive but merely help a relatively small number of people afford the unaffordable. In doing so, they help prop up an overheated market instead of allowing it to correct.

Such an approach - and it is the course we are already on - will not end happily. The more tightly the market becomes stretched, the more pain there will be when some external shock finally makes it snap. Happily, in this context, it is unusual for a review to be adopted wholesale by politicians. Let's hope Mr Healey, and for that matter the new housing team in Theresa May's government, remember that the only way to improve the housing situation for everybody is to ensure that homes are plentiful and cheap. That means bearing down on demand from landlord investors, which the government is showing signs of doing already, if tentatively. And it means building homes. A lot of them. More than we can presently imagine. And if the developers won't, then the government must.