Previous posts have looked at the way we provide affordable housing in the UK and identified some problems with that approach and at shanty towns in the developing world. In this post I want to touch on some of the other factors that affect the supply of affordable housing.
I grew up on a council estate in NE England in the ’50s and early ’60s. At that time the people who lived there were a much wider social range than would be the case now. It was expected that buying a house would be beyond the means of most and that Councils would try to bridge the gap. Of course there was still a substantial private rented sector too, but it was understood that for both security and quality, if you couldn’t buy, you were better off in a council house. Generally, the stigma that now attaches to social housing did not exist.
The reasons for this change are generally outside the scope of this post, but the sale of council houses to existing tenants at hugely discounted rates without using the income to build more, has increased the pressure on social housing providers to the extent that only the most disadvantaged are likely even to become eligible. This has also increased pressure on other areas of the housing market.
The increased numbers of people seeking to buy houses, until recently anyway, caused by the shift away from council housing to private ownership that began with the Thatcher Government, has not been fully met by an increase in the number being built. The gap between the numbers provided and the demand has been growing. The theory is that housing provision is best met by ‘the market’ and not by state bodies, but in practice the market doesn’t exist. What we have is a heavily regulated system with state control of the overall numbers via the planning system, creating artificial scarcity.
Planning consent is often hard to get, and thus the value of land which has planning consent is enormously inflated. Agricultural land sells for £5-£10k per acre – in some areas even less. The blogger at Fool on the Hill bought ten acres of it for £40k. If he were to build houses on it at a modest density of four to the acre, the cost of the land would be a very reasonable one thousand pounds per house, still leaving the total cost of a family home well below the notional deposit in David Cameron’s ‘5% of £250,000’ scheme. A mortgage of £250,000 means the purchaser would have to raise twelve and a half thousand pounds deposit, and would then have to pay one thousand six hundred pounds a month every month in good times and bad, in sickness and in health for the next twenty-five years – and that assumes interest rates didn’t rise above their present historic low. The value multiplier created by the artificial scarcity in housing land is huge – land with planning permission sells for twenty to thirty times as much as land without – even more in London. I’m not saying that planning law is without merit but pointing out one of its unintended and desperately damaging consequences. So if we have what amounts to a conspiracy to inflate the price of housing, cui bono? Or, to put it another way – follow the money.
To understand what is going on, we need to look at the history of the speculative bubble in housing. Over the past half century, the price of housing has risen considerably above the rate of inflation. Which means that everyone who has owned a legal home has seen a windfall profit, a profit which has come directly out of the speculative bubble. People are naturally inclined to project the past into the future. House prices have risen, so house prices will go on rising. In fact though, we’ve probably reached the natural limit of the bubble. Like any other Ponzi scheme, it can go on running only as long as there are new people ready and able to buy into the scheme, and frankly there no longer are. New entrants into the housing market may wish to join the dance, but they can no longer realistically raise the buy-in price. So house prices cannot rise without catastrophic effects on those without houses.
Housing is one of the two products – the other being pensions – that have over the past two generations required most people to hand over most of the money they earn to the ‘financial services’ industry, and the ‘financial services’ industry grew very fat and greedy on the proceeds. Note that I’m not claiming that the ‘financial services’ industry invented planning law, let alone that they did so with malice aforethought. Rather, planning and building law was created by well-meaning people to tackle real problems. If people were allowed to build their own houses wherever they wanted to, some of them would be eyesores or in places where any building would be an eyesore. If people were allowed to build houses ignoring the building standards, some of them would be dangerous, and some of them would fall down. Planning law and building standards tackle real problems in the real world. But by interfering with the market, they create excess value for someone to hoover up; they create, in effect, a new ecological niche. We tend to call the creatures which move in quickly to exploit new ecological niches ‘vermin’. Or ‘financial services’.
So the ‘financial services’ industry cannot be allowed to collapse. Yet that industry depends in large part on the tithe of mortgage charges it levies on householders, which enable those householders to have and to hold houses purchased at artificially inflated prices. If – or more likely when – the bubble bursts, those householders will be bankrupted. If/when those householders are bankrupted, they will stop paying their tithe to the ‘financial services’ industry, and the ‘financial services’ industry will be bankrupted. And that cannot be allowed to happen.
You think I’ve come a long way from Devizes, don’t you?
The idea that you could build your own dwelling, yourself, now, at a cost that will not require you to borrow any significant sum is heretical, because if the young people who ought to be taking out David Cameron’s quarter of a million pound mortgages hear it and heed it, they’ll stop taking out quarter million pound mortgages. They’ll stop buying houses, and start making their own. Which means that housing will no longer be scarce. Which means that the market price of housing will drop – as it naturally must – to the cost of production. Which means that people who bought houses on borrowed money at artificially inflated prices won’t be able to sell them at artificially inflated prices. Which means they’re bankrupt. Which means the banks are bankrupt. Which means the economy, and the political system as we know it, must collapse.
There are desperate attempts to find ways around this problem. The approach adopted by Kennet was one of them, but could never meet more than a fraction of the demand, nor meet the needs of the many who did not qualify for social housing but were still in poor quality inadequate housing.
Perhaps we need to accept the heresy. That’s hard. We know what happens to heretics – especially when they start getting followers.
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