Fixing and delivering a fairer housing system
It is time we faced some hard truths about the way we provide homes. This means addressing how the dynamics of a complex housing system perpetuate inequality
Lest we forget, the ‘credit crunch’ of 2007 was triggered by bad housing debt, which stopped the financial markets of the world’s richest countries from operating normally. These events shape our contemporary political and economic landscape. The movements that emerged in the aftermath — from the Tea Party to Occupy — seized on the idea that things could not and should not return to normal. And things have not returned to normal. In the UK, before 2008 interest rates had never been below 2% but — despite a headline story of recent economic recovery — they have never been above 2% since. The character of economic recovery in the UK has been unprecedented, seen for example in rising employment rates but significant in-work poverty and economic insecurity, price inflation outpacing wage increases and rising housing costs alongside falling rates of home ownership.
With hindsight, it has become clear that we have now passed an inflection point in the way our economy organises access to one of the most basic human needs: a home. The distribution of living space and of housing wealth has become significantly less equal in the last decade, and perspectives on how — or even whether — policy should respond are divergent.
The dominant narratives that attempt to account for the UK’s housing challenges tend towards caricature. Either housebuilders are greedy, deceitful and exploitative, or planners are cast as restrictive, obstructive and inept. And, as Yvette Williams argues elsewhere in this journal, we tend to reach for one-dimensional stereotypes when it comes to social housing tenants. Meanwhile, our main political parties have become focused on particular housing tenures; on using the infrastructure of government to either promote building for social renting, or to finance an increase in the proportion of people able to afford home ownership. Neither approach will reach everyone because both approaches lack a systemic response to the root causes of the housing challenges we face.
So what can be done? Of course, we need to create a shared vision of what an effective housing system would look like; one that is fairer, would share housing wealth among a greater proportion of the population and would not see tenure as a goal in and of itself, but focus instead on what provides people with security. But in reaching for this, we must come clean on a range of hard truths, several of which were obscured as we pursued the arduous path through the 20th century.
We need to acknowledge that the housing system is shaped by a moral choice.
First, we need to recognise that the outcomes of the housing system are derived from moral choices. Our societies will always include people whose ability to earn is zero. This includes the young and people whose physical or mental capabilities are highly limited (something that most of us will face towards the end of our lives). When families are unable or unwilling to accommodate the basic housing needs of individuals in need, the way in which we respond reflects the moral values of the wider collective. The markets that exist to build and allocate housing have always been subject to and supplemented by society’s collective efforts to regulate and to invest. We have a moral imperative to ensure basic provision for all those a society chooses to include as its own.
Second, we need to shed light on a multitude of issues that require a public policy response linked to housing. Consider that the costs related to social care are primarily related to residential provision. The most common causes of hospital admissions among the elderly come as a result of inadequate homes. Responding to domestic abuse inherently involves housing decisions. Insecurity and overcrowding in housing are bad for mental health and educational outcomes. Access to education is a primary motivation for young families moving home, second only to the ability to access nearby employment, which is consistently found to be the most powerful factor in house prices. Housing issues often underlie staff recruitment challenges for businesses. The nature of commuter pressure on transport networks is the result of housing choices. Last but not least, housing is a powerful mechanism in perpetuating the long-term macroeconomic issues of wealth inequality and regional inequality.
Third — and perhaps the area where we need the loudest wake-up call — is understanding the interdependencies between how we house ourselves and how we keep money flowing through the economy. As the economy grows, new money is needed. This money is not simply printed and coined but generated through debt. The amount of money in the economy exceeds the amount of cash circulating. Banks hold deposits from savers, which are recycled in the form of loans, but deposits are not required to cover the value of loans made. What is essential to the money supply — and therefore to economic growth overall — is the everyday practice of making loans. A loan is a contract for repayment, and new money is ‘created’ when a loan is issued to a borrower. As economist John Kenneth Galbraith observed: “the process by which banks create money is so simple that the mind is repelled. When something so important is involved, a deeper mystery seems only decent.”
Banks offer lower interest rates in the form of secured loans, where borrowers legally commit a physical asset, with proven financial value, to be surrendered if they cannot make cash repayments. Since the value of the UK’s housing stock is close to £7 trillion, which is over three and a half times the value of the UK’s gross domestic product, the housing market and the creation of mortgages are fundamental to lending overall and therefore to money creation. According to the Bank of England, there is currently £81 billion in ‘notes and coins’ in circulation. Compare this with the £250 billion that financial institutions in the UK made in new residential loans to individuals in 2017, effectively representing the largest source of new money entering the UK monetary system.
There are many feedback loops between the housing market and the money supply in the economy, between financial markets that assess risk and set interest rates, and concerning businesses and consumer confidence to take loans and mortgages, to spend and invest. Ultimately, house prices are determined by the availability of money and the willingness to pay: deposits of existing cash, combined with banks and building societies, which create new money within mortgages. The ease of buying and selling homes is particularly affected by the presence of new homeowners (or investors) anchoring ‘chains’ of transactions where properties are exchanged. All transactions are made with an eye on expectations about future house prices. All these factors overwhelm the argument that housing affordability challenges are simply a case of matching supply with demand. For example, at the peak of its construction boom in 2006, Ireland was building 90,000 new homes a year (more than its demographic trends warranted). But most were in the wrong place and/or out of reach of those who needed affordable housing. The country is now facing the most severe housing crisis in its modern history.
So in creating a fairer housing system we need to acknowledge that it is shaped by a moral choice, relates to an asset class unparalleled in its links with our monetary system, and is of fundamental importance to our wider constellation of public services and policy. The path to such an awakening goes via language. We need to become more self-aware about the language we use and the extent to which this shapes how we think about the world, define entitlements and expectations, and conceive of challenges and solutions.
For example, we tend to talk about paying our mortgage, whereas banks and building societies call them repayments; the ‘cash’ having already been paid to the previous owner. Repossession is a haunting word for those struggling with repayments, but a mortgage lender applies to the court for a ‘possession order’ on a home. The lender is the ‘owner’ in so much as they have a contract allowing exclusive access to it in return for regular repayments of the money advanced.
When we talk about a ‘housing crisis’ we need to ask, for whom is it a crisis? In recent years, the term has become shorthand for the struggles of the young middle-classes to achieve the same home ownership trajectory as their parents. For existing homeowners, increasing unaffordability represents their own (untaxed) capital gain, an increasingly valuable asset for their retirement, wealth they want to share with their family and pass on upon death (with favourable tax liabilities). So the crisis means very different things to different generations, depending on the financial equity they hold in housing and the potential impact that house prices will have on this. Meanwhile, those who have been among society’s poorest for their whole lives still do not necessarily have their perennial housing crises recognised.
Perhaps the most peculiar language concerns the idea that there is a ‘property ladder’ that we all must get on at any cost. The desirability of ‘getting on the ladder’ is so widely felt that the concept itself has gone completely undefined, making it invincible from challenge. There are key assumptions upon which the dynamic operation of the ladder depends: that prices rise, that the ability to borrow in the future is maintained and enhanced, that households’ ability to repay debt increases over time because incomes increase, which in turn depends on wages rising, and individuals progressing through the wage hierarchy, over the decades that mortgages are repaid.
In the UK, it is far from clear whether the assumptions this is based on will hold. It is in the interest of the baby boomer generation that they do, since for a majority of that generation, pension, savings, spending and inheritance calculations are all based on maintaining or furthering growth in property wealth. As housing analyst Neal Hudson puts it: “The housing ladder only worked because of the unique economic conditions of the late 20th century. It’s now broken and unlikely to recover.”
In this context, we need policy that cuts through the misconceptions about housing to provide long-term security for all. Yet, at present, public money is used to support home ownership, which has come to dominate public spending on housing. This represents a political investment more than an economically productive one.
The government is directly lending money to first-time buyers to buy new homes, and directly giving cash to those saving for mortgage deposits. For millions on low incomes, the government pays housing benefit to help cover rents. Almost half of this expenditure ultimately benefits private landlords and the annual housing benefit bill now dwarfs the money allocated to building new social housing, for which government or housing charities retain a valuable asset and its revenue potential. Through the right-to-buy policy, the government deprives itself of the market value of the housing it already owns while giving a windfall discount to existing social housing tenants affluent enough to purchase their property. Meanwhile, according to the National Audit Office in 2017, local authorities have increased their spending on homelessness while simultaneously reducing spending on preventing it.
Policymakers and the electorate can only make informed choices if they have a better understanding of the dynamics and the interplay in the housing system. The government admits the market is broken, yet relies primarily on market solutions to fix it. The housing system is bigger than the housing market, it includes those for whom a market will never be able to provide, and includes the flows of resources outside of the market, such as inheritance of property wealth. Yet our political debate focuses on either making the market for home ownership accessible to those on the fringes (in reality, arresting the decline in home ownership over the last decade), or expanding government housebuilding to accommodate those on the fringes of accessing social housing (in reality, tackling the backlog of those on a waiting list for social housing).
The limitations of these approaches are self-evident. For young adults looking to live independently for the first time, housing choices in reality might typically include staying in a childhood bedroom, crashing on a friend’s sofa, or signing your first rental contract and playing Gumtree roulette with your social life. The high and rising levels of private renting that we are seeing among millennials are not inherently a policy problem to be solved. The crux of the issue is the near-universal insecurity, the prevalence of poor-quality dwellings and the general unaffordability of private renting.
The creeping crisis, emerging in coming decades, will be that our pension system — and our entire culture of saving during working life — is not institutionally designed or culturally comfortable with the notion of significant (and perhaps rising) housing costs during retirement. The average household renting privately in England spends 46% of their income on rent. How will we choose to support the housing needs of retiring renters? If those no longer able to work can no longer repay mortgages outstanding — which will be more common as mortgage terms are getting longer and mortgages are being originated later in life — how should decisions to downsize be made fairly, given potential contributions to be made to fund social care needs arising in later life? Will our politicians be prepared to offer clarity and conviction and the brave honesty needed about long-term policy choices?
Equalising housing wealth
Once we have all come clean on the reality of our situation — from individuals to government — what sort of policies would spread housing wealth more equally, tackle insecurity and improve affordability?
First, and perhaps most importantly, the policy must extend beyond housing: how and where we live is shaped by a range of other policies including inheritance and capital gains tax, the welfare and benefits regime, the regulations governing our environment and resource consumption, and the choices about new public transport investment, which affect land value in different locations.
We also need local solutions. We do not really have a national housing market; we have a system of local housing markets with differing characteristics, which share some common parameters defined nationally, such as the base interest rate. Yet we are still largely trying to tackle localised housing challenges with a national rather than devolved policy toolkit. A national target for housebuilding does not make a lot of sense if the areas where new homes are built are not those where demand is high and affordability is challenging. Relevant long-term shifts, such as changes in demographics, affect different places differently.
Second, we need to take a more expansive view of our planning system. Many other countries limit building heights and have created green belts around their cities, but the UK system defers discretion on granting permission to each and every planning application, rather than allowing basic development codes to be established at a local level. This risk of rejection is priced into commercially driven developments. Substantial and fundamental reform to the planning system is so littered with failed attempts that it disheartens each subsequent effort, but each time the size of the prize rescues planning reform from obscurity.
Third, we need policy that recognises that buildings and the land underneath them are very different. Because of its finite nature, land has unique qualities and characteristics as an economic asset and needs to be treated as such. Over a century ago, David Lloyd George’s People’s Budget proposed a 20% tax on the increase in value of land at the point land was sold, a measure championed by a young Winston Churchill. The budget was resisted by the House of Lords — among them the country’s largest landowners — until the proposed land tax was withdrawn.
Luckily, property law is at the very heart of what government has evolved to regulate. Many housing finance models that pursue greater equity decouple these two fundamental elements of a dwelling. Council taxes are calculated based on estimated 1991 property values; when they are revised there will be fundamental questions about fairness, inequality and the important differences between those who own land and those who lease the right to live on it.
Until then — as Jack Robson outlines elsewhere in this edition — we also need to learn from other nations and act entrepreneurially to make things better in the here and now, testing and experimenting, and involving citizens in informing and designing policy fit for the 21st century.
The salience of housing issues is today creating the momentum to consider systemic reform.
There is hope. The surging salience of housing issues is today creating the momentum to consider systemic reform. We need to consolidate this momentum, and direct it towards minimising the probability that housing risks become economic crises. To do this, we need to ease the dependencies between our housing system, our financial system and societal wealth inequality. We need to detach our political agenda from being hooked on house price growth and singular solutions. Enhanced supply of new homes is part of the answer, but not all of it; we need to change the market fundamentals.
The way in which we provide people with homes is too important for either the market or government to tackle alone. To this end, we need enterprise and civil society to master the innovations, and for government to provide the right law, policy and investment to achieve a well-housed society. As Churchill put it, in arguing for structural reforms 100 years ago, “It is not the individual I attack; it is the system.” The tools are in our hands to deliver a fairer housing system. A failure to do so risks deepening the fractures that divide our society.
Jonathan Schifferes is the RSA’s associate director of public services and communities; Atif Shafique is a senior researcher within the same team
This article first appeared in the RSA Journal — Issue 2 2018