We Need A New Definition of Affordable Housing

The definition of affordable housing, in terms of the requirement for builders to provide it, as part of any new development, is that its price should be 20% below the average price of houses in the area. That is clearly a ridiculous definition. On TV, last week, even Tory candidate for London Mayor, Zach Goldsmith, admitted that, in London, it means that someone on even double the average London wage, would not be able to buy such “affordable housing”, in the capital. The average house price in London, is now over half a million pounds, so that 20%, below that still means defining affordable as houses costing around £450,000. A new definition of affordable needs to be established, as a legal requirement for all new developments.

In the past, house prices remained fairly stable at around 3 times average wages. For most of the last century, house prices went nowhere. Between 1900 and 1960, the inflation adjusted price of houses rose by zero! During some years they rose, but in other years they fell, sometimes by as much as 20%. After 1950, UK house prices rose by less than 1% a year in real terms, and that was entirely consistent with the rise in average household incomes that occurred between 1950 and 1970. Yet, house prices in the last 30 or 40 years have rocketed, despite wages being relatively stagnant.

That mirrors the situation with stock markets, where during the period of post war boom, GDP grew far more rapidly than the rise in stock markets, whilst in the following period, when GDP grew more slowly, stock markets soared. Both have the same root cause, a huge expansion of credit, and the encouragement of workers to make up for their sluggish wage increases, by going into increasing levels of unsustainable household debt. That is most notable after 1987. After that period, UK household debt to income rose from around 80-100%, to 160%. We are back now at levels of household debt equal to those in 2007-8, just prior to the financial meltdown. The difference today is that global interest rates are rising, and there is nothing central banks can do about that.

The average rate of interest is determined by the interaction of the demand for and supply of capital, and for various reasons I have described before, that balance is shifting in the direction of the demand outstripping the supply. That view has also been expressed recently by David Solomon of Goldman Sachs, who talks about capital markets becoming tighter, with firms having to go back into capital markets to issue additional bonds, or shares to raise capital.

As interest rates rise that is going to create a much greater financial crisis than happened in 2008. Not only will UK households, with this huge amount of debt, suddenly find that their debt repayments have risen by massive amounts each month, but the process of capitalisation also means that many of the paper assets they have seen as constituting their wealth, will evaporate into thin air. That process of capitalisation, for example, will cause land and property prices to collapse. That will also affect the banks that rely on these paper assets as the basis of their own balance sheets, so that they will be faced with needing to call in and curtail huge amounts of their current lending, as their own balance sheets shrink.

Much of this, and the consequent effects on the real economy could have been avoided had the irrational rise in property prices being prevented, but all governments over the last thirty years have seen an advantage in facilitating the delusion of rising real wealth – which was really rising impoverishment through increased debt – and have then found that having created that delusion, they could not risk unpopularity by causing the bubble to burst. Now that has changed. More people now see rising house prices as a bad thing rather than a good thing, as the reality begins to sink in.

As part of restoring some measure of sanity, therefore, a start would be to introduce a more rational definition of “affordable housing”. I would suggest that it be that it is defined as being a house price that is no more than three times average income for the particular area. In a place like Stoke, for example, where average wages are closer to £15,000 a year, than the national average figure of £25,000, that would mean a price of around £45,000. In London, it would mean a price of more like £90,000. If builders cannot provide affordable housing, as part of any new development, at these prices, they should be required to provide, instead, rented properties.

But, its also necessary to ensure that this does not result in just a further reduction in the quality of property provided as “affordable”. Britain already has some of the worst housing in Europe, in terms of the average property size. That is compounded by current planning rules on the Green Belt etc., which squeeze additional properties into unsuitable locations, on brownfield sites, where no one wants to live. We should introduce something akin to the old Parker-Morris standards for housing.

But, in addition to this, local councils, should have a mandatory duty imposed upon them to provide, by one means or another, the amount of new dwellings required for their area, as set out in the local plan. If private developers cannot provide the required additional dwellings to buy or rent, then the local authority should have a required duty to build those houses themselves, and to acquire the land needed by compulsory purchase, in the same way that, in the 1960's, slum clearance was achieved by such compulsory purchase of existing dwellings.