The Tories and Housing

The Tories have said that resolving the housing crisis is their priority. Theresa May has said that she is making it her personal responsibility to end the housing crisis. But, its clear that as with every other area of policy, when it comes to housing the Tories simply do not have a clue.

A couple of weeks ago, Sajid Javed, in one of the Sunday morning politics programmes said that to resolve the housing crisis it was necessary to start with the initial cause of the crisis, which he said is the shortage of supply of houses. But, even assuming that the actual problem is a shortage of supply – which it isn't – this would not be the starting point in resolving the crisis. The starting point is asking the question why this shortage of supply exists. Unless you address that question, it is not possible to develop any kind of rational policy to address that shortage of supply. But, the real problem is not a shortage of supply, and if you address the question preceding that, of why the supply of houses is not larger, that becomes abundantly clear.  I pointed out some years ago, that, in fact, there is 50% more homes per head of population today than there was in the 1970's, and Oxford Economics have also recently demonstrated that the amount of new residential floorspace has continually exceeded the actual amount of new household formation over the last few decades.

The real problem is a shortage of housing at prices that people can afford, whether that is houses to buy or to rent. Unless you understand that starting point, it is impossible to develop any kind of rational programme, and you end up with policies such as “Right to Buy”, “Help to Buy”, “Buy to Let”, and now the abolition of Stamp Duty and so on, which simply inflate demand further whilst doing nothing to increase supply, and thereby make the crisis worse rather than better, along with the policies of continually extending Housing Benefit, which simply subsidises low paying employers, and high rent landlords, who see this subsidy go straight into their pockets.

For the Tories and other proponents of orthodox bourgeois economic theory, the fact that house prices have risen so much, and yet the supply of houses has not, is a conundrum. For the same reason they believe that an increased supply of houses must result in a fall in the market price of houses, so they believe that the huge rise in prices must bring forward an increase in house building, as builders seek to be able to sell houses at this much higher price. But, despite the fact that house prices have risen astronomically, it has not resulted in an increase in house building. On the contrary, the number of new houses being built has been at historically low levels during nearly all of the period when house prices have been soaring!

Unless you understand the reason for that its impossible to resolve the crisis itself. There are several reasons why the soaring price of houses has not brought forth higher levels of house building. Firstly, a large part of house building in the past came from the building of council houses. Britain has only ever approached levels of annual house building of more than 200,000 on a consistent basis, when it has been large numbers of council houses. Outside such periods, Britain has always struggled to build even 200,000 new houses a year. But, for the last thirty years, we had Council Houses sold off under Right to Buy, whilst councils were prevented from using money raised from sales to use for new building, and Councils have been prevented from borrowing in order to build the Council houses required.

More recently, even Housing Associations were forced to sell the homes they owned to tenants, and they have faced a similar problem of being able to use receipts, or to increase borrowing to finance further building. Indeed, if you are a Housing Association, why on Earth would you borrow money to build additional homes to rent, if the Government then forced you to have to sell off those homes, at a discount, and thereby to also lose the future rental income that you would have obtained from those homes?

But, even if councils and housing associations did not have these restrictions, they would still face the same problem that private builders face, in building homes to sell. The reason that the astronomical rise in house prices has not brought forth an explosion of private house building is quite simple. Builders only build houses to produce profits, and although the price oh houses has risen exponentially, builders have also faced a sharp rise in the cost of building new houses, because the price of land has been driven up exponentially too, as a result of the bubble in existing house prices. Because existing house prices are so astronomically high, the owners of building land know that the price of any houses built on their land, will also be astronomically high.

Its like if the existing price of wheat is astronomically high, the owner of a field suitable for growing wheat, but which is not currently being cultivated, will know that a farmer who wants to cultivate it, will sell the wheat at these current high prices. That means the landowner will be able to charge a high rent for the land, equal to the surplus profit the farmer would otherwise make, and if they sell the land to the farmer, the price they will charge for the land will be the capitalised rent. The capitalised rent is the amount of capital that would be required, at the current rate of interest, to produce the equivalent in interest, of the annual rent. That is another reason that building land prices have risen, because not only have existing house prices rocketed, pushing up the rental equivalent, but interest rates have sunk to historically low levels, pushing up capitalised values.

When a builder has taken into consideration these increased costs of buying land at these inflated prices, the profit they are left with does not provide them with any surplus profit, which then reduces any incentive they have to increase their production substantially. And the councils and housing associations are faced with a similar problem. For a council to build additional council houses, it must first acquire building land to do so. Without the ability to buy up agricultural land, at agricultural prices, within the Green Belt, or to compulsory purchase building land, at agricultural prices – which would be subject to a legal challenge by landowners in the courts – Councils would face having to pay exorbitant amounts to buy land, which would then feed through into their cost of building Council Houses, thereby limiting the quantity they can build, and also meaning they would have to charge correspondingly high rents for any such Council houses, so as to recover this cost.

The requirement to build on Brownfield sites is doubly a stupid policy, because such brownfield sites are invariably in urban areas, where the land prices are higher than for agricultural land. Secondly, those already living in these urban areas are the ones who most urgently require their living environment to be made healthier and more desirable, by having such brownfield land greened. Rather than building on these brownfield sites, local councils should be developing policies to reclaim them, as green open space for the benefit of the existing residents. They should be turned into “village greens”, and protected against any future development on them, as a more sensible means of creating not a constricting “Green Belt”, but of creating liberating green lungs. Further building on this brownfield land, only has the effect of further diminishing the environment of such urban areas, and of simultaneously pushing up further the price of building land within that area, by increasing the demand for it.

Simply building more houses, whether to buy or to rent, will not reduce house prices, or rents. Only if the issue of the massive bubble of existing house prices is tackled, and its effect on causing a huge inflation of land prices, will it be possible to build more houses at a cost that enables them to be sold at lower prices, and rented at lower rents.

That brings us to the question then of the huge bubble in house prices. Builders will not build large numbers of additional houses just because prices are high, if their profits are not correspondingly high, and their profits will not be correspondingly high, if land prices are high. But, land prices are high, because existing house prices are in a huge bubble, which along with the monopoly of land ownership, and further monopoly restrictions such as the Green Belt, means that landowners can charge high rents and land prices. But, the further issue here is the market as the housebuilders see it.

Modern capitalism does not generally produce chaotically in the way it did at the start of the 19^th century. As Engels put it, even towards the end of that century, the advent of the large companies and corporations, meant that that kind of planlessness of capitalism had ended. The large companies plan their production for long periods ahead, and they do so on the basis of an understanding of the potential for future demand for their goods and services. Go to any new housing development of one of the large builders, and you will find that it is almost impossible to buy a house that they have already built. To buy a new house on such a development, it is necessary to buy the house “off-plan” that is to buy the house off the builders plans for the development, only knowing what kind of house you are buying, and where on the site it is to be located. The builder then builds the houses, as and when they have already effectively received orders for them, from buyers, and has received the deposit, the mortgage has been granted and so on. Only towards the end of the development, where it is a sizeable development, will the builder have completed houses speculatively to sell, in order to be able to get off-site, and move to some other new large development. You can often then buy these houses at a discounted price, but you have to settle for what is available.

It is generally only the smaller builders who build speculatively on the whole of the site, and usually only on smaller developments, given the limitations of their smaller capitals on the size of development they can undertake. That is why it is usually these smaller builders who suffer whenever the market changes suddenly, and they find they cannot sell the houses they have built at prices that recoup their costs, and so go bust. The larger builders having only built what they have received payment for are able to cover themselves, and simply keep the remaining land on the site in their land bank, until such time as the market recovers, or the government comes along with some new gimmick to help them start selling houses again.

But, it can also be seen here why the builders also restrict the quantity of houses they sell, irrespective of the extent to which house prices might have risen. Any capital, is only interested in the profit it can make. That depends on the costs of its production, and the price it can obtain for that production. This latter depends on the extent of monetary demand for that production. But monetary demand consists of two elements. Monetary demand of say £1 million might be comprised of 1 person willing to pay £1 million, or it might alternatively comprise 1 million people each prepared to pay £1, or a multitude of combinations of these two elements. For a builder or any other capitalist producer this is significant.

If I am a builder, and I can buy land, and build a house that costs say £800,000, I may be prepared to go ahead and advance my capital to build a house, if I know that there is a person out there with £1 million prepared to buy the house at that price. On that basis, I can make £200,000 profit. If no such person exists, it does me no good whatsoever to know that there are 1 million people each prepared to pay £1 for such a house, because they are not going to buy it form collectively! Moreover, if I build two houses, although the first buyer might have been prepared to pay £1 million for one house, they will have no reason to pay anything for a second house, which has no utility for them. But, by building this second superfluous house, I also thereby reduce the amount that the original buyer is prepared to pay for it. Knowing that it is on the market, as well, the buyer with £1 million might, if they are a speculator, agree to buy both houses now at £500,000 each. The builder will have been screwed either way. They will have expended £1.6 million of capital, and only able to get back £1 million. The more houses they build, under such conditions, the more capital they will advance, but with no potential for being able to sell the resultant houses at prices that recover the capital consumed in their production. It will be a crisis of overproduction, leading to the builder going bust, which is why the big builders do not, wherever possible, build more houses than they know they can sell at prices which enable them to make the average profit.

If we look at the real problem today, it is that although three may be lots of people who NEED houses, the number of people who can provide a DEMAND for houses, i.e. who can back up their desire for a house with the money also to purchase it, at current prices is much lower. Yet, the speculative price of houses is driven up, because there is a relatively small number of people who whilst not actually needing houses, have lots of money to buy them, and the more the price of existing houses is driven up, the more that drive to demand these houses, simply as a means of making a speculative gain, thereby drives up the price of existing houses, which then drives up the price of building land, which then pushes up the cost of building new houses built on that land, which means that builders have to charge higher prices for the houses they build, in order to make the average profit, which means the number of people who can afford to buy those houses is reduced, which means that builders cut back the quantity of new houses they build to only that number that they can sell at these inflated prices.

The starting point for resolving the housing crisis is then not the naïve idea that it is simply a matter of increasing supply. Actually, having listened to Sarah Beeny discussing this in recent weeks, I have been impressed with the extent to which she has actually understood that problem. She has quite rightly commented that any new housing supply in, say, London, will not act to bring down house prices, there, because this factor of land cost, will simply mean that the builders will seek to recoup that cost, plus their profit, so that any new supply will simply appear on the market at existing inflated prices. In fact, a look at the amount of new building in London demonstrates precisely that. London has had more building than elsewhere in the country, but it has done nothing to address the housing crisis, because the properties that have been built have usually been too expensive for the people who need housing to either buy or rent. Large amounts of the building in London, has simply been done for purposes of speculation. A small number of very rich people with lots of money, have been able to buy up, and even finance the building of properties, which then lie empty, because no one can afford to buy or rent them, and the speculators who have built them, are not bothered about that, because they have only built them with the anticipation that next year, the price of the property will be 20% higher than it is today, just like speculators buying a rare bottle of wine they never intend to drink, or who buy a painting they then lock away unseen in a bank vault.

The key to resolving the housing crisis is first to burst the speculative housing bubble. That requires several things. Firstly, it means scrapping all of the gimmicks that successive governments have introduced to try to prop up flagging demand for this overpriced housing. It means reversing the scrapping of stamp duty, for example; ending “Help to Buy”; removing all of the advantages for “Buy To Let” landlords; and so on. Secondly, it means ending the manipulation of government bond prices, and the inordinately lower official rates of interest used by the Bank of England, to encourage speculation in assets, whilst the cost of borrowing for the majority of businesses and consumers are driven much higher, where such loans can be obtained. It means reintroducing the kinds of controls on lending for property that existed in the past, where potential buyers had to save up a 10% deposit, as a minimum, and where lending for mortgages was restricted to 2.5 times household income.

A rise in interest rates would reduce the capitalised values of all assets including land. Restricting the excessive credit pumped into circulation to finance house purchase would also reduce demand for housing, and thereby lead to a fall in house prices. A fall in house prices, would further reduce the price of building land, which would reduce the cost of building new houses, whether of builders building houses to sell, or councils building houses to rent as council houses. That would reduce the price of new houses to buy or rent, which would then act to reduce existing house prices further with a further downward effect on land prices. As speculators in property saw house prices crashing, they would no longer see houses as simply a speculative asset to hold on to, whether it was used or not. They would rush to sell, driving property prices down sharply again. Landowners, sitting on land speculatively, would similarly see it as a fast depreciating asset, and would rush to throw it on to the market, for new building land, pushing down building land prices, and thereby reducing the costs of builders in producing new houses, which would reduce new house prices to levels where additional buyers would again be able to buy them, and so whereby builders would be able to produce houses profitably in much larger quantities.

But, the other means of resolving the problem more immediately is for councils to be able to utilise agricultural land, at agricultural land prices, to build new council house developments. The Green Belt is a thoroughly ridiculous idea. It is supposed to prevent urban sprawl, and to protect the rural environment. It only prevents urban sprawl by making life within already over built urban areas even more over built, and unpleasant places to live, whereas what those areas require is some of thee existing development along with brownfield sites turning into protected urban green areas. The Green Belt simply acts to protect a pleasant environment for the largely Tory voting elite able to live in desirable rural areas, and the landed aristocracy whose vast estates continue to form the majority of the British mainland.

Residential property makes up just 1% of the land on the British mainland. That is just half of the land that is taken up by golf courses! To argue that the Green Belt cannot be encroached up to build more houses, when even doubling the amount of residential property would amount to taking up no more than is currently occupied by golf courses is nonsensical. Of course, we should oppose urban sprawl, but the means to do that is to utilise the Green Belt, and vast areas of rural land, to build well planned, new towns and cities. In the US, Canada, Australia and other more recently settled countries, towns and cities could be built from the start on a more rational basis, whereas in Britain, towns and cities developed in a haphazard manner.

Some years ago, as Vice-Chair of the Staffordshire Health Scrutiny Committee, I looked at transport in the context of existing hospital facilities. A large problem exists where such large institutions are developed within existing urban developments. Where possible, it is much better to be able to develop new hospitals etc. on new sites, away from the problems that exist with built up urban town centres, so that adequate parking, public transport, and roads can be provided. A similar thing can be seen with the development of out of town shopping centres, which can be developed on the basis of adequate land, and appropriate transport routes. On a larger scale, it is much harder, and much more costly to try to deal with the problems of development in existing conurbations, than to be able to start on a clean page, and to plan out and develop a new town on a rational basis, as was done with the development of new towns such as Milton Keynes, for example.

If the housing crisis is to be addressed, it will require huge amounts of public investment in creating brand new towns on such greenfield and green belt land. We should avoid the problems of the anarchic development of urban areas in the past, by planning in advance to provide adequate amounts of green space within these urban areas, to limit the amount of development that can occur within a given land area, and providing adequate greenspace between towns. It will require public investment in the provision of adequate public services in those areas, and of 21^st century communications.

The Tories have no concept of any such solutions. On the contrary, their solutions continue to make the crisis worse rather than better.