Ken Gibb's 'Brick by Brick'

Housing, academia, the economy, culture and public policy

Category: housing market

Land, Tax & Housing Supply in Scotland


The Scottish Government has its five-year target of 50,000 new social and affordable homes and is exploring ways that the sector might overcome bottlenecks and impediments to the required levels of new build. Not surprisingly, there has been a focus on the supply delivery system, planning, the development industry and the land market. Scotland has recently had an independent review of the planning system chaired by Crawford Beveridge and earlier inquiries by RICS Scotland  and by the Shelter Commission on Housing and Wellbeing. Now, as a sidebar to the recent proposed reforms of the council tax, it has been suggested that the Scottish Government would consult on the efficacy of a tax on vacant and derelict land, so as to incentivise the supply of housing land from those relatively untapped sources. This follows on the recent introduction of a similar levy on such land in Ireland.

This was the context for a roundtable discussion I attended Tuesday morning about the pros and cons of such a tax chaired by the minister and populated by stakeholders across the housing supply delivery system, professionals, policy, academics and practice. It followed the Chatham House Rule so I will simply reflect on themes expressed around the table.

The meeting was structured around three key questions: why can’t we deliver more housing supply; would a tax on vacant & derelict land help; what other policy instruments might help? There was a wide range of views on show both in terms of diagnosis and what needs to be done.

Regarding what prevents housing land supply coming forward more speedily, there was (unresolved) disagreement over whether or not speculative land banking played a part. Other culprits were identified as high levels of risk, infrastructure constraints, construction capacity questions, the reduction in SME builders since the crisis, the cost of decontamination many derelict sites relative to the funds available, and lack of access to sufficient affordable land – amongst several other issues. Underlying much of what was said was the continuing large discrepancy between the volume of housing land with consents in the housing land supply figures and the much lower number of what actually gets completed. How do we rectify this and what quantitative significance does vacant and derelict land play as part of this story?

Contemplating a tax on vacant and derelict land means having clear definitions of what it means to be derelict or vacant and targeting the tax appropriately. That is not easy. Assuming that it can be done the tax would have to overcome a series of standard hurdles: the tax should be cheap to set up and run, it should be simple, transparent and be credible as a fair burden. It should also minimise wider distortions or unintended consequences.  I argued that if these criteria could be met through careful design, the tax should also possess local discretion so that the nuances of locally heterogeneous markets could to an extent be addressed. Overall, a wide range of views were expressed about the feasibility and desirability of such a tax.

In the course of the discussion a number of important wider points were made. First, there is of course a major issue about dereliction in our town centres and working on creating residential demand and solutions for these properties could play an important role in the future of many urban areas across Scotland. Second, there was a sense in some quarters that derelict and vacant land was a part of the problem of land supply for housing but it should not be over-cooked against the wider questions of how we best deliver on new housing targets. One view was that there was essentially nothing that far wrong with the planning systems aims and goals but there was a too common failure to actually deliver the housing delivery public policy outcomes we desire – and we need a range of mechanisms to make that happen.

How might this be done? First, there was discussion of the prospect that planning permission might be taken away on a site if it is not used. This is often discussed but of course there are dangers here – the site may nonetheless be a viable site and its development will be delayed and, moreover, by taking consent away, the effective housing land supply is actually being reduced. Second, there was discussion of national and regional land development agencies that could overcome market failures by delivering serviced affordable land for housing. To that end I would also support local revolving land funds that could do the same once they are pump-primed with initial funding. Third, it was suggested that the state can borrow over much longer periods than the private sector and should do more to exploit this by playing a larger role as an investor in infrastructure versus the relatively short run requirements of market sector developers and that, furthermore, there was an appetite for this long term state investment debt from pension funds.

Finally, there was debate about whether the local state has the capacity and even the confidence to use its existing powers, notably CPO as a way of braking log jams, assembling land and moving sites forward. Several speakers stressed the opportunity to use compulsory sales of land which has the added advantage that it is far cheaper to do in terms of transaction costs than CPOs from the point of view of local government.

Plenty of those present brought specific experienced examples to the table to make their arguments. Only one academic brought detailed research evidence (it was not me). One takeaway point for me from the debate in public policymaking terms, therefore, was that the Scottish Government still has an exercise ahead of it to collect different forms of rigorous evidence as well as this distillation of key stakeholder views – before decisions are taken about the direction of, and specific instruments for, a policy aimed at successfully expanding housing land supply and completions.




What do we know about the demand for private renting?

Regular readers will know that I have previously argued that we know surprisingly little about the UK rental market, despite the magnitude of growth in the sector in recent years. Evidence is hard to come by because of the disparate diffuse nature of the sector, which is really a series of well-defined demand segments. But this does not stop many people writing about the sector as if it was homogenous, simple to understand, monitor, evidence and, consequently, intervene in to moderate excesses.

Unfortunately, this over-generalisation has extended to the former Chancellor of the Exchequer who introduced tax changes that will reduce returns and increase borrowing and transactions costs (but without any proper analysis of the impact of these changes). But the sector is not simply an investor question – it is also about who lives in the sector and their aspirations and experiences; and it is all the more important because at the margin it is the sector where the action is because of credit constraints on entering owner occupation and, for others, because of the insufficient level of affordable housing supply of social housing.

It is against this backdrop that a couple of weeks ago the Bank of England’s blog site Bank Underground issued an interesting paper on the drivers of the demand for private renting by Mariana Gimpeliewicz and Tom Stratton. In what follows I will summarise their paper and its findings and then reflect a little on what they say.

Noting the observed growth in the share of total dwellings privately rented since 2002 and the growth since 2008 of buy to let mortgages (BTL) rising at more than 6% per annum (a subset of all private renting), the authors argued that it made sense to try to understand the growth in PRS demand, what its main components are and then divide the analysis between pre-crisis and post-crisis and also make some projections about future demand levels in the sector. The authors note that BTL loans explained about 70% of PRS expansion before the crisis but that tighter underwriting may explain why BTL only supported about a third of the growth after the crisis (most of which came from ‘cash purchasers’).

The main drivers of demand for the PRS are (1) demographic sub-groups i.e. students, in-migrants and younger people, who all have a higher propensity to rent privately; (2) where the provision of social housing falls, households will be funneled to the rental market; and, (3) potential first time buyers who are credit-constrained or face affordability shortcomings will be obliged to either rent or live with parents. In this study, the lack of affordability data means the focus instead under (3) is on credit conditions.

The authors found that pre-crisis, net inward migration was the largest contributor of PRS demand ie about a quarter of all sector growth (2002-07). Additional students helped explain another 12.5% of growth, with slightly less growth due to the reduction in social housing available. Their analysis explained about half of the growth in the sector n this period. Between 2008-13 (the credit crunch period), migration remained an important factor, with a declining role for social housing and student growth. Much more important was tighter credit conditions for first time buyers ie the withdrawal of high LTV loans – they found that this accounted for two thirds of the growth in the private rented sector in this period. Overall, their drivers account for 82% of the growth in the sector and all of the BTL segment’s growth. The authors recognise that affordability may be driving the unexplained growth – in other words that by driving up house prices new BTL supply may be making owning less affordable and hence more are directed towards the rental market (but this is supposition).

Looking ahead, the authors expect demand to grow to 2019 but much less slowly than in recent years. This amounts to as much as a million additional properties in the PRS in this period. The key to how this turns out will turn on the extent to which frustrated home-owners actually manage to purchase their first home. Buy to let growth is forecast to slow.

This paper is on the one hand an interesting thought experiment that allows us to see how the different segments are growing at varying rates and have done in the recent past. It shows also that buy to let is far from all of the story. One just has to look around our University cities, for instance, to see the growth in bespoke purpose-built student accommodation. The split between pre and post crisis is also intrinsically sensible and a useful exercise.

However, despite the value of the disaggregation of the sector, the use of different data and its creative manipulation, it is worth noting that there is not much underlying economics in the construction of these different numbers. So, relative rents and housing costs and income play no direct role in coming up with these numbers. Instead, a series of generally reasonable assumptions, extrapolations and extraneous propensities are adopted. This is reasonable in the absence of the economic data of the right kind but we should be cautious.

We need more work more on these sub-sectors – what are the economic drivers in different segments; how is individual tenure choice governed by things like relative prices, credit availability, income, down-payment constraints and household variables? These models may well fluctuate over the credit and wider business cycle but do they also vary across space in different regional labour markets? What about the industrial economics or theory of the firm of different kinds of landlords – what are their motivations and how responsive are decision makers to changes in financial and economic variables (this latter question is vital to understanding the impact of policy interventions?


Owning Housing in the UK: Snakes and Ladders or just Snakes?

One of my favourite ‘angry’ songs from the first Tom Robinson Band album (Power in the Darkness) was ‘I’m Alright, Jack’. The song always conveyed to me the sense of ‘pulling up the ladder’. I was reminded of this reading the new report by the Resolution Foundation: ‘Living Standards 2016‘. In the report they argue that the UK housing ladder has been ‘withdrawn’.

The Resolution Foundation argues that only now are living standards returning to pre-crisis levels. The study focuses on the experience and position of low to middle income working age households. They stress the cumulative impact of long term wage stagnation only recently recovering though ‘flattered’ by low inflation. FRS household survey data rolled forward to 2015 suggests that mean household incomes remain 1.6% below their 2009 levels though they are rising relative to recent years (median income has been doing a little better). Household type (pensioners have done much better since 2002 than working age households), tenure (though with a mortgage facing very low interest rates have done much better than those renting) and place (London is the second best region in terms of household income growth before housing costs but at the bottom of the pile after housing costs).

For the Resolution Foundation these points indicate strongly the central role of housing in affecting incomes and allied to the intergenerational differences in outcomes, helps explain the ‘drastic changes’ to the levels and rate of home ownership. They point out that 1/3 of home owners are aged over 64 (compared with a quarter in 2000) and 16-34 year olds account for just 10% of owners compared to 19% in 1998. They acknowledge that the trend was downward pre-dating the economic crisis but stress that it is among low to middle income households that the reversal has been greatest. They predict that in comparison to 2000 when around half of such households aged under 35 owned their home, today it is more like a quarter and will be just 10% in 2025 if trends continue and only 5% in London. The authors argue for policies to successfully implement the national living wage, reverse the ‘most punitive’ aspects of welfare reform and pursue a sustained and enlarged housebuilding programme.

These figures are important facts that we should be aware of. I would make a couple of additional comments. First, we stressed in the 1980s and 1990s that some national policies have important regional implications, such as the spatial impacts of mortgage interest tax relief. Today, the same can be said about the tightened regulation of the mortgage market since it is deposits that play such an important role rendering home ownership inaccessible – and that has huge spatial consequences particularly for overheated housing markets. Ability to meet such deposits remains arbitrary and increasingly a function of previous generations’ success in ‘winning’ the housing market game and recycling the proceeds to their children or grandchildren. This it seems to me is where a fundamental constraint on home ownership bites and where policy needs to be more innovative and creative (as we will continue to need a more regulated mortgage market compared to a decade ago).

Second, I return to that question about millennials and their changing attitude to housing and the greater insecurity of job tenure in the labour market, to renting in particular, and issues of location, and life-work balance. We need to understand housing demand, tenure aspirations, choices by households and the limits to changing these through policy interventions much better than we do. Aspirations studies are important in this but we do critically need a better understanding of aspirations modified by constraints and actual or likely economic choices. As I have argued before my sense is that the rental market is highly segmented and differentiated but that for a growing number of younger households who do not know anything else other than the parental home – it is is increasingly normal and often quite satisfactory as a housing outcome. It is clearly less well suited for other groups like families but if anything policy work needs to focus on lengthening tenancies and not by simply seeking to ‘solve’ home ownership without tackling the down payment issue.

Three (tax) strikes and you are out 

A relatively little-mentioned aspect of this week’s budget was the continuation of the fiscal assault on buy to let landlords. As we know, the rate of capital gains tax has been cut but the private landlord has been exempted from this effective tax subsidy. The rate of CGT remains at the old higher rate for them. While this is only a relative disadvantage compared to other forms of assets, it is a continuation of a process whereby the Treasury has accumulated fiscal penalties on the sector over the last year or so (reducing tax relief to the basic rate for interest on borrowing and also the 3% hike on all rates of stamp duty quickly replicated in Scotland).

The rationale from the UK Government is two-fold: they want to pursue a tenure-based housing policy that promotes the growth in home ownership and are of course pursuing a range of more or less credible policy proposals to do just that. Second, however, they are justifying this approach insofar as it means reducing the incentives to invest in private renting (or stay in the sector), because the Bank of England published its view that BTL investment may be pricing out home owners and creating bubble like inflation in the housing market (that needs to be moderated).

The logic of this argument is I think pretty ropey. It is one thing to say that rental investors are bidding up the properties they purchase (they obviously are very active and taking a large chunk of new lending and yes may be pushing prices up a bit); but it does not follow that by choking off the return to such investment via blunt fiscal interventions will (a) deflate any such bubble (whether or not it is a real issue consistently or largely outside of the Metropole) or (b) that this will in the short to medium run actually make things better in terms of the supply of housing. Let’s unpack the argument a bit.


Clearly, private renting and owner-occupied segments of the housing market are interdependent – they are a more or less functioning system where change in one affects the other. In recent years, largely though not wholly as a result of the non-affordability of home ownership and linked  long term supply shortages, demand has grown and supply has responded on the rental market to accommodate unfulfilled home ownership demand and, to an extent, meet new demands independent of this frustrated non-owning segment. Intervening through fiscal levers to make the rental sector less attractive may well reduce new investment and stimulate disinvestment – slowing the growth and even reducing the sector’s actual size. But there are least three problems that arise in this system where I think the Treasury is not thinking it all through.

First, it will take a long time for any downward pressures on prices caused by a landlord or investor exit to impact on house prices to the extent that they make a material difference to potential first time buyers (and it is questionable if this would ever be the case in some parts of the U.K.)..

Second, the PRS is not the only force acting on house prices – there remains the chronic weakness of new supply to deliver and the myriad host of new announcements and policies supposed to unlock housing supply, as well as of course other demand side policies like Help to Buy.  Where is the evidence that this strategy adds up or that BTL is the critical driver of prices?

Third, in the (potentially lengthy) intervening period while we wait optimistically for this supply renaissance to deliver large numbers annually of a range of owner-occupied supply to locations where there is demand and a good proportion of it is accessible to potential purchasers – just where are the growing number of households going to be accommodated? Will a shrinking rental market simply not reduce the options for people to rent and bid up market rents?  Surely, this continuing long term problem in the home ownership sector is precisely why we need a well-functioning, better regulated (e.g. longer length of tenancy) and well policed rental market? Actively trying to make it less competitive and less attractive to investors is simply wrong-headed.

In Defence of Buy to Let?

A few months ago I was speaking at a Scottish housing policy conference and I struggled to articulate a point about UK government policy on private renting. The essence of the idea was to question how the initial unfavourable tax changes to the private renting sector proposed by HM Treasury in the 2015 summer budget and then reinforced in the Autumn Statement actually helped deliver more housing supply and expansion in home ownership.

Mark Stephens recently pointed me to the February 2016 report by the House of Commons Treasury Committee on the Spending Review and Autumn Statement 2015 [1]. The report contains a chapter on housing, which has much to recommend it. Here, I want to focus just on what they say about Buy to Let.

The broader argument is contextualised by a belief stated by OBR that the private rented sector is expected to continue to grow, in part because of continuing affordability problems shutting young would-be purchasers out of home ownership. A critical question therefore is whether sufficient rental housing opportunities that are affordable exist for these and other households unable or unwilling to own. 

The Committee also stresses support for the idea promoted by the Bank of England’s Financial Policy Committee that they should have the power over direction of the BTL sector. The FPC note that in the year to September 2015, BTL lending grow by 10% compared to just 0.4% for owner-occupier lending. The worry is that BTL lending could threaten or risk wider financial stability. However, for reasons that the Treasury Committee terms ‘inexplicable’, the Government’s continues to delay granting this power of direction. Moreover, the Treasury Committee, rightly, also wants more detail on what the power of direction over BTL leading would mean, what tools would be used to achieve impact and how would the effects of such intervention be analysed.

The point of course is that there is a world of difference between promoting the case for greater financial scrutiny by the independent Bank of England and its Financial Policy Committee, as compared to using Bank concerns about BTL to warrant two examples of crude tax measures aimed at curtailing BTL investment. So, my concern is first that these are the wrong measures and have been introduced prior to realising the more sensitive and flexible regulatory role potentially to be played by the Bank. Second, there are grounds to argue that these are poorly specified policies in terms of what they are set out to do.

The decision to reduce mortgage tax relief to the basic rate for BTL landlords, to be introduced over 4 years from 2017 is justified by the HM Treasury analysis on the basis that the taxation of private renting is lighter than home ownership. As Paul Johnson of the IFS said in evidence: ‘this line of argument is plain wrong’ (section 101). Private landlords pay more in tax and in addition allowances for wear and tear depreciation (worth 10% of rents before tax) have also been removed.

Second, the decision to add a surcharge to all rates of stamp duty (repeated in Scotland’s land and building transactions tax) in the Autumn Statement was criticised by those giving evidence to the committee in terms of further increasing the tax disadvantage confronting private landlords and doing so via a ‘bad tax’ i.e. one on transactions which reduces mobility and will inevitably be passed on to tenants in the form of higher rents – reducing affordability. Peter Spencer from York University also made the point that the delayed implementation of this announcement, like in 1988 when double MIRAS was abolished several months after the announcement, would lead to a rush by investors to complete sales before the surcharge came into effect, followed by a dearth of sales thereafter (Section 111).

The point is that you do not need to be an opponent of bad private renting to see that these kinds of poorly constructed policies damage the housing system as a whole, reduce affordability and do little if anything to expand housing supply. We need a larger scale quality private renting sector if we accept the fundamental difficulties of developing a more balanced housing system. If in our hearts, we do not think that home ownership is going to be rendered much more affordable any time soon, there needs to be a sensible rental market alternative. It should be monitored and regulated as suggested by the Treasury Committee through the FPC (subject to the caveats raised by them), and we need of course need proper quality control and standards enforcements, But, it seems to me, the Chancellor’s policies as presently constituted, simply do not help.

1. House of Commons Treasury Committee, 6th report 2015-16, February 2016 Spending Review and Autumn Statement 2015. HC 638.

Rethinking Rent Indices


Private renting in the UK has been the primary beneficiary of the home ownership affordability crisis that predates the financial problems that occurred after 2007. The Buy to Let model allowed small landlords to grow quickly and the BTL formula responded well in the aftermath of the housing market downturn. Private renting has grown strongly from 8.7% in 1991 to 17.8% in 2012 (GB).

However, the sector has not been short of critics. Bad practice in some quarters had led to call for stronger regulation alongside growing interest in establishing longer more secure tenancies. This is now happening in Scotland through legislation currently at Bill stage. The Bill also includes limited controls on rent increase after a tenant and landlord agree the initial rent, provided the local area is deemed to be high pressure. At the same time, and perhaps linked to the belief coming out of the Bank of England that there may be a bubble in the Buy to Let sector, the Chancellor has been explicitly moving against the Buy to Let sector. First of all, he removed higher levels of tax relief on mortgage interest payments and then, second, in the recent Spending Review, he announced adding 3% to all levels of Stamp Duty Land Tax on second homes and rental investment properties.

So, there is a lot of policy action currently concerning the rental market. In this light it is striking how impoverished our evidence base remains on the rental market. A long standing view among researchers is that the sector is highly regionally varied, it is made up of quite distinct segments and sub-markets; it has problematic aspects undoubtedly but it also has areas that appear to be working well. We know relatively little about the behavioural impulses and motivations of the large number of small scale (often recent) landlords who dominate the sector. At the same time, we assume that most tenants are, in Peter Kemp’s nice phrase, conscripts rather than volunteers i.e. it is a constrained choice because of a lack of affordable alternative tenures especially home ownership that puts people in private renting, rather than a direct preference to rent. But is that really true and is it still as true as say ten years ago?

All of this heterogeneity is not reflected in much of the policy discourse about the sector. One area of evidence that is remarkably absent is good consistent data on rents. ONS have an experimental rent index, which suggests Scottish rents have risen 2.1% in the year to June 2015 and 2.5% in the UK. There was a good index developed in Northern Ireland  and there are a few other significant commercial data providers. However, compared to the high quality house price indices available there is a serious lack of consistent local market transparency, despite the small number of  honourable exceptions noted.

This is all the more important because, for one thing, the local housing allowance system relies on robust measures of the distribution of private rents by size across so-called broad rental market areas (something that assumes that these are in all places well-defined unitary market areas).

Why am I writing this just now? The main reason is that, and given this context, I saw today an interesting article in the new issue of the Review of Economics and Statistics by Brent Ambrose, Edward Coulson and Jiro Yoshida (‘The Repeat Rent Index’, Volume 97 (5) pp. 939-50). In an American context they point to the lack of data on housing flows (as opposed to the stock prices transacted as assets for home ownership and investment).

Interestingly, the authors seek to construct a repeat rent index modelled on the famous repeat sales index developed by Case and Shiller and now widely adopted, particularly in America. The essence of the idea is to link sales or, in this case, new leases, when the same properties come back on the market. One can measure price/rent change on the same property directly, as, if suitably controlled, you have the same broad quality of property and hence can overcome quality variation problems that bedevil house price data. There are well known problems in the repeat sales index. Bias in the type of properties that trade more frequently e.g. starter homes and also heterogeneity in terms of the time gap between two sales points for different properties – but this is arguably  different and less serious in the rental market. Based on national rent contract data held by a major data provider, the authors worked with observations  from 1998-2010 involving 1.4 million leases. Analysis was then conducted on cleaned and filtered data on metropolitan housing markets and the research also included robustness checks and careful supplementary empirical analysis.

The actual results are less important in a sense than the  filling of a significant  evidence gap – providing robust rental data for American cities to a level that simply did not exist before. The authors did find considerable spatial variation across the cities and over time. While this is new research, and by no means the final word, it is an indication of what is possible.

While repeat sales or rent models are not without their problems, it does seem to me that with sufficient observations, some of the constant quality assumptions that are important for sales indices are arguably less problematic for rental market housing. This is in itself a reason to seriously consider such indices as a useful way of adding consistency, transparency and policy relevant knowledge about how our rental markets actually behave.



A Housing Research Legacy: Remembering Alan Holmans

I was in London today at an event put on at the LSE in honour of the life and work of Alan Holmans. Alan had a long and valuable career in housing first as a civil servant and then as a researcher mainly at Cambridge’s Centre for Housing and Planning Policy. Alan was originally an academic economist and lectured at Glasgow but he really made his mark in the Government Economic Service because of his interests in statistics, historic data time series, housing needs and demand research and especially the role of demography in supporting forecasts and projections. Alan was also a stalwart of the Housing Studies Association and was author or co-author of innumerable papers, reports and other research publications.

The event today was ably organised by Christine Whitehead and featured many colleagues who had worked with or knew him, several for more than three decades. There were quite a few stories and anecdotes but, as is often the case with these sorts of events, there was actually a lot substantively to get your teeth into from the many and varied contributions by speakers and from the floor.

More than anything Alan was an enthusiast and advocate of robust evidence supporting the development of policy, be it a local or regional needs or demand study or making sense of land requirements for new housebuilding to meet demand. Some in the room lamented the shift away in recent years from evidence and analysis in policy development. But Alan went further arguing that in some cases the evidence simply took you so far and then the politicians had to make choices.

A case in point is the handling of backlog or existing housing need. Should a needs assessment assume that policy intervention will attempt to ‘clear’ it in three, five or even ten years? At one level this is a resource or commitment question but the choice has a massive effect on the numbers. Recently, the new national affordable need estimates in Scotland chose five years – twice the implied commitment and spend than the ten years often used in local studies. The key thing is to be upfront about the judgement made and equally explicit about your assumptions.

At the heart of much of the debate this afternoon was the old controversy between economics and demography. Which is more important to understanding the housing market? Of course, it is really a false argument: both are important and matter and they are undeniably connected. Some of the most interesting points made concerned the economic elasticities that impact on household formation decisions I.e. Non-affordability may well reduce household growth below more unconstrained projections, just as jobs and relative wages impact on net migration. At the same time, understandable scepticism about economic forecasting can also be a sensible attitude with which to approach long range demographic projections. Alan was comparatively rare, as Glen Bramley pointed out, because he was an economist interested specifically in demography.

A recurring theme was the importance of uncertainty both for the researcher as an undeniable feature of the contemporary housing market but also for thinking about demographic trends e.g. the effects of ageing on the market, let alone the effects of the blizzard of often incoherent housing policies coming from Whitehall. To be clear, people were not talking about quantifiable risks but a series of unknown parameters and unknowable futures that can impact in quite different ways on the housing system. This was more Keynesian uncertainty than expected utility calculation. My colleague Geoff Meen warmed to this theme noting that market volatility made it hard to predict house prices in the short run of say a year hence, let alone contemplate the complexities of long term forecasting for housing planning purposes in the face of multiple uncertainties.

Several speakers noted the historical analysis conducted by Alan which chimed with a number of people in the room. Geoff argued that a longer view suggests that affordability can’t keep getting worse – at some point there will be a correction, a reversion to the mean, but this may not be a pleasant experience! At the same time, Alan’s historical housing supply data suggested that there is no long term trend in supply so making the kind of step change required i.e. sustaining 200,000 to even 300,000 completions, does seem fanciful. Geoff is leading a book (that I am also involved with) which explicitly ties historical urban development to housing economics today. It will be published in the new year.

Alan was fondly recalled by all who attended today. There was also recognition of the significance of the research he did, the rigour with which he did his work and the need for analysts and Governments to carry on the work and the spirit it was done in. In a way, this is (and should be) a continuing challenge for future housing research, research commissioners and the users of that research.

Housing the Lords

The House of Lords Select Committee on Economic Affairs yesterday announced that it is undertaking an inquiry into the economics of the UK housing market. The Chair, Lord Hollick, is quoted as saying that the reason for the inquiry stems for the fact that ‘there are serious issues with the UK housing market…young people in particular are struggling with the cost of housing, whether they are looking to buy or rent. There is an affordability crisis in housing.’

The Committee appears to have a refreshing approach to housing policy. The inquiry is concerned both with the supply and affordability of UK housing across all tenures and seeks to assess the effectiveness of government policies on the demand and supply of reasonably priced housing across the UK. 

Lord Hollick also says: ‘the time is right for a thorough evidence-based assessment of the economics of the housing market…is there too much emphasis on owning your own home, should we be focusing efforts on ensuring adequate affordable housing is available for rent?

The more detailed prospectus of questions in the call for evidence is divided by housing tenure and asks:

1. Home ownership – how effective have schemes like Help to Buy been and have they exacerbated the lack of low cost supply? Are there tax measures that would boost supply and affordability (they mention inheritance tax and stamp duty)? What impact will the mortgage market review have and should there be further changes? Are further changes to the planning system necessary?

2. PRS – what will the reduction in tax relief to landlords mean for the supply and cost of rental market housing? Will the current trend of the increasing PRS continue? What are the advantages and disadvantages of restricting rent increases in the PRS?

3. Social housing – what will be the impact of the RTB for housing association tenants? What will be the impact of the proposed rent reductions – are there additional or different changes to rents that should be contemplated?

After giving evidence to the Scottish RICS Housing Commission and playing an advisory role in the Shelter Scotland Housing and Wellbeing Commission, it is good to see the continuing of the process of evidencing and building consensus within a broad set of housing market and policy questions. 

A few further thoughts strike me in response to the call for evidence.

I welcome the sense of a systemic interdependent approach. Land and different tenures are not independent in a vacuum but are in fact a system linked to local economic and demographic drivers, cross-tenure spillovers, macroeconomic variables, institutions and a supply side dominated by the existing stock. The pursuit of rising house prices, pushes up land prices, puts pressure on rents and leaves us with a higher housing benefit bill. 

A focus on affordability always raises questions of definition. The phrase widely used in the call is low cost, which makes sense. I did however enjoy the reference to reasonably priced homes – shades of Jeremy Clarkson and Top Gear’s reasonably priced car. Definitional issues there, too.

I was also happy to see the explicit reference to the evidence base – something that too often does not convincingly underwrite housing policy of late. How much thought, for instance, was given to likely supply behavioural responses to cutting tax relief for landlords? Would less and more expensive rented housing be worth the tax reform (a change which is arguably a break with normal tax principles)?

It is refreshing to see the explicit questioning of the (normally uncritical) emphasis on home ownership. However, the call has for me too narrow a focus on tax policies in that it mentions neither council tax nor the continued absence of taxes on investment returns from home ownership. 

It looks like the Inquiry is seeking both micro analysis (on the impacts of Help To Buy and the effects of rent restrictions – currently s live issue in Scotland) and also more macro themes too (the discussion of the mortgage market has economy-wide importance).

The Call’s social housing focus is very much of the moment – RTB and rents – and given the interesting times we live in concerning social housing especially in England, this is not surprising. However the inquiry could also consider the economic implications of the sector’s recent reclassification and the proposals announced last week to end lifetime tenancies. There is also surely a case for thinking long term about how to fund social housing and in so doing seek a sustainable equilibrium funding model (something essentially missing since 2008).

It is UK in focus but of course there are now significant policy divergences across the four nations of the UK, not least with respect to attitudes to welfare reform – a key area of housing subsidy with important impacts on behaviour that are not addressed in the call. Are there lessons to draw and share from around the UK (let alone internationally)?

But I do not want to nit-pick (evidence submissions can of course cover other areas too such as the ones I have mentioned). This looks like an important opportunity to have a wider and more sustained analysis of what ails UK housing, and to reflect on both short run and long term policy proposals that can help steer the UK on a path that would help meet the aims of the Inquiry. It is to be welcomed.

Thinking about local housing market volatility

A recent paper in Bank Underground (the Bank of England’s new blog site) by Arzu Uluc uses an interesting local-level data set (325 local authorities in England covering 1997-2009) with which to examine local housing booms and busts. The underlying model draws on data including real house prices, real gross disposable household income per capita, dwelling stock per capita and various mortgage market variables like loan to income, loan to value and the share of interest-only mortgages.

The author concludes that the local research allows us to infer (and reasonably so) that volatile housing markets can ‘threaten financial and macroeconomic stability’. Credit conditions in terms of the key ratios and types of mortgage products play an important role through the ‘1997-2009 housing cycle’.

Uluc presents his empirical work by generating six stylized facts. These are:

  1. Real house prices rose on average by 150% between 1997 and 2007 and then fell 12% by the end of 2009.
  2. Changes to the proportion of high loan to income mortgages were positively correlated with local housing booms and busts.
  3. There is a negative relationship between the changes to the proportion of high loan to value mortgages and the size of local booms and busts.
  4. Changes in the share of interest only mortgages were pro-cyclical (similar to 1. above).
  5. Housing booms and busts were also associated with real drivers like real income and dwelling stock growth.
  6. The bigger the local boom, the larger the subsequent bust.

A few caveats are in order – it is not clear why local authority data is particularly appropriate rather than broader more functional geographies; nor does it appear from the blog that there is spatial dependency accounted for in the analysis. I also wondered if the London effect needed to be explicitly modelled (or indeed some sense of North and South)? On the other hand, the author is clearly concerned about attribution and possible reverse causality or confounding factors in the models deployed. These are all things that can no doubt be explored in a longer paper.

What about the bigger messages?  The model is best summarised by a quote from the post: ‘the econometric analysis…suggests that booms and busts ere associated with both real factors and credit loosening. Higher real income growth [was] associated with larger booms in [the] 1997-2004 period, and in 2007-09 areas with higher growth in the dwelling stock per capita tended to see larger price falls”.

Thus, and despite the fall in endowment mortgage volume shares after 1997, changes in the share of interest only mortgages were associated with local house price booms. Similarly, higher loan to income ratio shares of new mortgages were associated with local booms. The interesting negative relationship between high loan to value mortgages as a share of the total and local house price growth – may be explained by the growth of the share of home movers as opposed to first time buyers among total transactions and the increased financial support utilised by remaining successful first time buyers from family and other savings (which also drove down LTV ratios).

As Uluc stresses, there are reverse causality explanations and possibly confounding omitted variables that may instead better explain what is going on – but the associations found are striking. It is a reminder of how difficult it can be to disentangle the relationship between the real housing market and monetary transmission through credit variables – something well known in the wider housing and economy literature but just as striking here.

Stylised facts are useful, but as the author points out, they are the starting point that we then develop models and theories from and look at fresh data to test the ideas that originally flow from these facts. It would therefore be interesting to extend this data forward beyond 2009 and also to aggregate a sub-sample of the local authorities into clusters that approximate for sub-regional housing market areas. If we did so, would we also be able to detect the influence of the changing regulation and practice of mortgage lenders in more recent years?

Housing and the Productivity Puzzle

Last week IPPR published a new report on the productivity gap or puzzle (Tony Dolphin and Izzy Hatfield are the authors of ‘The Missing Pieces: Solving Britain’s Productivity Puzzle’). This is a thought provoking report on one of the critical economic policy questions of our time. It also inevitably spills over into wider questions of interests such as the nature of work, wages, in-work benefits and indeed the long term effects of housing and housing tax policies.

What is their diagnosis and what do they propose to improve the situation? First of all, UK productivity performance is significantly poorer than European competitors such as Germany, the Netherlands, Belgium and France. At the same time over time the UK’s current productivity performance has notably worsened compared to its long term average up to the watershed year of 2007. Dolphin and Hatfield use a number of techniques to try to understand what is going on to create these worrying stylized facts.

Their analysis suggests that:

  • Poor performance against European competitors can be explained by lower productivity within UK industries not due to the overall composition of industry output being biased toward low productivity sectors.
  • Lost output growth per worker since 2008 within the UK has been due to broad performance weakening: the decline of oil & gas and financial sectors are a small part to this trend but actually the poor performance occurred across all sectors.
  • Poor productivity during the UK recession is related to labour hoarding and the fall in wages shifting the capital-labour ratio. But the recovery phase is characterized by a jobs growth that was disproportionately in low productivity low pay sectors.

The IPPR study therefore suggests that new job growth needs to be increasingly shifting into higher productivity sectors like manufacturing and finance. Firms should also be encouraged to increase training in their workforces (including increasing productivity in lower value-added sectors where so many work). They also argue that the Government’s catapult centre initiatives are focused on the high end of productivity enhancing sectors but this misses the importance to the economy of the domestic services: wholesale, distribution, caring services, food and retail. How are we to increase productivity here? The authors argue that the living wage proposal may be a positive step, if unemployment remains low, but cuts to capital spending, infrastructure, further education and science budgets are not conducive to this key engine of improving the economy (and reducing the budget deficit).

Housing matters to increased productivity and should be part of this debate. First, housing costs are an important part of the financial triangle facing people at the margins of work: what wages and working hours can they command; what in-work benefits and tax credits do they have access to that can augment their disposable income and, what are their housing costs and what housing options are there if a move rather than commuting is required for work? We know that the welcome higher levels of statutory minimum wage will often be offset by cuts to things like tax credits. Moreover, unpublished qualitative research I have been recently nvolved with suggests that labour market choices are significantly influenced by the cost and insecurity of private renting versus the perceived security of social renting (even if it is therefore traded off against work further afield).

Second, sufficient supplies of accessible and affordable housing and alongside it opportunities for subsequent trading up are essential to well functioning labour markets supporting careers but also longer distance mobility. This is about housing planning and the economics of the supply side but it is also about wider planning questions and the interdependence of the different parts of the housing system as a whole, for instance, concerning how housing investment across different segments and tenures complements business investment in the allocation of new land development opportunities. More than a decade ago I was in a project team led by Geoff Meen that suggested, at a regional level, that housing investment in new homes led business investment (jobs followed people). These are big complicated questions but they need to be part of the debate.

Third, writers like Duncan Maclennan have a longstanding interest in the notion that the housing sector impedes wider economic productivity because of the inflexibility of the housing system more broadly conceived – this is as much about insufficient investment as it is about misallocation of resources because affordable housing and land are often in the wrong place and not where housing and labour demand is high. Housing is also key infrastructure for the future and while not as obvious as the case made for high speed broadband or fancy transport or water industry investment – it is a necessary condition of sustainable growth. While it is not always clearly evidenced there are a range of arguments indicating that better housing and communities lends itself to improved education, employment and health outcomes (though it is often hard to decisively sort out causality).

Finally, and to return to a hobby horse, a tax system that encourages undiversified saving in less productive assets like second hand housing, promotes excessive borrowing and acts to encourage market speculation cannot be a positive productivity driver.