Listen to this article
Give us your feedback Thank you for your feedback.
What do you think?
Wednesday’s Budget was not quite as disappointing as I had projected in my preview Free Lunch. I had admittedly managed my expectations down quite low. And most of the main economic challenges I listed remain largely unaddressed. But on housing, chancellor Philip Hammond’s speech showed a welcome willingness to fight the good fight — if still with too much caution.
He claimed common cause with the prime minister in vowing to fix the UK’s dysfunctional market where too much housing is simply out of reach financially for the poor and above all for the young. The relentless rise in housing costs for non-owners has exacerbated the underlying squeeze on real wages. If the government could realise the goal of 300,000 new net homes per year set out by Hammond, it would make a real difference.
So far the government’s “solutions” have largely been on the demand side, where various financing subsidies, billed as helping homebuyers afford their purchases, have probably just put additional upward pressure on prices. Resources would be better channelled to the supply side to encourage more houses to be built.
Moreover, supply-side resources need to be coupled with other policies to ungum a construction sector that seems unwilling to make full use of existing possibilities to build. The chancellor pointed out in his speech that 270,000 residential planning permissions are currently left unexploited in London alone. So Hammond was quite right to say: “Solving this challenge will require money, planning reform and intervention.”
His moves in that direction left quite a bit to be desired, however. The headline figure of £44bn committed to housing construction over five years is only partly new money, and only partly money at all — some will take the form of loan guarantees. If the real new resources mobilised are less than meet the eye, so will be the effect. The Office for Budget Responsibility sounded a sceptical note and does not expect residential investment to exceed pre-crisis shares of national income, which barely sustained housebuilding at 200,000 net new residential units per year.
The promise of planning reform was welcome, but the devil will be in the detail. As important will be the promise to relax limits on local authority borrowing. Local councils know best what the housing needs are, and stand to gain (through increased council taxes) from greater development. Greater autonomy should increase the incentives for construction-friendly planning decisions. One further structural policy is to support small and medium enterprises in the housebuilding sector so as not to “remain dependent on the major national housebuilders”.
These last two structural reforms echo a report by MPs earlier this year which recommended both. The second is a little puzzling. The chancellor did not explain what is wrong with the big national housebuilders; nor why subsidising SMEs that can’t compete on their own is a good idea. It may well be — presumably the answer has to do with a lack of competition that holds things back. But if so, one must bring up a delicate subject for soon-to-be-global-but-not-European Britain: surely it would make sense to lower barriers to entry to construction companies from other European countries. Some of these can no doubt give native builders a run for their money in terms of both productivity and quality. In any case, it would do a lot more for competition than the SME segment can plausibly do.
The most vague, but potentially the most promising, part of the package was institutional. Hammond promised more intervention to unblock bottlenecks in the construction process, “using compulsory purchase powers as necessary” as I called for on Wednesday. Even better, the chancellor offered “bringing together money, expertise, and planning & compulsory purchase powers” in a single agency. If done well, and if given strong political backing, this is the sort of thing that could be muscular enough to be a game-changer. Those, however, are big ifs. But it is surely a necessary, if not sufficient, step.
Finally, there was one big thing missing in Hammond’s otherwise correct combined attention to money, planning and intervention. That was property tax reform. His sop to the young, the removal of stamp duty for first-time buyers for the first £300,000 of the purchase price, will have the usual effect of driving prices higher and so benefit existing homeowners. That might still reduce the upfront payment required and in that sense help buyers, but only at the price of even larger mortgages. A government truly committed to a functioning housing market would scrap stamp duty altogether and introduce a wealth tax to replace existing council tax.
Mr Hammond is on the right track. But it seems that proper help for Britain’s would-be homeowners will have to await a much stronger government.
- Losing London: the New York Times reports from London hospitals whose European staff are increasingly minded to leave Britain after the Brexit referendum.