The Economics of Social HousingEconomics of Social Housing Version 1 Jan 2009
The Economics of Social Housing
Economics of Social Housing Version 1 Jan 2009
Learning objectives
Economics of Social Housing Version 1.0 The aim of this session is to equip you with a basic understanding of the economic factors driving affordable housing – supply and demand We will survey the history of the UK housing market in general and then focus on the recent history of UK social housing We will then outline the economic mechanisms that drive social housing with special attention to S106 And we will assess how well S106 has performed Finally we will explain how and why the credit crunch happened and what its impact has been on UK affordable housing
Contents
Economics of Social Housing Version 1.0 Executive summary The macroeconomics of housing overall: supply and demand trends Or why the need for social housing is driven by macroeconomics – restricted supply relative to demand The macroeconomics of social housing: supply and demand trends The economics of planning policy to deliver affordable housing Or how affordable housing has been provided as a tax on developers and as a means of avoiding grants Economic assessment of planning-driven provision of affordable housing Or how well S106 addresses the economic issues of affordable housing UK affordable housing in the credit crunch The credit crunch and its economic impact UK housing What happened, why, and what it means
Key findings
The UK does not build enough houses to keep up with demand especially in the south east – we need around 155,000 new houses annually to cope with household growth Affordable housing has changed its role from being a chosen form of housing to being primarily a safety net for the very poorest in society Planning (S106) does not give the UK enough affordable homes Government spending on affordable housing is broadly the static– but the money goes on demand (rent) not on supply (house building) The HCA aims to transform UK housing by significant house building in smart, "joined-up" ways. The credit crunch could compromise its ambitions if private house building does not participate Economics of Social Housing Version 1.0
Executive summary (1)
Economics of Social Housing Version 1.0 The macroeconomics of housing overall: supply trends The UK’s overall supply of housing has grown in every period since 1939 National housing supply does not respond to increasing prices and rising demand UK house building is less responsive than other countries Housing is in short supply in the south but in surplus in the north Land supply has declined especially in the south due to planning Restricted supply has driven up house prices and reduced affordability in cycles The macroeconomics of housing overall: demand trends Mortgages are more affordable, so demand for housing has increased But first time buyers are worse off because the cost of deposits has risen Housing demand will be driven by changing types of household Planning constraints deliver national preferences, but imperfectly The macroeconomics of social housing: supply The overall net supply of social housing has declined since 1979 Most of the stock of social housing are existin
Executive summary (2)
Economics of Social Housing Version 1.0 The economics of planning policy to deliver affordable housing Planning policy has forced developers to create social housing S106-driven affordable housing is a stable component of housing completions S106 has grown as affordable housing additions has declined Regional supply of affordable housing matches demand, but not due to S106 Economic assessment of planning-driven provision of affordable housing Affordable housing via S106 may not increase the total supply of housing S106 does deliver affordable housing but is not necessarily fair S106 house building still needs public money and developers get a good deal Local authorities lack commercial skills to make S106 fully effective The impact of the credit crunch What happened Began when banks lent too much on risks they didn’t understand Liquidity and banks’ confidence destroyed Trust and therefore credit evaporated Why it happened Roots are in US affordable housing Innovations in finance c
Key Sources
Economics of Social Housing Version 1.0 Stephens, Whitehead, and Munro: Lessons From the Past, Challenges for the Future for Housing Policy: Evaluation of English Housing Policy 1975–2000, ODPM, 2005 Hills: Ends And Means: The Future Roles Of Social Housing In England, ESRC Research Centre for Analysis of Social Exclusion / Department of Communities and Local Government, 2007 Monk: The Provision Of Affordable Housing Through Section 106, Royal Institute of Chartered Surveyors, 2007
Contents
Economics of Social Housing Version 1.0 Executive summary The macroeconomics of housing overall: supply and demand trends Or why the need for social housing is driven by macroeconomics – restricted supply relative to demand The macroeconomics of social housing: supply and demand trends The economics of planning policy to deliver affordable housing Or how affordable housing has been provided as a tax on developers and as a means of avoiding grants Economic assessment of planning-driven provision of affordable housing Or how well S106 addresses the economic issues of affordable housing UK affordable housing in the credit crunch The credit crunch and its economic impact UK housing What happened, why, and what it means
The UK’s overall supply of housing has grown in every period since 1939
Economics of Social Housing Version 1.0 Changing housing stock composition since 1939 UK Housing stock has doubled since WW2 UK housing stock doubled to 22 million units since 1939 Owner occupation has grown continuously, other tenures have varied over time. Private rentals fell from the 1940s until the late 1980s, but grew to 11% of stock by 2004. The Right to Buy and less new building reduced social housing to only 18.5% of the stock by 2004. Source: Hills 2007
National housing supply does not respond to increasing prices and rising demand
Economics of Social Housing Version 1.0 House building has declined and price elasticity of supply has been near zero since 1990 Supply of new houses reduced significantly after 1980, as shown in Figure 2.1 from Stephens et al 2005, which looks at trends in new build completions since the end of WW2 Public/social sector output was high until the late 1970s. The private sector has not replaced public sector supply of new housing Private output rose in response to house increases in the boom of the late 1980s But private output did not increase in response to booming prices in the boom late 1990s-early 2000s. Supply elasticity was low, but is now virtually zero Supply has been low in both north and south, despite growing demand in the south Declining supply of houses since 1975 is shown in Figure 2.2 from Stephens et al which looks at new building in the ‘North’ (including the midlands) and ‘South’ (including London). The decline was steeper in the early part of
UK house building is less responsive than other countries
Economics of Social Housing Version 1.0 The UK is less responsive than other countries to changes in prices UK house building is only half as responsive as the French, a third as responsive as the US and only a quarter as responsive as German house building. Over the last 10-15 years, UK supply has become almost totally unresponsive, so as prices have risen, the supply of houses has not increased at all. Planning has been a constraint on the supply of new houses in the UK Housing targets define how much land local authorities allow for development. But regional and local housing targets do not respond to housing demand - the UK's supply of new housing responds relatively little, compared to other countries, to changes in house prices. House building is politically contentious Local costs of development can be high and those already housed have a much stronger voice than those in need of housing. Land is often unsuitable Much undeveloped land is either in areas of
Housing is in short supply in the south but in surplus in the north
Economics of Social Housing Version 1.0 Surplus housing stocks have declined in most areas Figure 2.3 from Stephens et al shows the balance between households and dwellings, expressed as the percentage surplus dwellings over households. Housing surpluses rose in most areas before 1980 and were substantial in the South East, due to public sector house building. After 1980, surplus declined in all regions, as public sector supply was cut back. In the 1990s, housing surplus shrank in London and the South East, while low demand in the North East led to growing surpluses. Surpluses vary across regions, with surplus stocks in the north and shortages in the south Figure 2.4 shows the annual rate of dwelling growth minus the annual rate of household growth for five-year periods from 1975 to 2001, distinguishing the north from the south. Surpluses of houses over households grew in the late 1970s but fell back in the early 1980s. Between 1985 and 1996, house
Land supply has declined especially in the south due to planning
Economics of Social Housing Version 1.0 Land supply is constrained in urban regions Figure 2.5 from Stephens shows the stock of outstanding planning permissions for private housing, per thousand resident households. Supply was more generous in the relatively rural East Midlands, East of England and South West. The stock supply was more limited in the more urban regions, both north and south. Stock supply rose slightly between 1988 and 1994 reflecting the 1980s boom and recession cycle. Stock supply fell in most regions up to 1997. The fall was modest in the three northern regions, substantial elsewhere, and very high in the South East. Planning permissions have declined since 1990 Figure 2.6 from Stephens looks at a measure of the flow supply of new planning permissions. Supply rose in the late 1980s boom period, but has since fallen more or less continuously. The fall was proportionately greater in the south. London has always had a low supply and droppe
Restricted supply has driven up house prices and reduced affordability in cycles
Economics of Social Housing Version 1.0 Regional housing and land price show that planning restrictions pushes up house prices Economic theory says that if planning cuts the number of houses which can be built below the volume demanded by the market then house prices will increase. Real house prices have been in a cycle of booms and busts since 1969. Each boom ends at a higher level of (real) pricing. This cycle of boom and bust shows that Britain has a low elasticity of supply of new housing. I.e. housing supply is static, but long term demand is rising. This is partly because of planning constraints In the long term prices have risen significantly (3.3% pa in real terms over this whole 35 year period for UK, or 2.1% since the cyclically comparable year of 1973). Both cycles and growth are stronger in some regions than others. In London prices in 2005 were over 3.5 times their level in 1969, whilst for the North they have only slightly more than doubled. Regiona
Mortgages are more affordable, so demand for housing has increased
Economics of Social Housing Version 1.0 Interest payments are low Total interest payments are now 8.9% of disposable income compared with a high of over 15% in 1990 (Chart 2.2) Repossessions have been at a fraction of their peak in 1991 when over 70,000 properties were taken into possession (Chart 2.3). Mortgage rates are low Mortgage rates have been at their lowest for forty years – average building society rates were 5.2% in May, compared with 11% between 1979 and 1997. Over the last 50 years the proportion of households that own their own home has increased substantially – to over 70% in 2003 (Chart 2.4). Nine out of ten households would prefer to own their own home if they could. Source: Barker 2004
But first time buyers are worse off because the cost of deposits has risen
Economics of Social Housing Version 1.0 One of the costs of long-term under supply is higher house prices and a lack of market affordability. Higher house prices make it harder for younger, less well-off households to buy their own home. Rising prices mean higher deposit costs so it is harder for first time buyers to enter the housing market. They often need help from relatives: in London over a third of first time buyers between 1995 and 2001 used gifts, family loans, inheritances or windfalls to fund deposits In contrast, in many European countries the ratio of house prices to incomes is lower than it was 30 years ago. Source: Barker 2004
Housing demand will be driven by changing types of household
Economics of Social Housing Version 1.0 Volumes of households are increasing because of social changes Households are rising at around 155,000 a year from 1996 to 2021. Many are single parent or single person households. Household increases are greatest in the south Increase in households is concentrated in London and the South East – where there is already the most demand for housing. London and the South East are expected to see 80,000 extra households each year to 2021. Source: Barker 2004
Planning constraints deliver national preferences, but imperfectly
Economics of Social Housing Version 1.0 Planning constraints on housing supply fulfils policy aims and reflects national preferences The housing market expresses national preferences for land use, where the UK wants to preserve land. This protects the countryside and addresses urban decline. The UK overall is a relatively densely populated country (242 persons per sq. km), on a par with Germany (230 persons per sq. km). It is significantly less dense than Belgium (337 per sq. km) or the Netherlands (390 per sq. km). But England is much more dense at 380 persons per sq. km. Constrained supply creates problems of affordability and constraints on economic growth – these are the price of urban regeneration and preservation of green belt and rural landscape. But planning may constrain supply unnecessarily Some development would have a high cost to society (such as urban parks and fields with rights of way). But some argue planning stops building on land with a lower social value. Plannin
Contents
Economics of Social Housing Version 1.0 Executive summary The macroeconomics of housing overall: supply and demand trends Or why the need for social housing is driven by macroeconomics – restricted supply relative to demand The macroeconomics of social housing: supply and demand trends The economics of planning policy to deliver affordable housing Or how affordable housing has been provided as a tax on developers and as a means of avoiding grants Economic assessment of planning-driven provision of affordable housing Or how well S106 addresses the economic issues of affordable housing The credit crunch and its impact on affordable housing provision What happened, why, and what it means for affordable house building
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