Homes, not assets

“Housing cannot become affordable unless it becomes cheaper relative to what people earn. There is no version of this where prices keep climbing and your children can buy a home.”

The thing nobody will say

Politicians are unwilling to tell this truth because millions of people have their wealth tied up in their home. So the problem has been skirted around for 40 years. Most of the policies claiming to make homes easier to buy – help with the deposit, help with the mortgage, help with the stamp duty – make the long term problem worse, not better, by pushing more money into the market.

The price correction need not be what people fear.

Prices do not have to fall. They have to stop rising while wages catch up. Ten years of flat house prices while wages grow three per cent a year is a real-terms fall of around a quarter. A house that costs eight times your earnings today will cost six times your earnings in a decade. Nobody goes into negative equity. Nobody loses their home. The family who bought in 2016 still has every pound they had. Their children can afford to move out.

Until we accept that fact, we’ll continue to see more counterproductive policies.¹

Follow the money, again

Public discourse always focuses on supply. Supply matters. It’s half the equation.

The demand side of the equation is not how many people want a house. It’s how many people are willing and able to pay for a house.

Two scenarios. In one world, banks lend four times your income. In another world, they lend six times your income. The exact same house will be more expensive in world two. Fifty per cent more money chasing the same goods. Britain spent forty years increasing what banks would lend. We deregulated mortgage lending, ran interest rates to the floor, then subsidised deposits directly.

Regulations allow banks to lend far more against repossessable assets like houses than against a firm in Burnley that might fail. A mortgage ties up a fraction of the capital that a business loan of the same size requires. Same bank, same balance sheet, several times as much of one as the other.²

So the credit that could have built productive capacity chased existing buildings instead.

And it compounds. More lending raises prices. Higher prices make the collateral better. Better collateral justifies more lending. Nothing in that loop produces a factory, a machine, or a job. It produces a larger price tag attached to the same house.

Why the builders won’t fix this

The government’s 2018 Letwin Review looked into why housebuilders took so long to build even when they have planning permission. Typically 15.5 years to complete a large site. It found no evidence of deliberate hoarding. What it found was simpler.

It concluded that developers release homes at the rate the local market will absorb without the price falling or devaluing the land they already own. These are profit making companies, we should not expect anything else.

The review then declined to propose a remedy, because any remedy would make housebuilders less profitable and risk destabilising the market.

This is the government’s own review saying we cannot build our way to affordable housing because it breaks the business model of volume housebuilders. In that sense, the review was right. We draw a different conclusion, though: if the tool cannot do the job without destroying itself, get another tool.³

Viability and affordable housing

The Residual Theory of Land Value is the industry standard. The cost to build a home is sticky – wages of bricklayers and joiners, the cost of timber and tiles is known. The sales price is set by the purchasing power of the market. Take away developer’s margin and the build cost from the sales income, and what’s left is the price of the land. This is the flexible part, or residual, in economic language.

But homes need schools, GP surgeries, and play parks. A developer must contribute through payments to your local council under Section 106 of the Town and Country Planning Act, 1990.

It produces a viability assessment showing what it can afford. Land cost, build cost, and a margin of around twenty per cent. It offsets them against expected sale value, and whatever remains is available for schools, parks and ‘affordable’ homes. If the margin is too low, the developer reduces the number of ‘affordable’ homes.

But there’s a sleight of hand. Land price is the one genuinely residual item in that equation. But by the time the council sees the numbers, the land has been bought or optioned, and treated as a fixed cost. So instead of the price of the land changing, the amount of money for public good absorbs the shock. Usually the number of ‘affordable’ homes is reduced.

The planning officer cannot win. She can be the best in England but she’s stuck with the wrong formula. Chapter 5 called cutting planning departments a dismantling of the nation’s defences. This is what that looks like from the inside.

What we euphemistically call ‘affordable’ typically means 80% of local market rate. It is not indexed against wages or ability to actually afford it. Developers deliver about one affordable home in seven, and the taxpayer pays for most of the rest.⁴

Permission is a licence, not a possession

There is a field on the edge of town worth its value as farmland. The council grants planning permission. The next morning it is worth a hundred times more. That value increase is created by a decision of the state.

That huge increase in value is given to the landowner. Then when the state wants the land to build a school or a council estate, it has to hand over cash in compensation for the value it created. We manufacture the value, give it away, and buy it back at full price.

This structural flaw inflates the price of land. We should mitigate that by treating planning permission as a licence rather than a possession. Apply three mechanisms.

Grant it on terms. Planning permission can already carry conditions. Set the price at which land changes hands for public purposes and we curb speculation and end hope value.

Put a price on time. Planning permission typically lasts three to five years before expiring. But if even one trench is dug, the permission lasts forever. Start putting a tax on land as soon as planning permission is granted, and the economics change. Developers will build or sell.

Break the ransom strips. Buy a site, and you may find that the only road onto it crosses a few square metres owned by somebody else. That’s known as a ransom strip. If a council uses a compulsory purchase order (CPO) the ransom strip owner still gets about a third of the increase in value of everything to be built behind it, increasing costs by millions of pounds. That convention comes from a 1961 tribunal case.

But water companies can lay sewers by right. Gas networks can lay pipes. Parliament gave them these powers so no individual could hold the network to ransom. Bring in legislation so a local authority can build a road over ransom strips with a fair compensation based on the land’s use value, not its ransom value.⁵

Buy the land

The IPPR found that between 2010 and 2023, £15 billion of local authority land had been sold to balance councils’ books under austerity.

The state should be buying land, not selling it. Buying land consumes no bricklayers and no steel. It transfers a title. So acquisition sits outside the capacity guardrail, and should begin immediately — while the workforce is still being trained, and the pipeline is becoming visible enough for a college to open a course against it.⁶

Where the market does not build at all

In large parts of Britain the constraint is not planning permission. It is that nobody can make money building a decent house. Bricks and cement have a nearly uniform price nationally.

Though labour costs are lower in Teesside than central London, the drastically lower sales price wipes out any margin. In most of the country by area building homes is not viable for volume house builders. No amount of planning reform can alter this.

Only public finance closes that gap. And it is where the multiplier gives the most benefit. Homes get built, jobs get created.⁷

A hundred thousand a year

The sector’s estimate of what England needs is ninety thousand social rent homes a year. It comes from Heriot-Watt, commissioned by Crisis and the National Housing Federation, and it has been endorsed by the Commons housing committee, the Affordable Housing Commission, and Shelter. About as close to consensus as housing gets.

England built 9,561 social homes in 2022-23. Councils have managed around 1,760 a year since 2011. Over the last two years, sixty local authority districts built none at all.

“So let’s build a hundred thousand council homes a year.”

We’ve done it before. From 1946 to 1980. An average of 126,000 council homes a year. Every year, for thirty-five years, under Attlee, Churchill, Eden, Macmillan, Douglas-Home, Wilson, Heath and Callaghan. Without the productivity tools we have today.

Again, we propose a rate, not a total. A total is a spending envelope, and this report does not issue those. A rate is a statement about capacity – how fast we can build and how many people we can train – which is the only constraint that binds.⁸

Build them closer together

A bus route needs passengers who live near the bus stop. A corner shop needs customers within walking distance. A primary school, a library, a swimming pool – need enough people within its catchment. A community where people never see each other is not a community.

Build at a density of thirty houses to the hectare with a car in every drive and you have not merely used more land. You have made the bus uneconomic. And then you call the bus unaffordable.

There’s that sentence again: we can’t afford it. The consequence of a decision nobody remembers making.

We’re not talking tower blocks. Terraces and townhouses do the work. Post-war suburbs were built at around thirty homes to the hectare and today’s greenfield estates are much the same. Georgian-style streets reach forty to sixty. Victorian terraces manage sixty-five to seventy-five, with a front door on the street and a garden at the back.

The most expensive residential streets in Britain are denser than anything we build now. Bath, Edinburgh New Town, Notting Hill. So are Amsterdam, Barcelona and Paris. People pay a premium for those streets precisely because density is what puts the amenities within walking distance.

Density also closes a viability gap. Less road, less pipe, less cable, less land per home. It is one of the few levers that improves the sums without a subsidy.⁹

What a council house is

British social housing has become a last resort. Allocated by need, to the poorest, after years on a list. That is what happens when there is not enough of it. Recent changes to Right to Buy are a step in the right direction. The Social Housing Bill will mean newly built social and affordable homes for rent can’t be sold for 35 years.

Vienna shows the alternative. Most of the city lives in council or subsidised housing, most residents are eligible, and you do not lose your tenancy when your income rises. Private rents there are far below comparable European cities, because a Viennese landlord competes with a decent public alternative rather than just other private landlords.

We will not specify a tenure mix any more than we specified an electricity generating mix. Build enough good homes at fair rents and the mix is a detail. Build too few and it is a rationing system.¹⁰

Throughout we’ve used the words council housing or social housing, because that’s what people are most familiar with. But this works just as well for co-operatives and community land trusts. And a secure, genuinely affordable rental sector is an anchor for communities to come together.

Turn off competing capital

Britain has 16.5 million owner-occupied homes, 4.2 million social homes, and 4.9 million in the private rented sector (PRS). Every time a new buyer bids for a home, they compete with the cash of landlords and investors.

Let’s make a democratic decision that housing is so important to quality of life that we will level the playing field. Change the law to introduce owner-occupier protection. A law where any existing home that comes onto the market can only be bought by a real person, who has to live in it. This is just for existing housing stock, not new builds, and no one has to sell what they currently own – any current holdings are grandfathered.

Parliament sets the threshold, so a retired couple letting a single flat are untouched while a portfolio landlord is not. Lower it over time and the tap opens further. Shrink the PRS sector too fast and renters pay for it in the gap. That is why this is a tap and not a switch, and why it should be turned no faster than the building.

This shifts the market. Because landlords now have to sell to real people who will live in the homes, and PRS is skewed towards the bottom of the market, first-time buyers will see prices stabilise. Some PRS properties that are undesirable may not find private buyers, so give councils the right of first refusal to buy, and transfer them into council stock. This increases council stock over and above the 100,000 new builds a year without competing for resources.

Landlord capital now has to go into new builds. This sits outside the absorption rate the government’s own review said was the constraint on building. This also solves the density problem – it’s more cost effective for developers. Council planners should allow good quality townhouses funded by PRS capital. That would get Britain building. Across the country – because the arithmetic makes new build now viable in regions with lower land values.¹¹

While we’re on, let’s tweak the banking regulations. Risk weighting rules currently make mortgage lending vastly more profitable for banks than lending to businesses. Raise the capital banks must hold against mortgage lending, gradually, and two things happen at once. Less credit inflates house prices. More credit reaches firms that make things. The aim is not to crash prices. It is to hold them steady while wages catch up.[108]

And if you rent

Your rent is not set by your landlord’s costs. It is set by what you can be made to pay. Which is why every reform aimed at landlord behaviour improves your conditions without touching the price.

Only one thing reduces rents, and that is having the freedom to walk away.

The energy chapter described a market where gas sets the price of everything because it is the marginal unit. The private rented sector works the same way. It sets the price because for most people there is no alternative to it. Build a large public sector at cost rents and the alternative exists, and the private market has to compete with it.¹²

We have done this before

After the war, Britain needed towns. It did not ask the market to provide them.

Development corporations were given powers to buy farmland at its value as farmland. They built the town – houses, roads, schools, sewers, shops. And the land, now worth many times what it cost, paid for the infrastructure that made it valuable.

Stevenage. Milton Keynes. Homes for millions of people, built largely out of the value the building itself created.

The mechanism was not clever. It was obvious. Own the land when the uplift happens.

We knew how to do this within living memory. Then we stopped, and started paying private landowners for value the public created, and wondered why nothing gets built.¹³

Your front door

This report began with a mini-budget, a trading floor and a mortgage.

In September 2022 a bond market took fright, and within forty-eight hours the cost of the roof over millions of British heads was repriced upwards. Not because anything happened to those roofs.

So: if you rent, a public sector large enough to compete for you means a landlord who has to. And if you are thirty-four and still living in a box room, and every plan you have ever made has been postponed by the price of somewhere to live, this is the chapter written for you.

“A house is a place to live. Successive governments turned it into a financial asset, and then acted surprised when it started behaving like one.”