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Where next for housing policy?

WHQ takes a look at the Barker and Miles Reviews.

In 2003, two major reviews of housing policy were commissioned by the Treasury, one looking at housing supply (Barker) and the other at the mortgage market (Miles). Both have now produced interim reports, (with the final reports being published with the Budget in March), and have far-reaching implications for the detail of housing and related policy in the coming years.

Review of housing supply

In his Budget speech in April 2003, the Chancellor Gordon Brown announced that Kate Barker, an economist and a member of the Monetary Policy Committee of the Bank of England, had agreed to undertake a review of housing supply in the UK. The main driving factor behind the decision to undertake the review was concern about the impact of housing market volatility on the government’s wider economic objectives. In 2003, the way the housing market was operating was assessed by the Treasury as a high risk factor to the achievement of meeting one of the five economic tests for entry into the Economic Monetary Union (EMU) and therefore entry into the Euro. The slow supply response to rising house prices was seen as contributing to this volatility.

The interim report of the review, Securing our Future Housing Needs, was published on 10th December 2003. The main conclusions of the interim report are that there is a serious supply shortfall to which the housebuilding industry does not effectively respond and local authorities are not incentivised/face few sanctions regarding easing land/planning permission constraints (see below for more detail).

The report notes that the government has a number of policy levers available to influence the supply of homes – tax, stamp duty, the planning system, investment in affordable housing and influencing the behaviour of the housebuilding industry. It states that ‘UK economic well-being could be improved by increasing the supply of housing ….making a difference to housing supply may require a robust set of polices’.

Barker interim report: main points

  • In 2001, around 175,000 dwellings were built in the UK – the lowest level since the Second World War. Over the past ten years, the number of new dwellings built has been 12.5% lower than in the previous decade
  • Over the last 30 years, UK house prices went up by 2.4% a year in real terms – compared to the European average of 1.1%. In Germany it was 0%, and in France 0.8%
  • If UK house prices had risen in line with the European average, since 1975, the UK would have been £8 billion better off. As a result of these price rises first time buyers in 2001 paid on average £32,000 more for their homes
  • In 2002, only 37% of new households in England could afford to buy a house, compared to 46% in the late 1980s
  • The ratio of lowest quartile house prices to lowest quartile earnings has increased significantly in most English regions. In 1993, a London house cost around four times the annual income of a low income household. By 2002, the same house had risen to almost eight times annual income
  • The current rate at which the housing stock is replaced implies that houses built now need to last 1,200 years

A range of factors reduce UK housing supply:

  • the housebuilding industry is characterised by low levels of responsiveness to demand, low levels of investment in brownfield and low levels of innovation
  • competition tends to focus on land, once land is acquired housebuilders have little incentive to compete for customers or to innovate
  • local authorities have few positive incentives to build and few sanctions if they fail to meet targets for new homes set at a regional level
  • infrastructure barriers hold up construction of over 40,000 dwellings in the South East alone
  • institutional investment in property is limited; the review suggests government should consider a tax transparent vehicle to encourage investment

Review of the UK mortgage market

The Interim Report of the Miles Review, The UK mortgage market: taking a longer-term view on information, incentives and pricing, was published on Tuesday 9th December. The report analyses why there is so little mortgage lending in the UK where the interest rate is fixed for more than a few years and considers whether there are obstacles to the development of a larger long-term fixed-rate mortgage market. The report notes that the housing finance system in the UK is not fundamentally flawed, but can be improved.

Miles interim report: conclusions

The low level of fixed-rate lending reflect wider problems in the UK financial system:

  • many borrowers focus on the initial cost of the debt and do not seem to consider carefully how these payments might change relative to their incomes, even though they will face debt repayments for many years
  • many households seem to have a poor understanding of the risk characteristics of different financial products
  • cross-subsidisation in the pricing of mortgages has made mortgages where borrowers pay the same rate for several years appear expensive relative to the cost of discounted variable-rate deals and short-term fixed-rate mortgages

These three factors combine in a way which leads households to make less forward-looking decisions than is desirable and so reduce demand for longer-term fixed-rate mortgages.

The review also identified technical, supply side factors that might inhibit the emergence of a larger market in longer-term fixed-rate mortgages.

At the time of going to print, it remains unclear what either Barker or Miles will recommend in their final reports and just as important, what recommendations the government might take up. It is evident that there is no quick fix either in terms of fixed rate mortgages or housing supply.

And Wales?

It is important to recognise that both reviews are concerned with the UK and will therefore have implications for Wales. As a generality, Welsh home buyers are more conservative than those elsewhere in the UK and a better supply of fixed-rate mortgages might be attractive to them.

The Barker review is more difficult. The interim report says little about Wales – as WHQ Advisory Board member Chris O’Meara noted in her letter published in Inside Housing on 9th January 2004, ‘When Kate Barker has finished in England, we would welcome her talents to do the same job here’. The review team have met with Welsh experts, but it is not clear what will result from this.

The CML report Who’s Counting? helps fill some of the gaps in information left by lack of coverage by the Barker review. It concluded that 110,000 new dwellings (6,100 per year) are needed in the private sector and 45,000 (2,500 per year) in the social rented sector between 1998 and 2016 and identified a backlog of unmet need of 33,000 dwellings as at 1998. Comparing these figures against completions of new homes, it is clear that more social housing is needed than is currently being built.

The good news about the reviews and the Treasury’s new interest is that housing is high on the agenda. The links between housing and a competitive economy have now been fully recognised and if housing can deliver there is a much better chance that the Treasury will grant the resources.

However, the reviews also pose a question as to whether the Office of the Deputy Prime Minister and the Assembly are being marginalised in the context of Treasury and No. 10-driven developments of housing policy. Given the devolution settlement of the Assembly, and the amount of housing policy that is underpinned by financial decisions not made within Wales, the notion that housing policy can simply be defined as a ‘devolved function’ has always been at question. The issues identified by the Barker and Miles reviews bring this tension further into focus. Will the outcomes of the two reviews drag Wales along in their slipstream or leave us in a back water?

The interim reports of the Barker and Miles Reviews are available online at www.hm-treasury.gov.uk/Independent_Reviews/independent_reviews_index.cfm

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