In an abridged version of his chapter in the 2005 CIH Cymru report Game Plan: Housing, Planning and the Economy, John Stewart makes the case for the central role of housing in enabling the Welsh Assembly Government to achieve its economic growth and employment targets.
Introduction
The economic role of new housing has emerged as a major issue in Britain over the last four years. In 2001, the Housing Research Foundation published a pioneering study, The Economic Role of New Housing, prepared by some of Britain’s leading housing economists, including Geoff Meen. In 2002, the House Builders Federation (HBF) published an influential report, Building a Crisis, which described the long-term under-supply of new housing in England and outlined the damaging economic consequences of inadequate levels of house building. This was followed a year later by HBF’s Building Success; the Economic Role of New Housing in Wales. Around this time, the UK Government acknowledged that England faced a housing supply crisis.
In 2003, the Government’s concerns culminated in the appointment of Kate Barker, a member of the Monetary Policy Committee, to carry out a thorough review of constraints on housing supply (see WHQ issues 54 and 55). Her final report concluded that England needed a substantial increase in house building and a more market-responsive system of supply. It examined the economic consequences of housing under-supply, which included slower and more volatile economic growth, lower levels of employment, restricted labour mobility, constraints on labour productivity and adverse consequences for wealth distribution. Although Barker focused largely on England, the broad findings of her study are just as applicable to Wales and Scotland.
Housing and the Welsh economy
In the UK, housing investment – both new build and improvements to the existing stock – accounts for around 3% of gross domestic product (GDP) and 17% of gross fixed capital formation. Investment in new private dwellings contributes just over 1% to GDP, while total housing expenditure represents approximately 13% of GDP.
A study for the Council of Mortgage Lenders in 2002 estimated that housing-related activities accounted for approximately 4.5% of total employment in Wales in 2000, half as much again as employment in the automotive and electronics sectors. The same study also found that for every extra job generated in the construction sector, a further 0.41 full-time equivalent jobs were created in the wider Welsh economy.
Future housing demand
In another study for the Council of Mortgage Lenders, Alan Holmans estimated that Wales would need 8,600 new dwellings per year from 1998-2016 to meet anticipated household growth. In addition, Holmans reported a backlog of unmet need of some 33,000 dwellings. In the first six years of this period (1998/99-2003/04), housing completions averaged 8,277 per year, 4% short of requirements.
In addition, particular to Wales are:
- an exceptionally old housing stock in worse condition than the English stock
- a vacancy rate of 1 in 25 (4.0%), with another 1 in 100 (1.2%) classified as second homes, against 3.2% and 0.6% respectively in England (2001 Census)
- rates of demolition that suggest that today’s new homes will have to last over 2,100 years, compared to the figure of 1,200 years for England estimated by Barker
Housing and Welsh government policy
As has been reported previously in WHQ, Winning Wales, the National Economic Development Strategy of the Welsh Assembly Government, shows little realisation that housing, including new housing, has an important role to play in achieving the ‘economic transformation‘ that is the overall aim of the strategy. Where housing is mentioned, there is a comparatively narrow focus on improvements to the existing stock, especially the social stock, rather than on the wider social and economic role of housing.
Better Homes for People in Wales; a National Housing Strategy for Wales, similarly neglects the economic role of new housing. Instead, it focuses on specific issues such as housing stock quality, tenure, social housing and support for vulnerable groups.
The Assembly’s Sustainable Development Scheme, adopted in March 2004, does not recognise the fundamental social, economic and environmental importance of housing in achieving sustainable development. Planning Policy for Wales, published in March 2002, made no mention of housing’s economic role in its broad housing objectives.
The crucial role new housing needs to play in helping the Assembly meet its ambitious economic objectives is also entirely absent from People, Places, Futures; the Wales Spatial Plan. The emphasis tends to be on affordable housing, not total housing supply, and on restraint policies.
The economic role of new housing in Wales
It is possible to identify three key roles that new housing can play.
1) Supporting economic growth and prosperity
Achieving the Assembly’s ambitious targets for growth of both per capita GDP, (60% faster than over the last decade), and employment will require giving the maximum possible encouragement to all the available economic drivers in Wales. Any national or local government policies which hold back GDP growth, employment creation or productivity improvements will undermine achievement of the Assembly’s targets.
New housing’s most important economic role is its long-term influence on the labour market. The Assembly’s target is to raise total employment by 175,000 by 2010 and to shift the structure of employment towards high value-adding jobs. It is only by increasing productivity that the Assembly’s ambition to raise per capita GDP will be achieved. Those filling these jobs will need sufficient homes of the right quality and type in the right locations.
Because the existing stock is spatially fixed, new housing provides the most important mechanism by which the housing stock can adapt over time to economic, employment and social change. If this adaptation is unduly constrained, it will have far-reaching economic consequences.
Too few homes to meet the rising labour needs of an area will lead to labour shortages, rising wages and loss of competitiveness in relation to other areas where housing provision is adequate and housing more affordable. While the impact of housing shortages and poor affordability on ’key workers‘ is generally recognised, the growth of an area may also be constrained if too few larger, higher-value homes are provided to meet the needs of educated and skilled employees, managers, professionals and entrepreneurs, groups the Assembly is especially anxious to retain.
While ‘affordable housing’ policies are important in the short to medium term, in the longer term the only sustainable way to make private housing affordable is to ensure there are sufficient new homes to meet demand. By ignoring the adverse economic consequences of inadequate housing supply in England for so long, the Government has had to introduce a raft of economic, planning and housing policy reforms and find billions of pounds for new infrastructure provision. It will be many years, and possibly several decades, before the damage done by past policies has been repaired.
By addressing these issues now, Wales could avoid having to learn the same painful lessons as England.
2) Encouraging success, reversing decline
Given Wales’ relatively poor economic performance, it cannot afford the luxury of suppressing development in high-growth areas in the hope that economic activity and employment will be diverted automatically to less prosperous areas of Wales. Instead, constraint policies in high-growth areas run the risk of driving economic activity into other prosperous regions of the UK, or even to other countries.
Constraint policies are relevant not just to industrial and commercial land, but also to residential land. If planning policies keep the housing supply in an area below demand, house prices will rise, employers will face skills shortages, and wages and salaries will be driven up in order to attract employees, with damaging consequences for competitiveness, productivity and prosperity. Also, housing shortages and high house prices have most impact on households on middle and lower incomes, including first-time buyers. Many ’key workers‘ fall into this group, people who play an essential role in any community and the economy.
3) Planning for growth
There are signs that Wales is beginning to follow some of the same policies which produced a housing crisis in England. In particular, by devolving responsibility for housing provision to local planning authorities, without an adequate national strategy (i.e. the Wales Spatial Plan), there is a risk that housing provision will be insufficient to support the Assembly’s ambitious national targets for growth and employment.
One of the more difficult aspects of planning is achieving a sensible balance between local and national responsibilities. The Assembly’s strategic role should be to ensure sufficient homes are produced, of the right types and in the right places, to meet household growth and changing economic and social needs. Reconciling the inevitable conflicts between economic, social and environmental objectives should be one of the most important roles of the Wales Spatial Plan. Unitary Development Plan’s (UDPs) must be produced on time, and housing totals across all UDPs must add up to a sensible overall total, with a sub-national distribution which adequately meets Wales’ economic needs.
Conclusion
Housing under-supply has emerged as a major economic issue in Britain over the last four years.
Wales’ current policy context fails to recognise fully the central economic role new housing needs to play in delivering the Assembly’s ambitious economic. As in England, because a large majority of the new homes required in the future will be built by the private sector for private buyers, planning policies must allow housing supply to be responsive to market demand. Simply dictating to the market will not work. Similarly, policies directed largely at the condition of the existing housing stock, however important, are not sufficient. Areas of growth and decline need separate strategies. Constraining housing supply in high-growth areas, in the hope that demand will be automatically diverted into less prosperous areas, risks damaging economic prospects in the buoyant areas, with little or no benefit to areas of decline.
John Stewart is Director of Economic Affairs at the House Builders Federation, email John Stewart.
The full version of this article is included in the 2005 CIH Cymru report Game Plan: Housing, Planning and the Economy, available from www.cih.org/publications