The new housing targets – how they (don’t) relate to reality and why

The Government announced new housing targets on July 30th 2024.  Overall the objective is for a total of 1.5 million over a four-year period or 375,000 per annum. 

 

The vital question, ignored by commentators is do we need that level of housing growth?  There is an assumption that we do, that it will result in cheaper housing and that all the current issues around need will be resolved.  Yet the evidence suggests otherwise.

 

Each year more dwellings are built than the number of additional households.  We have a surplus in England of 1.5 million dwellings, in Cornwall of 35,000 dwellings. Problems of affordability and poor quality housing will not be addressed by building more. There are policy options to deal with current problems including investment in updating existing properties, changing the mortgage market to assist first time buyers, changing the private rental market and providing support to renters. Its not a case of building more it’s a case of improving what we have and using the existing surplus.

 

Calculation of the new target

What is the methodology behind the new target? This is set out below.

“With the proposed new Standard Method, new housing is required to be delivered proportionate to existing housing stock. It’s based on a requirement to deliver 0.8% of the existing housing stock annually. An uplift is then applied based on local affordability ratios to require more housing to be delivered where housing is least affordable."

[Land Tech blog, 7th August 2024].  https://land.tech/blog/housing-targets-for-2024-and-beyond

 

What we see and what we need

The new target uses all existing dwelling numbers this means. It perpetuates the growth of such properties that are a significant problem in Cornwall.

 

The new target operates on the false premise that all dwellings in an area are provided to meet local need, regardless of whether they are used for housing people or not.  It essentially accepts the use of dwellings for second home and holiday lets.  The role that supply creates its own demand is ignored. In Cornwall a range of ‘actors' operate with the aim of encouraging people to buy property in Cornwall, whether to live in or to use for second homes or holiday lets.  Developers recognise and encourage this process. This creates a situation where housing ‘need’ in Cornwall consists of two components – local housing need and demand by people who are encouraged to buy or rent property in Cornwall.

 

So we have a target based on arbitrary and irrelevant assumptions. So what should a target be based on?

 

 

A new target

 Looking at changes in the number of occupied dwellings is the most appropriate metric to use as a basis for dwelling targets. It uses dwellings actually used for housing as distinct from dwellings used as second homes, holiday lets or investment properties. However, it is imperative to consider that the growth in occupied properties largely reflects net migration to Cornwall, which is largely a result of the ‘Cornwall is the place to live’ mantra. Without this increase Cornwall’s population would fall.

 

Comparing actual changes in terms of occupied dwelling numbers over the 2011 to 2021 period, we can see that the new target is over twice as high as this (2.2 times higher).  Instead of 2,015 dwellings per year a total of 4,454 dwellings or an additional 2,439 dwellings are planned.

 

A target of 2,015 should therefore be the maximum for Cornwall, although this should be reduced to take account of the current surplus of 35,000.

 

[The 2021 census gives a total of 35,000 vacant/unoccupied dwellings consisting of holiday lets, holiday homes and empty properties.  Compared to the new target it means we already have enough in reserve equal to 7.9 years supply.  In fact, this surplus equals 17.4 years supply in terms of annual occupied dwelling growth].

 

How many new dwellings do we need in England?

What would a sensible target look like? The table below shows the annual rates of relevant variables – net additions in dwellings, all dwelling growth and household growth.

 

Currently dwelling numbers and net additions are increasing at a higher level than household growth. This reflects the growth of properties which are either empty, second homes or holiday lets. 

 

The current net additional dwelling figure – 189,300, could be used for the higher target, with the all household (occupied dwellings) figure for the lower level.  The aim of figure above the household (occupied dwellings) level would be to reduce any backlog in need.  At the same time the number of unoccupied properties should be reduced. 

 

Local targets would be adjusted to take account of the number of unoccupied dwellings.

 

Growth 2011-21	Annual rate
Net additions	189,300
All dwellings	188,300
Households (occupied dwellings)	138,600

 

Supply and affordability

House values/prices are the consequence of several factors of which supply is only one component.  The main factors are the level of interest rates and earnings.  Interest rates in the past have also been effectively reduced due to the policy of quantitative easing. The evidence suggests that increasing supply therefore would not lead to lower house prices.

 

An article in the Economist stated: “These figures suggest that hitting the 1.5m target would have only a limited effect on home values. An additional 1.5m homes is equivalent to 6% of the housing stock so, all things being equal, prices would fall by 12%.  But the country is already adding about 1.2m homes new homes every five years, so an additional 300,000 homes might skim 2.5 percentage points off house prices.  And other things are never equal. According to the housing ministry’s guidance, a two-percentage-point fall in interest rates pushes house prices in the other direction by six percentage points.”  [Economist, 10th August 2024].

 

In a report under the Bank Underground auspices, it was evidenced that low interest rates and rising incomes where the major factors influencing prices. . “…Between 1985 and 2018… we estimate that the long-run effect of the decline in the risk-free rate increased real house prices by about 108%; the increase in household income increased house prices by around 80%; whilst the increased net tax obligations pushed house prices down by around 15%.”

[Miles, D., and Monro, V., 13 January 2020, ‘What’s been driving long-run house price growth in the UK?’, Bank Underground.]

 

Quantitative Easing (QE) was designed to boost spending and investment by lowering interest rates, the policy was intended to maintain and boost economic activity after the Great Financial Crisis of 2008.  Research carried out since then has looked at the effects, in particular its role in boosting asset prices – including houses.

 

“One of the main channels through which ultra-loose monetary policies affect income and wealth distribution is changes in asset prices. First, lower central bank interest rates reduce the interest rates on other securities (such as government and corporate bonds) and increase their prices. Second, asset purchases result in a further fall in yields and an increase in their prices.” [European Parliament, 15 June 2015, ECB Quantitative Easing (QE): What are the side effects? Monetary Dialogue, Compilation of notes, Directorate General for Internal Policies, Policy Department a: Economic and Scientific Policy.]

 

How have we got here? 

Why have we got a situation where governments create the wrong targets for the wrong reasons?  This can be attributed to a simple fact - the dominance of the idea that ‘supply’ is the fundamental factor behind housing problems especially house prices and rents.  This discourse rests upon an understandable interpretation of economic theory – that the interaction between supply and demand is the driver of prices in housing.  Yet as has been explained earlier this apparently obvious relationship does is not applicable to housing. The question therefore is why does it still hold sway?

 

It reflects an acceptance of the ‘supply’ cause by governments, many academics, lobby groups (masquerading as ‘think tanks'), and commentators, aided and abetted by a development industry and related actors who seek to justify more house building to maximise profit.  The discourse succeeds because it appears logical and its promoters represent powerful interests both economic and political. Rejecting it and establishing an alternative policy framework runs against the neo-liberal policy that has permeated policymaking since the early 1980s. 

 

Conclusion

The government’s new housing targets represent a significant increase in numbers up from 300,000 to 375,000.  The Government has used flawed assumptions and accepted that supply or the lack of it is the root cause of housing problems.  As well as leading to unnecessary and unsustainable development the policy will not actually solve the problems it purports to deal with.

 

Evidence suggests that a lower target of between 188,3500 and 203,000 would be more appropriate allied with a range of policy measures to address the various aspects of housing. These would seek to resolve the contributory factors, which together have created a housing crisis.