The UK’s chronic shortage of affordable homes is starving business of talent and pushing up employment costs. Dan Lewis, the IoD’s senior adviser on infrastructure policy, explores solutions ranging from tax concessions to land reclamation
Unless you are in the business of selling property, there’s a good chance that you see the high price of housing as a problem for the UK. The cost of the average home is 7.6 times higher than the average annual salary, compared with 3.6 times in 1997. Housing costs translate into employer costs in terms of wages, skills shortages and above all, lost growth opportunities. This makes it a business issue.
The findings of our latest survey of IoD members on this topic are clear: more than half of the respondents reported that employees had quit or potential recruits had not joined their firms because they couldn’t afford to live near their workplace and/or couldn’t face a long commute.
There’s a more direct hit to the nation’s finances too: housing benefit. At £25bn, it is one of the biggest and fastest-growing parts of the annual welfare bill. You could do a lot with £25bn, such as installing ultra-fast broadband throughout the UK. But, instead of making long-term investments to strengthen the economy, taxpayers are spending heavily on benefits because housing is so unaffordable.
So what’s going on? Let’s start with volume. In a forthcoming paper for the IoD, an analysis of Land Registry data on property sales since 1995 highlights one key trend: the number of transactions (churn) is falling. Across England and Wales, 80,000 completions a month is now a typical figure. A decade ago, that figure was around the 120,000 mark. There have been several factors behind this trend, including a decline in mortgage lending since the financial crisis of 2007-08; a population growth spurt; an increase in stamp duty; and the granting of subsidies to new homebuyers, which have continued to push up house prices.
Can’t we just build enough new dwellings to meet demand? If only. The cost of land constitutes three-quarters of the cost of a home – and land with planning permission is in artificially short supply. The government controls its availability. Most green belts and other restrictions on building didn’t exist in the 1930s, when housebuilding was at its peak in the 20th century. In that decade 2.8 million homes were built, mostly by smaller housebuilders, to accommodate a population that was 20 million smaller than it is today. Relative to the needs of the UK’s current population, we estimate the shortfall of homes to be about two million.
Many small plots are available, but the preponderance of large housebuilders, which need to build on a large scale to make a profit, hinders their development.
There is no quick fix. Over the next five years, stimulating churn through a reduction in taxes has to be the priority. This can be done not only by cutting stamp duty and capital gains tax, but also by incentivising older people to downsize.
To house the projected additional eight million people who’ll be living in the UK in 2041, we’ll need to review green belt policy and build several new towns. By that point, virtual reality will be a mature technology, making remote working and switching virtually between any number of locations feasible – as long as the right fibre-optic infrastructure is in place.
Housing the nation’s expected extra 25 million people by 2116 will require much more radical thinking, especially if we’re still not prepared to build on greenfield sites. Suggestions have included reclaiming Doggerland – an area covered by the North Sea since 6500BC – or even establishing colonies in space. Until then, increasing supply with more building, lower taxes and fewer regulations is the way to reduce this huge cost to UK plc.
Prices v wages
It may come as news to some IoD South East members, but there are actually large swathes of the UK where homes are still affordable. For
first-time buyers, there are several districts of Scotland and north-east England that have reasonable house-price-to-average-salary ratios of 3 to 3.5, compared with 12 in London.
The problem is that they don’t have the jobs or infrastructure to attract many people. That’s why the IoD has campaigned so vigorously for full-fibre broadband to be rolled out across the country. This would enable remote working from affordable locations, drive down business costs and stimulate the rural economy
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