Without Busting the Bank

Whoever is elected as PM, and at whatever time, the main priorities remain the same, the economy, defence, law and order, housing, education, national health, and the protection of the sick and vulnerable. In simple terms the protection and wellbeing of all its citizens.

Listening to the party leaders or reading their manifestos it appears no one is attempting to radically resolve at least one of these requirements of a government, number four on the list, a longstanding problem, the UK Housing Crisis.

Since the post war boom of the 1950’s there has been a total structural failure in the housing sector. For example, no longer do you witness council building programmes on the scale of the post war years during the 1950’s.

Such is the scale of the problem many people wait years to secure a home for themselves and their families, if at all. According to the Centre for Policy Studies in 2026 the housing backlog stood at 6,5m homes and has grown over the decades, equivalent to around 15m people having no permanent residence of their own. That’s a whopping 21% of the population.

France builds homes at a 40% higher rate than the UK, from a similar size economy and a slightly higher national debt ratio. The UK has the second worst rate of housing per 1,000 of population in the whole of Europe.

This gross underperformance is in the face of the population growing at 0.54% p.a. over the last ten years, equivalent to 380,000 souls requiring 170,000 new homes every year just to cover the population growth. Over the last ten years an average of 198,300 new dwellings have been built resulting in a notional small surplus of  28,300. Eighty Five percent of house builds is needed to cover immigration with a sparse extra to reduce the enormous backlog.  At this rate it will take over two centuries to solve the problem. These figure become even starker if you take the immigration trends over the last five years.

To bite into the huge backlog 6.5m over the next 15 years would require an additional annual 433,00, less the surplus of 28,300 to give a grand total of 404,700, say 400,000 new homes per annum. The total building programme needed therefore is a whopping 600,000.  This seems an insurmountable task even for a nation with the fifth biggest economy in the world!

The housing problem isn’t just a matter of simple arithmetic based on housing numbers; there are other factors that require to be born in mind. What is this doing for social cohesion, is the housing demand strangling the spending power of the masses and the economic growth demanded of it, is the lack of labour mobility debilitating our chronic productivity and does the excess housing demand of itself drive up property prices to unaffordable levels. Government policies on migration, skills and training, economic growth, funding capacity, governance of the national debt and the re-balancing of the economy are all significantly affected.

It stretches beyond the pure economics into cultural identity and social cohesion. It is not a simple bi-modal problem, it needs really concerted thinking and planning over long timescales.

All these factors have to be considered in tandem.

Effect of Falling Birth Rates and Migration

There are two overwhelming factors at play that have a strategic bearing on housing policy; birthrates and net migration. These have to be grappled with first if there is any hope of meaningful progress.

Birthrates in the UK and Europe are lower than the rate required to maintain population levels. In the UK it averages around 1,6 per 1000 whereas in Europe it averages 1,4 per 1000; France an exception at 1,8 per 1000. It is generally accepted that the birthrate needs to average 2,1 per 1000 for total populations to remain static.

This means for the UK, whereas the population should be falling at an annual rate of 35,000 per annum (i.e. (2.1-1.6 per 1000 x 70m), the total population is growing by 0.54% per annum over the last ten years, or 380,000 (i.e. 70m x 0.54%). In other words, by interpolation, migration is contributing to a total housing demand for 415,000 people per annum, equivalent to 170,000 homes per annum!

To reduce the challenge would necessitate a zero population growth policy, a reskilling of the indigenous workforce to maintain competitiveness and a virtual doubling of the housing programme from 198,300 to 433,300 over 15 years, or if stretched to 25 years 260,000. At the lower end a 31% increase in new builds would seem an achievable target. In other words any justifiable population increase beyond zero would trigger a higher house building programme.

The problem becomes manageable and the housing programme could always be accelerated or reduced depending on other constraints. Any housing programme has to be self-balancing in all its aspects.

The UK GDP is currently £3,000bn. Assuming a 260,000 house building programme was executed using predominantly local raw materials and skilled labour, the national income from construction on house building would underpin an annual income of £65bn or 2.2% for an average two bedroom house cost of £250k., or an additional 0.5% to current annual growth rates.

The Housing Strategy cannot be fixed without first fixing the net migration policy.

The market pressures on the housing market have driven erratic and excessive movements on mortgage repayments and rentals to levels that many cannot afford.

One of the benefits that is estimated is a rebalancing of the housing demand and supply ration would reduce the average cost of houses by £75,000 an important step to re-establish affordability for all.

But there are other structural steps required to rebalance private versus public housing.

Currently, for those starting out in family life there is no certainty of a home, or affordability over the long term.

For those on low incomes back in the 1950’s new families could apply to go onto a council house list and reasonably expect a home within a year or two. For a three-bedroom house at a rent, in my case where I lived in Nottingham, of 14 shillings per week, or in today’s terms, adjusted for RPI, of £200 per month. Today it costs twice that figure, averaging up to £390 per month for a two-bedroomed house. Coupled with the combination of inflation on food and energy, no wonder families are struggling to make ends meet.

We are not alone; France has problems and parts of the USA where various schemes are being developed are using the rental route to house people.

It is doubtful that to meet a challenge of this magnitude for both private and social housing can be met by private funding alone, even if aided by attractive tax or other incentives. The investment needed above current intentions is huge. To address the backlog alone would require an annual investment of £65bn.   

Sadly, for such a pressing priority there is no evidence that any political party has a real grasp of the challenge.

Competing demands on the public purse make meeting such a challenge daunting especially when there is a national debt mountain of £3,0tr.

The question needs asking, is there an alternative approach, taken step by proven step, which could achieve a final guaranteed practical aim of 100% housing of the nation?

What might that alternative approach look like?

I proposed a conceptual approach before but was largely ignored. Except for a government desire to build an extra 150,000 per annum and support from a member of the Royal Household, otherwise nothing!

The first question is why has the private and public sector demonstrated they have been unable to cope and why does it need government intervention when there is not a weak housing demand issue?

The second question is why is it happening on such a gigantic scale?

And the third question, how would you fund £65bn without throwing the economy and government financing into a basket case?

As a minimum, the housing backlog of 6,5m homes must be dealt urgently, along with accommodating the future rate of increase from any permitted growth in population numbers. If it turns out that the population increase cannot be managed within the funding capacity available, the only tool left is to unduly restrict inward migration by the adjustments required. However, great care and diligence is necessary to do this. The focus is on the net numbers on migration not the analysis of who’s coming in and importantly who is going out. Is the economic pool improving or deteriorating. Germany for example took the courageous step of allowing 1,5m migrants into their country in one year. But those that came were the middle classes comprising scientists, engineers, professionals, teachers; not desperate people from impoverished countries.

The ability to successfully implement a radical change needs the joint support of the UK Government and the International Banking Community. To operate effectively it is recommended there is a UK Consortium of Retail Banks experienced in house lending, acting as executors for the operation of any final scheme underpinned by Government guarantees.

The UK government must lead from the front, arrange an internationally based committed funding programme lasting at least three parliamentary cycles, i.e., 15 years but ideally 25 years. This is needed to overcome the stop/start problem and any erratic market conditions.

The total funding could be via a 25-year government guaranteed and private sector property bond at a fixed interest of (say) 5,25% drawn in at least three, five-yearly tranches each of £325bn. Of the total the private sector would draw down approximately 75% ( £250bn, being their current level at the moment), and the government £75bn. The Government’s additional commitment would be an annual £15bn backed by property assets and reduced by their current expenditure on social housing. They would guarantee repayments on loans for defaulters. Funders would earn a 0,5% margin over current 25-year gilts and gain around 2% return on increases in market values. The private sector would be under an obligation that half of new homes would be for social housing and therefore as the government is covering part of that, the private sector would need to commit around £150bn from their share of the fund dedicated to social housing.

The government risk would be minimal and the economic and social benefits enormous. On funding completion they could offer the rental streams to councils to reduce local rate bills.

There is delicate national debt level to be managed now standing at £3,0tr. Issues such as over exposure to debt would be avoided as debt would be directly asset backed and international funders outlook for the UK economy as a whole improved possibly reducing total borrowing rates on all debt.

For house buyers the mortgage repayments on a £250,000 mortgage over 25 years is £1,400 per month. The capital element is £800 per month leaving an interest cost of £600 per month. In addition the ownership derives a capital appreciation, a form of pension, of 2% giving annual returns of £200, giving a notional net expenditure cost of £400 per month.

Council House Tenants are currently paying a similar amount up to £390 per month on average but in dense economic areas much greater than this. Londoners for example may earn 17% more than the national average but they are 3% worse off after rents. To aid mobility and to address regional deficiencies a tenant rebate is required either operated nationally or regionally to smooth out these differences.

I would propose that council renters should receive a discount on market rents equivalent to the capital gains earned by house buyers. Whilst this would be a running cost it is eventually recovered on house realisations either on the market or adjusted in the transfer mechanism to local councils.

The annual cost of such rentals in each year would amount to £312m      (260,000 x 50% x (12 x 200).

Those tenants who wish to avail themselves of eventual ownership would pay a market rental for at least 5 years to avail themselves of a purchase option at a cost price adjusted by repayments to give a discount of 5% (leaving the other 5% to the national government), whilst those wishing to remain in social housing with no option to convert would enjoy a rent reduction at 50% of the average market rate.

The rental costs for both private and social renters would become fixed and certain over a long extended period.

Local councils could look forward to an eventual annual increasing rent roll of £312m per annum.

Any property bought within a 25-year timescale would, whatever the changes in ownership or tenancy, carry with it the obligations and conditions incorporated in the property bond, for example put options on sellers.

The objective would be to ensure a constant supply of secure funds allowing the gradual rebuilding of the housing stock thereby renewing the building trades and freeing citizens from worries over short-term erratic market influences. Much as the creation of the NHS system was designed to do for health.

No person would be able to rent or buy more than one dwelling. Regional variations would need to be catered for.

Left out of this concept paper for the moment is how would such financial dynamics fits into a national public funds strategy to include National Debt Management, GDP Growth, Energy Sourcing, Mass Migration, NHS Rationalisation, Productivity, Defence etc. That is a broader subject, but a strategic linkage nevertheless is required so all can hang logically together.

Perhaps, these huge sums have provoked politicians shying away from a total resolution?

Michael Gove at least made a courageous attempt with his £11,5bn Affordable Homes Programme (AHP) that projected the building of 180,000 new homes over five years to 2026.

That took a bite out of the problem but was not enough. My projections suggest a figure of 260,000 each.

BENEFITS PROFILE                   

Benefits to Private Tenant –

Guaranteed Rent

Increases linked to Government indices not to the market or short-term interest rates                                                                      

Purchase Option at a 5% discount on cost after 5 years   

Benefits to Social Tenant –

Guaranteed Rent discounted by 50%

            Increases linked to Government indices not to the market

            Tenancy for life                                                 

   Local Councils –

Solution to Social Housing

Increase in Housing Stock at no Investment Cost to local authorities

Increasing Rent Roll

Transfer of Property Assets to Local Councils after 25 years at Zero Value

Effects of Excessive Inflation or Market Property Prices on Rents Eradicated

CLOSING REMARKS

The scheme could be expanded if increased growth in GDP permits it.

Any risk exposure reduced by measures in other areas such as in parallel a NHS restructuring, transforming to a continental model. That has the potential of saving the public purse £50bn a year when compared with the French system for similar populations but better in general medical outcomes whilst still retaining affordability. Medical need is still met at all society levels. A review of the interest on quantitative easing reviewed. No other nation apparently does this. They are other financial dynamics at play.

All it needs is political leadership and radical strategic planning sustained over less than a generation, the possibilities are all there.

Appraise the assumptions and numbers by all means and then decide when can we start?