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Chapter 11 discusses subsidies to the supply of rental housing. The traditional approach has been to subsidise first local authorities and then housing associations to produce additional social housing. Later the emphasis shifted to introducing private finance and recycling past subsidy to provide a range of affordable housing products. Additionally, the planning system was modified to make it possible to require the provision of affordable housing on residential development sites. Allocation principles have also changed, moving away from accommodating lower-income working households to emphasising provision for vulnerable households of all types. Here we examine the impact of changing financing mechanisms on the capacity to add to the housing stock; the types of provision; and the rents that are charged across the country. We also consider the impact of Right to Buy and other approaches to transferring accommodation between tenures. Finally, we look to comparable international experience.
For many younger and lower-income people, housing affordability continues to worsen.
Based on the academic research of two distinguished housing economists – and stimulated by working with governments across the world - this wide-ranging book sets out clear theoretical and empirical frameworks to tackle one of today’s most important socio-economic issues.
Housing unaffordability arises from complex forces and a prerequisite to effective policy is understanding the causes of rising house prices and rents and the interactions between housing, housing finance and the macroeconomy. The authors challenge many of the conventional wisdoms in housing policy and offer innovative recommendations to improve affordability.
Chapter 6 discusses new house building and the changing structure of the industry. Current housing policy is heavily concerned with ways of increasing supply and, in terms of analysis, the responsiveness of construction to changes in house prices is one of the key parameters. If the response is strong, then increases in demand are primarily met by an increase in supply. If the response is weak then demand increases lead to worsening affordability. The response appears to be particularly weak in the UK by international standards. However, the chapter also demonstrates, through simulations, the extent to which it is feasible to improve affordability by increases in house building. To have a significant impact, increases have to be large and sustained, on a scale that has rarely been achieved in the UK in the past.
Whatever measure of affordability is used house prices and rents play a central role and Chapter 3 is concerned with what causes these two variables to change over time and vary across different parts of the country. Although increases in house prices have been particularly strong in the UK by international standards, other countries are also discussed. In fact, house price trends and volatility can be explained by a fairly small number of variables – and their influence has been remarkably consistent over the last fifty years. The problem has been rather that house prices are very sensitive to changes in incomes, interest rates and credit conditions and these vary greatly over time. Therefore, modest changes in macroeconomic conditions have disproportionate effects on housing. UK empirical work on market rents is less well-developed than for house prices, but the chapter considers the reasons why rents appear to have risen at a slower rate than house prices.
Chapter 14 highlights the key themes of the book and their implications for policy. Although there is considerable agreement among economists with regard to the range of required policy reforms - including changes to land use planning, taxation, social housing provision, rents and subsidies, and to financial markets - there are external constraints, both political and economic, that impose limitations on even the most positive reforming governments. But the absence of positive policy change in the UK would imply that the worsening affordability and volatility that have often typified housing markets are likely to continue. The book shows the need to extend housing policy beyond a concentration on expanding supply and points to the need for a more balanced approach that incorporates policies addressing demand as well as the supply sides of housing. Given the policy constraints, the chapter also points to possible new directions.