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The opening chapter provides an overview of the topics covered in the book, set in the context of the key policy debates that have taken place in recent years, not just in the UK but across countries facing similar issues. The chapter introduces the analytical approaches to be used. The methods are primarily those of economists – including modern as well as traditional techniques - but recognise the insights of other disciplines and the political constraints under which housing operates. The chapter stresses that housing cannot be divorced from the macroeconomy and monetary and fiscal policies are often more important to housing outcomes than policies directly aimed at housing. But housing also influences the economy which, particularly since the Global Financial Crisis, has added further constraints on housing policy.
Chapter 8 marks the beginning of the book’s policy discussion. Not only is housing strongly affected by the macroeconomy, but housing also affects the economy as a whole. Although housebuilding is a modest part of economic activity, the indirect effects of housing are powerful. Chapter 8 considers these interlinkages. Early research, which concentrated on the relationship between housing and consumer expenditure, generated considerable controversy. The Global Financial Crisis stimulated further analysis, emphasising the role of housing wealth particularly in providing collateral for loans. Recent international studies have considered the impact of liberalisation of international capital markets; the importance of housing and housing finance for macroeconomic stabilisation; and in reverse the importance of macro policy for default, particularly in the light of the US sub-prime crisis. The chapter also discusses the extent to which housing becomes more sensitive to changes in monetary policy instruments in a liberalised environment.
In Chapter 7, fiscal and monetary policies are considered and particular attention is paid to structural changes in mortgage finance markets. From the early 1980s the UK experienced two periods of strong mortgage growth: the first lasted until the recession of the early 1990s and the second started in the mid-1990s and ended with the Global Financial Crisis (GFC). However, a distinguishing feature of the GFC period was the fall in mortgage advances, which has never been fully reversed. Credit tightening causes particular problems for first-time buyers as compared to the majority of current owners; the latter typically have sufficient equity in their existing properties, which they can use to finance further purchases. Therefore, the decline in credit availability has had important distributional effects. Accumulated equity also provides an advantage for existing owners entering the expanded Buy to Let market. Similarly, the stress tests that borrowers now have to undertake fall primarily on aspiring first-time buyers and those with volatile incomes. The chapter also considers non-neutralities in the property tax system which can discriminate against first-time buyers.
Chapter 13 is concerned with owner occupation and discusses both the long history of tax reliefs for this sector and the scope for enabling increases in ownership among younger cohorts in future years. Support has always been closely related to political as much as economic objectives – as well as to the limitations of rental tenures. Consequently, some policies – particularly those concerned with taxation – have been off limits. Nevertheless, many economists are highly critical of the current tax system and have proposed reforms. Falling home ownership rates among the young and indeed the early middle aged are an international phenomenon, but the decline (while currently being slowly reversed) has been greater in the UK than in most other developed economies. The chapter also argues the need for home ownership to be sustainable. This raises the question of the benefits from additions to the standard debt financing model, including greater use of equity finance.
Chapter 4 concentrates on new household formation and the tenure choices of younger age groups. Not only have the young experienced lower rates of home ownership than previous generations, but they are more likely to remain with parents for longer or share with those in a similar position. The UK is not alone and many other countries have experienced similar trends. Since younger households are now more likely to rent privately for longer, the chapter discusses whether this represents a change in preferences – renting is more flexible – or whether young households are constrained from entering home ownership by high housing costs, credit constraints, job insecurity, competition from the Buy to Let market, demand from older households and from those wanting second homes.
Most UK households do not face affordability difficulties; those most affected are typically low-income renters and aspiring first-time buyers. However, popularly-used affordability indicators look at the average household position across the country, rather than the distribution across households. Therefore, Chapter 2 discusses the strengths and weaknesses of different affordability measures, including the popular price to earnings or income ratios, the share of expenditure taken by housing and residual income methods. The chapter is critical of these measures and, therefore, proposes two new indicators that provide more information: the first examines the relationship between housing stress and expenditure shares for low-income renters; the second constructs a version of the Lorenz curve for aspiring first-time buyers and shows the proportion of houses that could be afforded by households with different levels of income around the country.
The land use planning system in Britain is frequently seen as a key constraint on increasing housing supply and this is the topic for Chapter 9 in conjunction with an analysis of the development and use of household projections in determining housing requirements. Household projections had, and continue to have, very real impacts on how land supply and prices are determined and therefore on how many new homes are provided. The chapter discusses the development of the regulatory system starting from the 1947 Town and Country Planning Act and the role of the public sector in overcoming post-war shortages. The chapter then moves on to examine the development of concerns about the negative impacts of planning from the 1970s. The question arises whether this approach remains relevant in a market-led economy. The chapter also considers alternatives to the English land use planning model, notably the use of zoning systems in many countries with comparable pressures.
Chapter 10 returns to the question of increasing private housing construction. In addition to the restrictions on construction arising from land use planning policies, other constraints arise from the behavioural responses and incentives structures facing local authorities, builders and landowners. Output is, therefore, influenced by the structure of the housebuilding industry, notably the business model of larger speculative builders; the skills base and productivity; and the extent to which demand is there to maintain increased output levels. The chapter then discusses possible models for speeding up development, including off-plan sales by private developers; greater diversity of housing types and tenures; and the increasing incentives to housing associations to develop market housing. In addition, the chapter considers attempts to limit the negative impacts of planning controls through permitted development and planning in principle as well as the core role of planning obligations in providing affordable housing and local infrastructure.
Chapter 5 discusses housing for low-income groups. Households face a wide dispersion of housing costs and data for the UK and many other countries show that those on low incomes are more likely to spend a high percentage of their incomes on housing in the absence of support. Low-income households are also more heavily concentrated in the rental housing sectors. The chapter, therefore, concentrates on the measures that have been implemented to support housing and the extent to which the problem of high rents is offset by income related subsidies. The chapter also stresses that low-income affordability cannot be considered in isolation from other parts of the housing market and the economy more widely, notably fiscal and monetary policies and changes in the income distribution, and policy has generally taken insufficient account of the interlinkages.
Chapter 12 turns to tenant subsidies. Since the introduction of income-related housing subsidies to tenants in the early 1970s there has been continuing debate about the relative weight to be given to demand side and supply side subsidies. The numbers helped by the second is limited by available supply while in the UK the first provides an as of right benefit to all eligible households in both the social and private rented sectors. Other issues relate to the efficiency and capacity to target assistance, the relative public expenditure costs to achieve government objectives, and their impact on the allocation of affordable housing and on work incentives. One of the most important and unpredicted changes in housing has been the growth of private renting which now accommodates around 20 per cent of households in the UK. The chapter discusses these tenure shifts and examines how austerity, regulation and changes to welfare policy have impacted on households and affordability.