10 December 2003

Barker Review of Housing Supply: Interim Report Published

Launching her Interim Report - “Securing our Future Housing Needs” - Kate Barker said:

“Housing has a huge impact on people’s quality of life. The Government is already doing a great deal to tackle housing supply problems. However, it is clear that the UK housing market is not working as well as it should. In particular there is a problem of weak supply, with major implications for the UK’s economic well-being and house price volatility. The review’s final report next Spring will set out policy proposals for addressing the problems I have identified.”

In 2001, around 175,000 dwellings were built in the UK – the lowest level since the Second World War (see Chart 1, page 9). And over the past ten years, the number of new dwellings built has been 12.5% lower than in the previous decade.
Over the last 30 years, UK house prices went up by 2.4% a year in real terms – compared to the European average of 1.1%. In Germany it was 0%, and in France 0.8%.
If UK house prices had risen in line with the European average, since 1975, the UK economy would have been £8 billion better off. As a result of these price rises first time buyers in 2001 paid on average £32,000 more for their homes.

The Review considers a range of factors that might be constraining the supply of housing in the UK, arising from industry failures or the policy environment.

The main constraint identified by the Review is land supply. This problem relates in part to the housebuilding industry, in particular, its response to risk which leads to reluctance to build out large sites quickly. The regulatory relationship and control over the use of land also influences the way in which land is made available for development.

Key findings:

Housing supply and its implications

Historically, UK housing supply has been unresponsive to changes in price - three times less responsive than in the US and four times less responsive than Germany. Over the last 10-15 years, UK housing supply appears to have become entirely unresponsive – as prices rose, housebuilding did not increase. Inadequate housebuilding constrains economic growth, damaging the flexibility and performance of the UK economy, reducing living standards for everyone. Regional price differentials also reduce labour mobility and hamper economic growth. Too few houses and consequent higher house prices also create affordability problems:

In 2002, only 37% of new households in England could afford to buy a house, compared to 46% in the late 1980s.
The ratio of lowest quartile house prices to lowest quartile earnings has increased significantly in most English regions. In 1993, a London house cost around four times the annual income of a low income household. By 2002, the same house had risen to almost eight times annual income (see Chart 1.7 page 34).
Reduced housing supply contributes to homelessness - households in England in temporary accommodation have more than doubled between 1995 and 2003 from 46,000 to over 93,000.
35 per cent of first time buyers in London pay at least part of their deposit with a third party contribution, compared to 22 per cent in the North and the Midlands. Increasing reliance on inheritance and donations drives a wedge between first time buyers who have access to wealth and those who do not.

The housebuilding industry and the availability of land

The housebuilding industry is characterised by a reluctance to invest in brownfield development and low levels of innovation. Many house builders hold considerable portfolios of undeveloped land with planning permission. There is little evidence to suggest, at any rate across the country as a whole, that these landbanks prevent other house builders entering the industry, or allow house builders to exercise market power. But, once land and planning permission has been acquired house builders have little incentive to compete for consumers or innovate.

Only 54% of new home buyers say they would buy a new home or another home from the same house builder.
In order to best maximise profits many house builders control production rates and “trickle-out” no more than 100-200 houses per annum from a large development. This may not be desirable from society’s point of view.
Modern methods of construction are not well established in England where housebuilding techniques are very labour intensive – around 50 per cent more than Denmark, and 25 per cent more than Scotland. Labour intensity has not changed significantly in England over the last 25 years. The housebuilding sector suffers from significant skill shortages with 80 percent of firms reporting difficulty finding bricklayers, carpenters and plumbers.

Government policy levers

The Government is an important player in addressing problems with housing supply. Through the Sustainable Communities Plan and current housing and planning bills, it has already embarked on major reforms of the planning system and of social housing. Nevertheless there are significant challenges:

Local authorities have few positive incentives to build and few sanctions if they fail to meet targets, while the planning framework could respond better to market signals and take better account of costs and benefits of development.
Infrastructure barriers hold up construction of over 40,000 dwellings in the South East alone.
Only 1% of property institutional investment is in residential property. A tax-transparent vehicle (based on the US Real Estate Investment Trust model) could encourage more investment.
Higher land and build costs have meant that public money for housing is not going as far as it used to. Social sector building has not risen in line with increased public expenditure in the sector.

Increasing housing supply

The Review reaches no conclusions on how many houses we need to build in future. Government faces choices about how far to meet growing demand, given the environmental and social costs of housebuilding. The report published today does contain estimates of undersupply to help inform the debate:

39,000 additional houses a year are required simply to accommodate population growth and changing patterns of household formation in England.
In recent years between 93,000 and 146,000 households per annum have been priced out of the housing market in England compared to affordability levels in the late 1980s.
The review has commissioned academic modelling work, to investigate estimates of the number of additional houses consistent with various long-run house price scenarios. This suggests that an additional 145,000 homes per annum would be required in the UK to lower real house price inflation to the European average of 1.1% and that an additional 240,000 houses would be needed in the UK to lower real house price inflation to zero. These are likely to be over estimates as greater supply would affect expectations and change the response of prices to additions to the housing stock.

Notes to Editors

1. HM Treasury’s assessment of the five economic tests concluded that “… the incompatibility of housing structures means that the housing market is a high risk factor to the achievement of settled and sustainable convergence”.

2. The Review was set up on 9 April 2003 by the Chancellor of the Exchequer and the Deputy Prime Minister with the following Terms of Reference:

Conduct a review of issues underlying the lack of supply and responsiveness of housing in the UK;
In particular to consider:
- The role of competition, capacity, technology and finance of the housebuilding industry; and
- The interaction of these factors with the planning system and the Government’s sustainable development objectives;
If appropriate, identify options for Government action, including the use of fiscal instruments.

3. Kate Barker has consulted extensively in preparing the Interim Report and wishes to continue to consult before preparing a final report. The final report will be published in Spring 2004.

4. This is an interim report to set out the costs and benefits of a better housing supply and to identify ways in which housing supply, as it currently operates, affects our economic and social well-being. The report estimates the scale of the housing shortage in the UK and assesses the poor response of housing supply. The Report also identifies what, at this interim stage of the Review, Kate Barker sees as the main causes of shortage and unresponsiveness.

5. Further copies of this report can be obtained from the Review website.

6. Kate Barker became a member of the Bank of England’s Monetary Policy Committee in June 2001. Previously she was Chief Economic Advisor at the Confederation of British Industry (CBI) and before that Chief Economist at Ford of Europe.

7. Press enquiries: 020 7270 5238

8. Non-media enquiries: 020 7270 4558