The big beasts of housing may face extinction in a downturn but there are all kinds of small creatures waiting to take their place
It’s not often that Institute for Fiscal Studies lectures achieve the same email virulence as offers of cheap Viagra. So it’s something of a testament to Vince Cable’s influence that last week my inbox clogged up links to the transcript of his recent talk on the housing boom and bust. It’s worth reading – if you can handle the dense history of economic thought, replete with academic references, which Cable handles with his usual wry erudition.
For those that can’t, here’s a summary: all bubbles burst eventually, the recent housing boom was a bubble, it’s now bursting. And although the economy seems to survive some bubbles - remember the dot com crash of the late 1990s? - this is one is going to hurt. As Cable points out, the last two house price recessions lasted around 4 years each, wiping 34% and 30% off house prices. This time the bubble was bigger and inflation is lower than before, so the recession could be deeper and longer.
The bursting of the house price bubble does not bode well for housebuilding or regeneration. Already the volume builders are in meltdown, smaller builders are going bust, and a whole business model seems broken. Unfortunately, almost all regeneration and housing policy appears to have been predicated on an eternally rising property market: affordable housing relies on cross subsidy from Section 106 payments, social landlords depend on private sale to fund their core business, and the finances of regeneration schemes are squeezed from both ends by falling sales values and tighter credit.
The result is that the regeneration of our inner cities seems jeopardised, especially in those places that got too carried away with the ‘executive living’ flats mode of production. To the surprise of absolutely no-one, it now turns out that this market was a bubble on a bubble, fuelled by buy-to-let investors looking for quick capital gains rather than rental income or a place to live. Cable’s answer is for the government to spend 100 times more than the £200m already announced buying up unwanted flats for social housing. While there must be some scope for replenishing depleted social housing stocks relatively cheaply, this line of thinking is dangerously short sighted.
First, most of these homes are one and two bed flats, not the family homes the social rented sector needs. Second, the quality of many is so poor that they don’t meet minimum standards for social housing. Any argument for relaxing these basic standards is a false economy, as the public purse will be paying to maintain these homes in the future. During the last bust lots of flats were bought under the Housing Market Package, some of which are rumoured to have been so poor they needed Decent Homes money to sort them out less than ten years later. Finally, we have a right to ask what the point of such an intervention would be. Given that the UK housing stock was recently worth £4 trillion, even Cable’s £20bn would not have a serious impact on prices.
The abiding image will be the gigantic, lumbering beasts of the housebuilding industry slowly crashing into the swamp, roaring their fury to the sky, while warm blooded mammals scurry from the trees to take their place.
Instead of trying to reinflate an unsustainable bubble, or trying to revive a failed business model, the smart money will be trying to pick the winners of the future – and smart policy will be trying to encourage them. Cable is right that it is the role of government to invest counter cyclically to prevent boom and bust patterns – after all, what else is regeneration than long term public investment against the short term pressures of the market? But it’s a shame he regards Keynesians like himself as dinosaurs replaced by the small furry mammals of monetarism. I doubt that anyone who has lived through the shock therapy of monetarist economic policy in, say, the Welsh valleys, would think of monetarists as even slightly small or furry.
And there is nothing fluffy either about the business model that is now dying around us. If the recent housing boom and current crisis teaches us anything it’s that the relationship between public and private sectors has been horribly wrong for ages. In the boom years developers made fortunes and had no incentive to build more, while governments alternately left it to the market or changed the rules repeatedly. Result - not enough homes were built, many were rubbish anyway, and all sides blamed each other. Over time, the complex regulatory environment encouraged concentration, and a wave of leveraged takeovers created ever bigger beasts at the top of the housing industry. Only the giants seemed able to manage the vast land banks, the years of planning negotiations and the huge debts required to build homes. Now the whole economy is deleveraging and land prices are falling, a permanent shift in the economic climate is threatening the dinosaurs with extinction.
Like all calamitous extinctions, this one will take down many struggling species, including the smaller, regional housebuilders that lack the capital to survive the credit crunch. But the abiding image will inevitably be that of the gigantic, lumbering beasts of the housebuilding industry slowly crashing into the swamp, roaring their fury to the sky, while warm blooded mammals scurry from the trees to take their place.
The truth is that housing production has never been a purely market affair – at least not since most of us stopped living ten to a room in cholera-ridden hovels. We have produced the most, and the best, homes when there has been a healthy mix between public, private and voluntary sector producers, co-operating and competing with each other. To reduce exposure to financial shocks, a warm blooded housebuilding industry needs a wide range of providers, of all sizes and from all sectors, operating on different business models, with different sources of finance.
Some of the smaller mammals have always been with us: the neglected self-builders have long been the single biggest source of new homes, and those RSLs that didn’t get into the speculative game are already beginning to eye up new opportunities. Others are new to the jungle – Local Housing Companies and other joint ventures will soon be bringing local authorities back into housing provision, and Community Land Trusts could finally find their niche now that land prices are becoming more realistic. New commercial entrants, including institutional funds seeking long term investment opportunities, foreign and home-grown companies with new ways of operating, will all have their place. None of these alone can replace the giant housebuilders of the last decades, but between them they could mark the beginning of a new evolutionary epoch. That must be good for regeneration.
Toby Lloyd is managing consultant in regeneration and housing at Navigant Consulting