Peter Franklin: Under Labour, the housing crisis goes from bad to worse

Peter Franklin is an Associate Editor of UnHerd.

Angela Rayner wasn’t cut off in her prime, she made a lucky escape. I’m not alluding to the general state of the government she was part of, but her specific responsibility for delivering Labour’s promise to build 1.5 million new homes over the course of this parliament.

During her brief stint as the shadow housing secretary, Kemi Badenoch delivered a blistering speech at the despatch box in which she warned her then opposite number that the target was undeliverable:

“I think we know who is in charge, and it is not the right honourable Lady. She has been stitched up — her colleagues have made her the fall guy.”

Of course, Badenoch couldn’t have known that Rayner would auto-destruct, but she was right about the bigger picture: Labour is heading for failure on its housing policy.

That much is clear from figures released a few days after Rayner’s resignation. According to the Home Builders Federation (HBF) planning permission for new homes during the second quarter of this year fell by 17 per cent compared to the same period last year. That’s just 44,520 new homes for all of England – the lowest quarterly figure since 2012.

The HBF says that 370,000 permissions are required annually to meet the manifesto target. But rather then making progress towards this goal, the government is going backwards. So, who’s to blame?

It’s easy to point the finger at planning authorities. If the bottleneck is planning approvals then councils are the obvious culprit. That’s why the Planning and Infrastructure Bill is all about forcing the pace of the planning system (even if its own progress through Parliament isn’t exactly lightning fast).

But are those pesky planners the biggest problem here? Or the councillors in charge of local planning departments? Or the dreaded nimbies who vote for the councillors?

It’s worth noting that the latest fall in planning approvals isn’t a novel development, but part of a much longer drop-off that stretches back to 2018. And yet during this period the rate of planning approvals has been pretty high and consistent. More than 80 per cent of applications are approved.

So it’s not that councils are becoming more obstructive. Rather, the reason that the number of approvals is down is that the number of applications is down.

But before the finger of blame swings round to the developers, its worth asking whether they’ve got a good reason for submitting fewer applications. For instance, if the planning process has become even more onerous than it used to be, developers could be forgiven for not banging their heads against a brick wall (especially if they’re not permitted to build one).

James Yucel, director of the Conservative YIMBY campaign, identifies the 2018 revision of the National Planning Policy Framework (NPPF) as the key impediment. He argues that the number of approvals has “fallen off a cliff” because the new rules altered the way in which the financial viability of new sites is assessed for planning purposes – and therefore expectations of demand.

Certainly, the timing of NPPF is significant coming as it did at the start of what Yucel calls the “biggest collapse of housebuilding in British history”. Did anything else of relevance happen around this time? Most obviously there was pandemic, though it should be said that the slide in construction started well before the first lockdown. Aside from some temporary disruption, then, the slow down cannot be blamed on the virus.

If we’re looking for a long-term cause of a long-term phenomenon (and one that predates the pandemic) there is one factor that is surely more significant than any tinkering with the NPPF.

As you may have noticed, we’ve been living through a period of extraordinary property price inflation. In the 21st Century, it kicked off with the boom years under Blair. That, of course, was followed by the global financial crisis in 2008 and the Brown bust. During the Cameron and May years the property market picked up again, heralding another long rally in prices (no doubt fuelled by money-printing at the Bank of England).

However, towards the end of the 2010s the white-hot property market cooled back down again. There was a post-Covid spike, but that too appears to be subsiding. So while there’s no sign of the long-feared (or hoped-for) market correction, the era of high and sustained house price inflation appears to be over for now.

Crucially, this happened “despite” the collapse in housebuilding. It’s also rather interesting that the runaway house price inflation of the Blair years happened “despite” a building boom. It’s almost as if the relationship between housing affordability and housing supply isn’t quite as straightforward as we’ve been led to believe.

Rest assured, I’m not building up to a pro-nimby, anti-development argument here. Indeed, I believe it’s essential that we build, build, build. But that’s precisely why we need to proceed on the basis of economic reality, not the just-so stories of theoretical economists. And the observable reality in 21st-century Britain is this: high house price inflation does not follow from inadequate levels of house building; rather, inadequate supply follows from low inflation.

But why should this be? Well, it’s not as counterintuitive as it might first appear. All businesses depend on the careful management of cashflow, and that’s especially true of construction with its big upfront costs. There’s the cost of materials and labour, of course.

But, above all, there’s the cost of land. In pressured property markets, that’s a huge expense that exposes developers (and those who finance them) to potentially massive losses. When land values are going up fast, the risk is obviously reduced. Indeed, healthy profits are all but guaranteed. But when prices stagnate the risks multiply – and developers are bound to proceed more cautiously. It’s this that’s hitting supply, not the lack of planning approvals.

Though developers do need the long-term security of a pipeline of sites and permissions, the number of approvals runs way ahead of actual construction. According to IPPR research, approvals for 1.4 million dwellings have gone unused since 2007. Even if councils were to completely stop issuing new approvals (which, of course, they won’t) developers could still go on building for years.

So if developers aren’t building more homes it’s because they don’t want to – and that, in turn, is because they can’t be sure of selling on the land they buy at a sufficient mark-up. In that respect it’s not the number of planning approvals that makes the business case for more house building, but the rate of house price inflation. For aspiring home owners it’s a catch-22 situation.

The only way out is for the state to bear the risk of land ownership during development, leaving builders to concentrate on building. Local authorities, development corporations or community land trusts would be authorised to purchase sites and put in basic services. Building firms, housing associations and self-builders would then bid for the right to develop each plot.

But given the size and precarity of our national debt pile, is the public sector in any better position to handle the financial risks of buying and selling land on the necessary scale? Well, it would be if it purchased the land at close to agricultural use values, which are a fraction of building land values. The relevant public body could then grant itself planning permission. As a result, there’d be no need to rely on high house price inflation to ensure profitability: the land use change would do the trick instead.

Of course, there’d be losers. For instance, there’d be fewer windfall profits for wealthy landowners who just happen to find themselves in the right place at the right time. There are also those in the building industry with a vested interest in the status quo i.e. the tail of property speculation wagging the dog of construction. What’s more, the big developers won’t like it if barriers to market entry are lowered for smaller, more innovative, competitors.

Well, never mind. In all sectors, we need to put productive enterprise before the rentier economy. Furthermore, this country can’t afford to prop-up a broken model of development. It’s time to tear it down and rebuild from the bottom-up.