Despite the spending review's boost for social homes, the government's headline housing pledge looks a long a shot as ever – but its changing perspective on supply and demand could have implications for the architectural community
The latest spending review decision to provide £39 billion over the next 10 years for social and affordable housing is being lauded as a game changer.
Certainly, it’s a strong commitment to getting homes built for lower-income households in England. In nominal terms it represents a big rise on the funding package announced in September 2020, of £11.5 billion over the five years 2021-26.
However, its impact on construction and housing numbers will be more muted than the numbers might suggest. Build costs are up a quarter since 2020, and the share of grant subsidy per home delivered will likely rise if, as expected, there is more emphasis on social-rented homes. Despite this, the spending review announcement will be widely welcomed, not least among the many Labour MPs for whom social housing is a priority.
Intriguingly, the move by the chancellor, Rachel Reeves, may signal more than simply a political choice to expand lower-cost housing. It might reasonably be interpreted as a sign of Treasury thinking softening on its seemingly entrenched view that planning was the critical problem. Certainly, many concerned experts have sought to encourage the Treasury to look much harder at the demand-side challenges.
Their advice seems to be cutting through. Asking ChatGPT about the evolving Treasury rhetoric prompted this reply: ‘There's been a clear shift in Treasury tone over the past year: from almost exclusive supply-side framing to a more balanced supply + demand narrative.’ AI hallucinations aside, this points to a crude consensus that Treasury debate has pivoted from issues such as planning and materials and skills supply to who will pay for new homes.
For architects this has profound implications that flow from the forces prompting this shift in the discussion, within and outside the Treasury. It would be wise for the architectural community not only to follow but to engage with this evolving debate.
Why? Because it suggests greater use of alternative business models to the traditional current trader model, which for decades has delivered the vast majority of new homes.
Alternative models are already delivering ever more new homes, through joint ventures, partnerships, housing association not-for-profit subsidiary companies, permitted development rights, build-to-rent, and self-build. This will continue, altering the mix of both clients and their approaches to delivery, changing the relationships architects have within the housebuilding sector.
Starmer's pledge becoming a political millstone
Seeking to understand the shifting commercial and political sands, it may be worth starting with Keir Starmer’s pledge in October 2023 to build 1.5 million homes within five years. This is becoming a political millstone.
Chart 1 shows a straight-line estimate for growth. It suggests a delivery rate of around 350,000 new homes a year would be needed by 2029. But as each day passes with output falling as it is, the required build rate rises.
Earlier this month, Florence Eshalomi, chair of the Housing, Communities and Local Government Committee, sent a letter to Reeves stating: ‘Evidence to our Committee from across the housing sector has been clear: the Government will fail to meet this target if it relies on the private sector alone.’
Yet evidence suggesting the 1.5 million-home target was a folly has been in plain sight for a decade or more, particularly given the current backdrop of a recessive housing market, growing political and economic uncertainty, a cost-of-living crisis, and tight constraints on public finance.
So why was this overlooked? Probably because the ‘Westminster bubble’ fixates on supply-side issues, particularly planning, but also environmental issues, labour availability, and productivity. These are important, but appear to have blindsided politicians of all stripes to one central issue: who ultimately will pay for the new homes if the public purse can’t be raided?
The reality seems to be dawning in Westminster that private buyers, mainly households and buy-to-let investors, won’t generate sufficient demand to hit the target. Hence the pivot from the supply-side question, ‘how can we build these homes?’, to the demand-side ‘who will pay for them?’
Before looking in detail at the demand-side dynamics, it’s worth recognising that multiple challenges on the supply side exist: finding labour, materials price rises, planning constraints and increased environmental regulation. These are not trivial. Importantly, the supply-side burden on private house builders has increased. This challenges the viability of projects.
But while attention on the supply side is well justified, the gaping hole in government thinking sits on the demand side. Who will pay for the land and construction of 1.5 million homes? Having resources to deliver homes is one thing, but having buyers for the products is ultimately more important – be they households, investors, overseas buyers, housing associations or the public sector.
The case and need for more homes may be overwhelming, but that doesn’t equate to economic demand in a market economy. With public-sector finances highly constrained, many housing associations cash-strapped, and council housebuilding limited through controls on public sector debt, it would seem that meeting Starmer’s target rests primarily on demand from the private sector.
The research team at real-estate services firm Savills is among a growing group of housing market experts shifting the focus of debate towards the demand side. Its recent research Delivering 1.5 million homes in England – Where is the market demand? illuminates the problem of relying on private sales.
These sales account for about two thirds of new homes. Leaving aside bulk sales, they tend to be sold to households or buy-to-let landlords – a market in steep decline. Savills suggests around 27 per cent are built for affordable tenures, with 7 per cent purpose-built to rent. But a large share of new affordable homes is delivered through Section 106 agreements tied to private development.
This research reinforces the view that the private sector is critical to meeting the 1.5 million homes target. Crucially, as things stand, this rests heavily on speculative housebuilders operating the current trader model. All the evidence suggests that even with incentives, such as Help to Buy, it would be a huge stretch to boost these numbers sufficiently.
To understand why we need to look at the dynamics of the market, some of which is covered in the Savills research. Arguably, the three key factors to consider are the relationship between the level of residential transactions and the level of new private homes being built, the likely future trajectory of residential transactions, and the likely ability of households to buy homes in the future.
The close relationship between residential transactions and new private starts and completions has been recognised for many years. In a presentation during a Consultative Committee on Construction Industry Statistics meeting in November 2015 I posed the question: ‘Why is it that since the mid to late 1970s, homes built closely track residential property transactions at a ratio of around 1:10?’ Chart 2 recasts the data from that slide.
Decline in turnover
The final slide ended with a warning: ‘Homeowners are moving less often.’ This highlighted that delivering new private sector homes would likely become tougher.
This concern over falling transaction numbers was reinforced by a report published by the Council of Mortgage Lenders in June 2017. The research, led by residential analyst Neal Hudson, was titled: Missing Movers: A Long-Term Decline in Housing Transactions? For disclosure, I was co-author.
The research highlighted a dramatic decline in the turnover of the existing stock of homes, for which there are many explanations (Chart 3). An obvious reason is the rising average age of homeowners. Older homeowners move far less often. A less obvious factor is the increase in the time taken for mortgaged homeowners to building equity in their homes – the gap between their mortgage sum and the value of their home. In earlier high-inflationary decades, in real terms mortgages shrank rapidly while house prices rose. This boosted homeowners’ equity.
The report notes: ‘As things stand, with low growth, low interest rates and high house prices, the typical homeowner is likely to see their equity grow far slower in the future. All other things equal, this will restrain movement among mortgaged movers.’
In a nutshell, the findings warned of lower residential transactions in future, all other things being equal. This in turn, accepting the linkage between transactions and private new build, would limit sales of private new homes.
Since then, two factors have confounded the relationship – 10:1 – between transactions and delivery of new homes, as we see in Chart 4. The first was the Help to Buy: Equity Loan scheme, which incentivised buying a new home. The second came during the post-Covid ‘race for space’ when demand for homes rocketed and housebuilders had plenty of stock to sell after a cooling in the market. Both were consistent with the premise of a strong market relationship between transactions and new home delivery.
Turning to the third pivotal factor mentioned above, the ability of households to buy homes, it would seem Keir Starmer’s advisers paid it too little attention. Even as he was making his 1.5 million new homes pledge, there were clear signs of a sharp fall on the horizon – not least because the Help to Buy scheme had recently ended.
The long view
To understand these signals, we need to look more widely at macroeconomic trends, not least the past, present, and likely future impact of globalisation.
Despite its detractors and challenges, globalisation improved the financial fortunes of most UK households over the past four to five decades. This fits with what economists would expect from the longstanding notion of comparative advantage. The UK increasingly specialised in services, selling these to other countries at relatively high prices in exchange for goods that became relatively cheaper. This supported strong growth in real household incomes, at least up to the global financial crisis.
Sadly, the positive effects from transitioning to greater international trade were always likely to wane. They did. Chart 4, based on Institute of Fiscal Studies data, shows growth in real household incomes split by parliamentary periods. Notably growth declined after the financial crisis and also post-Covid.
While the growth rate is forecast to rise during this parliament, it will remain low by historical standards. This lowers the opportunities for households to improve their lot in the housing market and constrains transactions.
The trajectories of the three key factors addressed above have been clear for years, providing strong evidence that the government ‘will fail to meet this target if it relies on the private sector alone’. That is one reason why many housing experts took a dim view of the target. Another is that is creates a perverse incentive to cut corners to hit the numbers.
Certainly, the government faces short-term challenges and will wish to save face on its pledge. This might tempt it to return to incentives to boost delivery through the dominant current trader model – a new version of Help to Buy perhaps.
For architects, however, the above narrative helps explain the rising share of non-market new homes and why new business models for delivering new homes are emerging. It also suggests we may see more alternative ways to deliver homes in future, along with growing calls for a return to council housebuilding and a bigger boost for self-build.
Whatever moves the government may take in the short term, the housebuilding sector is in a period of change. Change poses threats and opportunities. For architects there is a threat that they will become further distanced from influence in the housing sector, but the opportunity to reassert themselves as critical actors is far bigger given the complexity of the challenge ahead. Particularly with new towns on the horizon.
To grasp this opportunity, they will need to illustrate how they can add value in the process of finding new models to deliver the quality and number of new homes the nation needs. This will require them injecting credible ideas into the business, financial, social, environmental, technical, and political landscapes that will influence the housing delivery models of the future.