The great house price divide

‘Miliband pledges to target land hoarders to solve housing crisis’, announced the Guardian this week. ‘Use it, or lose it’ was the mantra from shadow ministers. The call is for radical solutions, including granting councils new powers to fine developers who sit on land with planning permission, or even to buy the land off them.

We need ‘muscular action’ to get Britain building again, said Sir Michael Lyons, who chairs Labour’s housing review. But are house-builders and developers really sitting on acres of land ready for affordable new homes, and is land banking a major cause of the housing crisis and a constraint on local growth?

An attack on land banking is an old chestnut with Labour. In December 2005 the Guardian headline was ‘Prescott challenges developers accused of hoarding housing land’. Labour housing ministers throughout the noughties made similar claims. Most have fallen on deaf ears, and all have been greeted with dismay by both social landlords and private builders. Given the long time lag between housing starts and completions, it is very hard to know when to intervene, and even if government was willing to compulsory purchase ‘hoarded land’ it would have to pay the market price.

The Barker review of housing supply, published in 2004 when housebuilding was a third higher than today, concluded that there was ‘little evidence, at least across the country as a whole, to substantiate concerns that option contracts and the practice of land banking allow housebuilders to erect barriers to entry into the market’. Barker did concede that many housebuilders ‘trickle-out’ houses in order to control production rates to protect themselves against price volatility, but this is not the same as widespread land hoarding. She also pointed out that new supply accounts for under 1% of the housing stock.

The LGA came to a similar conclusion, claiming that ‘over the last five financial years (2007-12) the proportion of schemes and units un-started has decreased, and the proportion under construction increased’. There is clearly a case to curb land banking where developers are stalling sites for no reason and speculating. But the evidence that volume housebuilders are profiteering by hoarding land seems shaky. According to official data (as of December 2013) Miliband is correct in saying there are around 500,000 units with planning permission. But half of the total have been started, 184,000 were about to start, and the remainder has either been sold or shelved.

Labour is right to call for a step change in new build (we need to double supply to 230,000 a year just to keep up with household growth) and spot-on in highlighting the structural problems that continue to plague the UK housing market. But land banking is a soft target with little reward. It distracts from the bigger concerns, not least the acute lack of truly affordable homes (mostly due to the cut in housing subsidy), investor caution (because much of the country has yet to recover from the financial crash), fragile demand (because incomes are sluggish) and the ever-widening housing divide – which is a symptom of unbalanced growth and the lack of support for economic development in areas outside London and the south east.

The housing crisis is seen almost exclusively through a London lens. It is true that London house prices have spiralled out of control on the back of soaring overseas investment and weak supply (especially for social housing). Back in 1997 the ratio of median earnings to median house prices was 3:1. Now it is 9:1, which makes it impossible for first time buyers, even with Help to Buy. With house prices and rents set to rise by more than 10% it is a bubble that could burst.

But Labour must avoid falling into the trap of thinking the housing crisis is a London (and its hinterland) crisis. It is far from it. Labour should seek to put the spotlight on what is happening to the housing market in the rest of the country, where prices have still not recovered and demand is flat.

The Smith Institute’s report on the Great House Price Divide, which we published today, shows how house prices in England and Wales have changed in 179 areas over the past six years. While in inner London prices have risen by more than 30%, in most other parts of the country prices have fallen sharply – by 15% in the Midlands and by over 20% in the North. In Hartlepool prices are 48% below what they were in 2007; in Liverpool 33% down; in Lancashire 25% down; in Sheffield 18% down;  in Birmingham 14% down; in Derby 18% down; and in greater Manchester 17% down.

These falling values push some homeowners into negative equity and make it hard for others to move jobs. Housebuilders, developers and lenders are also wary of the higher risks in places where values remain low. Indeed, the house price divide becomes self-fulfilling and exacerbates both the regional economic divide and wealth inequalities. Building more and more homes in London and the south east is necessary, but it won’t narrow tackle the root economic development causes of house price inflation.

As the research illustrates, what we have witnessed over the past six years is the growth of two distinct and divergent housing markets: a London-centric property market where house prices have recovered and in some cases soared; and the rest of England and Wales where prices are flat and transactions are low.  This is fundamentally not a problem of land banking but the result of a serious economic divide, with jobs and growth concentrated more and more in high housing demand postcodes in London.

Labour will need to make major reforms to the housing market to deliver on its pledge of 200,000 homes a year by 2020. More homes will be needed in London and the south east, but it is also important to narrow the regional house price divide and unlock surplus housing supply in the north and Midlands. To achieve that, Labour has to recognise that solving the housing crisis demands stronger growth outside of London and a long term commitment to rebalancing the economy.