In Britain today, home ownership rates stand at a 30-year low. More and more families with young children are renting, while recent research from the Resolution Foundation found that one in three millennials are unlikely to ever own their own home. At the same time, Britain ranks fifth on infrastructure spending when compared to its G7 counterparts. How can the government solve problems in housing and infrastructure, and how can the private sector help in the fix? M&G Prudential brought together a group of politicians, economists and fund managers to determine the strategy, going ahead, at a recent Spectator roundtable.
Fraser Nelson, Editor of the Spectator, chaired the roundtable. He kicked off the discussion by picking up on one of the reasons for a tight housing supply – less than ideal private investment in infrastructure and housing. With the FTSE generally healthy, why were private investors not investing more? For Simon Pilcher, CEO of Fixed Income at M&G Investments, the asset management arm of M&G Prudential, a lack of certainty on returns is the main reason. ‘We have money, waiting to be deployed. But in housing, for instance, planning permission takes a long time. Our clients would need to have a greater degree of planning certainty before committing resources.’
Such certainty, if it were possible, could come from the local authorities that give out planning permissions. But more often than not, these authorities themselves are tied up by complex and lengthy planning legislation. So is there anything central government could do to assure investors more? One possibility is motivating local authorities to act differently. Liz Truss MP, chief secretary to the Treasury, said, ‘local authorities need to be more frontfooted with their solutions’. Just look at the success of Canary Wharf, ‘now that we have regenerated the Docklands, why not let’s encourage local authorities to emulate that success elsewhere?’
Sir Robert Syms MP, Chair of the High Speed Rail Committee, suggested ‘bribing local authorities’ to ‘tilt the political imperative’. Take New Homes Bonus, a policy that gives additional money for the communal pot, if neighbourhoods had new homes built in the area. A good idea, but why has that bonus been reduced since? In a similar vein, Tory backbencher Nick Boles suggested considering Labour’s proposal to remove ‘hope value’. This is the added value of land once planning permission is given – in other words, a surplus created by local authorities. As it currently stands, private landowners can sell at hope value, but since local authorities give this permission, wouldn’t it make sense for them to capture the added value, rather than private sellers? This money can then be diverted into the community pot to encourage local authorities to expedite the planning process. ‘The reason why Milton Keynes is possible, is because they were able to buy the land at this base value, then use the planning gain in value to pay for its infrastructure.’ But expect this proposal to face fierce opposition in government. When Labour first publicised the policy earlier this year, Liz Truss tweeted that the plan was ‘sinister’.
But even if all bureaucratic hoops had been jumped through, the British economy might not be in a state to handle the drastic increase in housing supply that is the government target. Mike Spicer, Director of Research and Economics at the British Chambers of Commerce, tells us of the desperate state of the building industry where commodity prices are rising. ‘We can create an environment for the private sector to build more houses, but if we don’t have the people, or the materials to do it, that’s just going to be reflected in the cost of materials which has surged in recent years.’
One way to get around this could be innovative new builds. Instead of using traditional methods, which strain capital and labour, builders could explore formats like modular homes, which are built in a factory as separate components and pieced together on site. But Andrew McPhilips, Chief Economist at the Northern Powerhouse Partnership, says it’s unlikely these innovative builds will get the backing of mortgage lenders. ‘Mortgage lenders, to be risk averse, will only lend against traditional construction, brick-built house… anything beyond that, they think, why would I go to the hassle?’
With so many parties involved, each with different interests, the bottom line for businesses is still certainty. Simon Pilcher says, ‘one of the challenges is ensuring that the market has confidence that whatever is put in place will stand the test of time.’ Will any new Conservative housing and infrastructure policies stay in place for a period long enough for businesses to make returns on investment?
For the Tory MPs present, the best way to ensure this is the Conservatives winning the next election – and for all four MPs, there was a deep recognition that this rests on how the government reacts to the housing crisis.
Holding the key are millennials. So far, the millennial generation have found Jeremy Corbyn’s message pretty persuasive (just look at the success, and demographic, of Momentum). If the housing ladder isn’t made more accessible for them under a Conservative government, they will vote for an alternative.
Tony Brown, Head of Real Estate at M&G Investments, suggests a radical rethink of the problem. ‘Do all young people really want to own their own home? Imagine you can have a three-year lease in an estate owned and managed by a corporate landlord, really good quality, maintained by the landlord and better than anything you could get through buying property.’ That is the reality for renters in some other European countries, where not owning a home isn’t the end of the world. This requires a cultural shift that, unfortunately, British youth are not ready for. Nick Boles cites several opinion polls that show that the vast majority of millennials place importance on homeownership.
Short of a drastic cultural overhaul, what next? Whether the solution is to relax planning legislation, or incentivise local authorities, to increase housing stock, or get rid of hope value, policies will need to get through central and local government, parliament, and various vested interests. Ambitious reforms probably wouldn’t survive all this, but Nick Boles suggests that losing on reforms in the right direction is better than doing nothing at all. ‘It’s only when you have a big, stand-off row with the vested interests that people notice and think, okay, maybe they are grabbing this nettle.’
Matt Cavanagh, Director of Group Government Relations at M&G Prudential, agreed that something must be done. But, the government needed to decide its direction first. ‘If you go in a certain direction, and it’s clear what that direction is, the industry will get behind it, investors will get behind it, and we can all go forward.’ The work now, then, remains for the government to collect its thoughts and create the next steps for action.