Launching her Interim Report - 'Securing our Future Housing Needs' -
Kate Barker said: 'Housing has a huge impact on people's quality of
supply problems. However, it is clear that the UK housing market is
not working as well as it should. In particular there is a problem of
weak supply, with major implications for the UK's economic well-being
and house price volatility. The review's final report next spring
will set out policy proposals for addressing the problems I have
- In 2001, around 175,000 dwellings were built in the UK - the lowest
level since the Second World War (see Chart 1, page 9). And over
the past ten years, the number of new dwellings built has been
12.5% lower than in the previous decade.
- Over the last 30 years, UK house prices went up by 2.4% a year in
real terms - compared to the European average of 1.1%. In Germany
it was 0%, and in France 0.8%.
- If UK house prices had risen in line with the European average,
since 1975, the UK economy would have been £8bn better off. As a
result of these price rises first time buyers in 2001 paid on
average £32,000 more for their homes.
The Review considers a range of factors that might be constraining
the supply of housing in the UK, arising from industry failures or
the policy environment.
The main constraint identified by the Review is land supply. This
problem relates in part to the housebuilding industry, in particular,
its response to risk which leads to reluctance to build out large
sites quickly. The regulatory relationship and control over the use
of land also influences the way in which land is made available for
Housing supply and its implications
Historically, UK housing supply has been unresponsive to changes in
pri ce - three times less responsive than in the US and four times
less responsive than Germany. Over the last 10-15 years, UK housing
supply appears to have become entirely unresponsive - as prices rose,
housebuilding did not increase. Inadequate housebuilding constrains
economic growth, damaging the flexibility and performance of the UK
economy, reducing living standards for everyone. Regional price
differentials also reduce labour mobility and hamper economic growth.
Too few houses and consequent higher house prices also create
- In 2002, only 37% of new households in England could afford to buy
a house, compared to 46% in the late 1980s.
- The ratio of lowest quartile house prices to lowest quartile
earnings has increased significantly in most English regions. In
1993, a London house cost around four times the annual income of a
low income household. By 2002, the same house had risen to almost
eight times annual income (see Chart 1.7 page 34).
- Reduced housing supply contributes to homelessness - households in
England in temporary accommodation have more than doubled between
1995 and 2003 from 46,000 to over 93,000.
- 35 per cent of first time buyers in London pay at least part of
their deposit with a third party contribution, compared to 22 per
cent in the north and the Midlands. Increasing reliance on
inheritance and donations drives a wedge between first time buyers
who have access to wealth and those who do not.
The housebuilding industry and the availability of land
The housebuilding industry is characterised by a reluctance to invest
in brownfield development and low levels of innovation. Many
housebuilders hold considerable portfolios of undeveloped land with
planning permission. There is little evidence to suggest, at any rate
across the country as a whole, that these landbanks prevent other
housebuilders entering the industry, or allow housebuild ers to
exercise market power. But, once land and planning permission has
been acquired housebuilders have little incentive to compete for
consumers or innovate.
- Only 54% of new home buyers say they would buy a new home or
another home from the same housebuilder.
- In order to best maximise profits many housebuilders control
production rates and 'trickle-out' no more than 100-200 houses per
annum from a large development. This may not be desirable from
society's point of view.
- Modern methods of construction are not well established in England
where housebuilding techniques are very labour intensive - around
50 per cent more than Denmark, and 25 per cent more than Scotland.
Labour intensity has not changed significantly in England over the
last 25 years. The housebuilding sector suffers from significant
skill shortages with 80 percent of firms reporting difficulty
finding bricklayers, carpenters and plumbers.
Government policy levers
The government is an important player in addressing problems with
housing supply. Through the Sustainable Communities Plan and current
housing and planning bills, it has already embarked on major reforms
of the planning system and of social housing. Nevertheless there are
- Local authorities have few positive incentives to build and few
sanctions if they fail to meet targets, while the planning
framework could respond better to market signals and take better
account of costs and benefits of development.
- Infrastructure barriers hold up construction of over 40,000
dwellings in the south-east alone.
- Only 1% of property institutional investment is in residential
property. A tax-transparent vehicle (based on the US Real Estate
Investment Trust model) could encourage more investment.
- Higher land and build costs have meant that public money for
housing is not going as far as it used to. Social sector building
has not risen in line with increased public expenditure in the
Increasing housing supply
The Review reaches no conclusions on how many houses we need to build
in future. Government faces choices about howfar to meet growing
demand, given the environmental and social costs of housebuilding.
The report published today does contain estimates of undersupply to
help inform the debate:
- 39,000 additional houses a year are required simply to accommodate
population growth and changing patterns of household formation in
- In recent years between 93,000 and 146,000 households per annum
have been priced out of the housing market in England compared to
affordability levels in the late 1980s.
- The review has commissioned academic modelling work, to investigate
estimates of the number of additional houses consistent with
various long-run house price scenarios. This suggests that an
additional 145,000 homes per annum would be required in the UK to
lower real house price inflation to the European average of 1.1%
and that an additional 240,000 houses would be needed in the UK to
lower real house price inflation to zero. These are likely to be
over estimates as greater supply would affect expectations and
change the response of prices to additions to the housing stock.
1. HM Treasury's assessment of the five economic tests concluded that
'... the incompatibility of housing structures means that the housing
market is a high risk factor to the achievement of settled and
2. The Review was set up on 9 April 2003 by the chancellor of the
Exchequer and the deputy prime minister with the following Terms of
- Conduct a review of issues underlying the lack of supply and
responsiveness of housing in the UK;
- In particular to consider:
- The role of competition, capacity, technology and fina nce of the
housebuilding industry; and
- The interaction of these factors with the planning system and the
government's sustainable development objectives;
- If appropriate, identify options for government action, including
the use of fiscal instruments.
3. Kate Barker has consulted extensively in preparing the Interim
Report and wishes to continue to consult before preparing a final
report. The final report will be published in spring 2004.
4. This is an interim report to set out the costs and benefits of a
better housing supply and to identify ways in which housing supply,
as it currently operates, affects our economic and social well-being.
The report estimates the scale of the housing shortage in the UK and
assesses the poor response of housing supply. The Report also
identifies what, at this interim stage of the Review, Kate Barker
sees as the main causes of shortage and unresponsiveness.
5. This report is available here.
6. Kate Barker became a member of the Bank of England's monetary
policy committee in June 2001. Previously she was chief economic
advisor at the Confederation of British Industry and before that
chief economist at Ford of Europe.