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BARKER REVIEW: INTERIM REPORT ON HOUSING SUPPLY PUBLISHED

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Issued by the Treasury on behalf of the Barker Review ...
Issued by the Treasury on behalf of the Barker Review

Launching her Interim Report - 'Securing our Future Housing Needs' -

Kate Barker said: 'Housing has a huge impact on people's quality of

life. The government is already doing a great deal to tackle housing

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

identified.'

- 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

development.

Key findings:

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

affordability problems:

- 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

significant challenges:

- 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

sector.

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

England.

- 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.

Notes

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

sustainable convergence'.

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

Reference:

- 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.

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