UK housing prices and planning policy post corona virus pandemic

Author: Kevin Leigh
In: Article Published: Monday 18 May 2020

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A brave new world or more of the same housing crisis?[1]

Introduction

Over half the UK’s wealth is in property. That is more than £7 trillion in just England and Wales, of which around £1-1.5 trillion is secured by lending[2]. The provision of sufficient housing of the right type, in the right places and at affordable prices is a perennial problem. A crisis existed before the Corona-19 virus appeared. The Secretary of State for Housing, Robert Jenrick, described this as an “acute housing need in this country[3] As we continue to work through lockdown, we must contemplate life afterwards. No-one has a crystal ball. However, mature thinking and past experience might illuminate possible pathways. 

Where will housing provision be as we begin to emerge from the pandemic’s induced economic downturn? This article is intended to promote thoughts on housing need requirements, housing land supply and significantly the housing cost. The reader should thereby be encouraged to raise the housing debate to the forefront of political policymaking, which is the driver behind all planning policy. 

Precipitously, when Alconbury[4] (an early human rights planning challenge) was being argued in the House of Lords two decades ago, their Lordships posited during submissions that if people did not like planning policy, or at least how it was being interpreted and applied by a minister, the remedy was to vote the minister out of power[5]. To many commentators at the time, the suggestion that the voting public would try to change a minister or even government based on planning policies seemed far-fetched. Fast forward almost two decades and we see a country shaped by politicians, a recent election where development policies were front and centre, and an electorate understandably most concerned that our living and working environments are acceptable. As Sir Winston Churchill said:[6]

There is no doubt that it is around the family and the home that all the greatest virtues, the most dominating virtues of human society, are created, strengthened and maintained.

Before we begin thinking about what might happen as the UK and the rest of the world slowly return to the (new) normal, let us set out key points underlying any consideration of housing provision and house prices:

  • Housing supply has been under-provisioned for years
  • The basic need for housing need has not been diminished by CV19
  • Housing provision remains a central plank of government policy
  • Development policy constraints seem unlikely to alter and will continue to inhibit development
  • Interest rates are very low, but lenders are very cautious
  • Consumer confidence is severely dented
  • Mortgage regulation was tightened before CV19 to restrict lending to financial ability 
  • Over £1 trillion is owed by households in mortgages and equity release funding
  • Over £82 billion is estimated in house sales to be stalled pending lockdown[7]

Housing need

Economically, with so much debt in housing, we can easily see why government wants to avoid house prices crashing. With people out of work, household debt rising and savings reducing, money flowing into the economy will reduce. Even with low interest rates, if banks and lenders are reluctant to lend again (echoes of 2008-9) and people remain worried about spending beyond necessary living, the likely impacts will be on the biggest capital items for most people. Namely houses and vehicles. Around 90% of new cars are now funded by financial arrangements. Most of these in practical terms result in vehicles being hired or temporarily owned until refinanced or traded. A true analysis of car funding shows a preference for what in reality is a form of vehicle rental. Doubtless because most vehicles depreciate. In contrast, housing is a much more expensive capital investment that despite historical long-term growth is a daunting, often off-putting and, increasingly nowadays, simply not a viable financial option. Renting accommodation has been steadily rising in the UK: 20% of housing is through private rentals and slightly less is in the social sector[8]. Over one third of our housing is now rented and the proportion is rising.

People are likely post-CV19 to reconsider whether home ownership is the right model for them. More than 6.5 million jobs could be lost due to the economic fallout from CV19 which is around a quarter of the UK’s total workforce[9]. While North American and European experience is that renting is an acceptable way of life, historically and largely because of the capital growth in property long term, the British psyche encourages, or at least has until now encouraged, people to acquire their own home. This way, over time and as the debt is repaid, the owner has a large and tax-free growth of money for when they retire. Or so the traditional theory goes. 

Housing should be seen as a basic life necessity in a civilised society. However, as housing has become so expensive, ascending onto the property ladder has become more difficult. Indeed, it is often impossible to climb onto it. Even where people buy their home, the first purchase has been delayed and so they are often older. This might mean a reduced hope that they will: (1) one day, sell the home unencumbered; and (2) gain through capital growth (since they will hold it for a shorter period). With these factors diminished, the incentive of home ownership is reduced and home ownership plays a diminished role in sound financial planning. The financial crash in 2008-9 and now CV19 have inevitably shallowed property growth for decades. It is understandable therefore if people are dissuaded from buying their home using long-term debt in the form of a mortgage, especially if land values grow slowly after repeated economic and property crashes (whatever their cause). Indeed home ownership among 25 to 34 year olds has dropped around 20% in the first decades of this century[10].

It can be argued then that people will be keener to rent with younger people keener to continue to rent, at least in the short to medium term while their own as well as national finances recover. Hard-earned deposits are likely to have supported many people during lockdown. Even if such conjecture is wrong and instead more people continue to buy rather than rent homes because funding long-term debt is likely to continue to be cheap as interest rates stay low, there is still a need to build new housing. Thus, there will always be a need for housing. The physical layout of construction for rental accommodation is slightly different from building to sell and so too is funding which has to look at projected rental income and not sales (gross development value). But whether housing demand is fuelled by buying or renting, it has to be met.

In addition, and directly as an outcome of CV19, households will want accommodation that includes more (or more useable) space for working from home as well as better outside amenity areas when spending time at home. The pandemic has shown that we need both room in our houses as well as space around them. Building and planning standards should alter to accommodate this awareness. For example:

  • almost 50% of people expect to continue working from home post lockdown
  • almost 40% of people under 50 want a bigger home; 40% of people are now more likely to choose a village location
  • over 15% are happier for longer commutes
  • over two thirds of people want more outdoor space and rural locations[11].

Overall the need for housing (including care homes) remains. Deaths from CV19 in the (mostly) older population will not materially affect the need for care homes. But the pandemic will impact on the type and scope of accommodation and services that are provided. The economy will take time to recover. Estimates are that this will be several years minimum. Experience post-2008 is it will take a decade. The construction industry has been one of the first to resume since construction work was permitted during the lockdown. However, long lead times for house building (and conversions) mean that those in the industry cannot wait to see the economy begin to recover and consumer confidence slowly return before reacting if much needed housing is to delivered in time. 

Areas to consider

With the above in mind and looking forward to creating better housing that suits the needs of the people who will live in them, whether renting or owning, the following factors should guide where new housing might best be located and what form it should take. These principles can then inform better planning policies, especially those necessary to avoid over-crowded settlements and future ghettos from poorly designed estates: 

Housing standards

  • Room size and/or numbers of rooms to allow for better home working including flexible spaces in homes the use of which could change over course of the day or week
  • External space to enable people to enjoy more meaningful domestic relaxation 
  • Better control of standards of accommodation allowed through permitted development schemes to avoid conversion and adaption that provide bare or poor minimums where buildings and spaces around them were not originally designed for housing
  • Box-ticking minimum standards becoming unacceptable

Type of tenure

  • Increased renting
  • People keener to rent to avoid being tied to one location and/or locked into long-term debt through mortgage

Location

  • More people working from home
  • Commuting reducing as home working or working from office hubs becomes popular
  • Need for office hubs away from city/central urban locations to serve more dispersed workforce – both relocation of main offices to better locations (less expensive and more user and environment friendly) as well as provision of flexible office space for use by anyone who cannot work from home or prefers to work elsewhere

Sustainability should be revisited to reflect:

  • increased working from home and desire to keep doing so
  • ability to have food/supplies delivered by one distributor instead of multiple shopping trips by multiple households
  • use of electric vehicles for short trips to local hubs with less impact environmentally than hydrocarbon-based transport
  • improved health and well-being as people can live in better locations if the need for commuting is reduced 
  • land values in city/urban centres and around commuting hubs reducing as pressure to densify housebuilding is reduced

Impact on city/urban centres

  • Need for (usually) expensive central locations reduce as offices relocate or reduce in size
  • Central office locations used differently for non-office uses such as housing and leisure

Prices/values

  • If housing does not need to be within commuting distance of central locations for daily/regular use, there is reduced pressure for housing in commuter suburbs/towns/cities
  • Reduced pressure for housing in commuter locations brings house prices down or slows growth of house values as market stabilises to the “new normal”
  • Increased need for more housing outside central conurbations
  • Reconsideration of housing constraint policies outside established settlements including revisiting meaning of sustainability under the “new normal”

Other matters

  • Well-being is now recognised as being the top factor of working life. This is directly affected by:
    • the working environment including commuting
    • financial costs of commuting and living near commuting nodes
    • the mental impact of life as a commuter
    • the effect of the above on the family around the worker
  • Workers should be prepared to visit office locations and gatherings with colleagues less often, but still periodically, to avoid silo mentality and maintain work cross-referencing
  • Increased use of remote technology for workforce generally (computers, internet, mobile phones and videoconferencing)
  • Specialists and advisers could use say drones such as Iceni Projects’ “iSite”[12] and, for example, internet sites such as Google’s “Street View”[13] in order to provide services normally carried out by travelling and visiting
  • Infrastructure and leisure locations will need to alter to accommodate changed living places

Travel changes are likely:

  • More holidaying in UK/staycations: 
    • boosting of local economies
    • increased use of UK travel infrastructure by domestic holidaymakers
    • opportunities to enhance UK travel offer both for access to and provision at destinations
  • Reduced air travel and foreign recreational demand as: 
    • costs rise
    • inconvenience increases: health screening gets added to existing anti-terrorism measures; isolating post travel becomes a requirement, at least in the short to medium term
    • people fear becoming infected during travel abroad and when at destinations

The way forward

Development for housing must continue. Pessimistic forecasts of land drastically falling land values misunderstand the reality of demand. If we are not careful, we could create a self-fulfilling prophecy of lowering land values. The real bottlenecks and danger points once again might lie at the feet of politicians as well as lenders. There is a long-overdue need to revisit historic planning policies that restrict housing locations to existing over-crowded and under-provided commuter and urban centres.

So why might the forecasts of large house price falls be wrong? In 2008 the financial crisis led to property values falling 20% over 16 months. Values did not recover until mid-2014 and this was not universal across the country. The present context is obviously completely different. Though both financial crises are manmade, the current economic one is deliberate and caused by an intentional forced contraction of the market in order to keep people inside during lockdown. Ten years ago there were credit difficulties. Lending regulation was lax – indeed it caused the financial crisis. In the early part of the century house price increases had been rocketing fuelled by lax lending. Today in contrast house sales and moving have simply been delayed while the economic activity of the workforce has deliberately but very effectively been stayed/slowed. But this is completely artificial and not systemic. 

Sales have currently completely stalled but this is the direct result of government imposing CV19 restrictions[14]. Estate agents are now returning to work and house viewing with social distancing (save for empty properties) will commence. Sales already in the pipeline will pick up where they left off. Meanwhile price drops in the housing market of anything from 2-3% to 13% have been projected. The Council for Economics and Business Research forecasts 13% fall by end of 2020. Capital Economics forecasts 3%. In contrast the Royal Institute for Chartered Surveyors forecast average growth for sales and rental markets of 2.5% per annum for each market over the next 5 years[15]. Valuers for some banks and estate agents are downgrading by around 20% and even 30%, arguably more as a kneejerk (some will say prudent) policy decision until they see where the markets are going rather than on any apparent science. However, this might be an especially false approach tending to create what is being observed rather than reacting to or even preventing it. 

Government intervention in the economy – especially at the micro-level of households and businesses – has introduced measures to lessen the economic blow: for example, help with furloughing, mortgage holidays, cheap business bounce-back loans. Such intervention is unprecedented and was certainly not present in the financial crash a decade ago or the previous property crash in the nineties (when interest rates were also massively different). 

Prices only drop when sales take place at lower prices. Therefore, forecasting a permanent drop in house prices depends upon whether there will be a sustained surge of forced selling. There might be an initial drop as some buyers take the opportunity to leverage better deals from anxious vendors and some owners decide to cash out facing economic uncertainty. However, taking say the example of a 20% drop in house prices predicted by some commentators, this would mean the average first-time house will fall in price by around a whopping £50K![16] If this is extrapolated upwards through owners higher up the selling chains, the overall values representing price drops become mind-boggling. 

It is inconceivable in the context of CV19 that once house sales start moving again that a meaningful number of UK house sellers will accept such a drastic reduction in their capital investment. Aside from any obvious negative equity issues, the reality is that people will not sell but remain in their current accommodation, either looking to improve it or simply biding their time until the economic outlook is more attractive. This is realistic since before the pandemic they were paying mortgages that had been more strenuously assessed to match their ability than ever before. There will undoubtedly be financial pressures on households through reduced income and lost jobs. Nonetheless will the government allow say a quarter of the economic workforce to be forced to sell?[17] If it did, these households will enter the rental and social housing markets that already lack anywhere near the capacity to fulfil demand given the gross under-supply of new homes for decades. Consequently, doomsayers need to rethink the logic of predictions for house prices plummeting.

If one turns to land supply, sites currently or about to be developed will have been acquired before the pandemic. The prices that were paid reflected a projected market dramatically different from the current reality. The planning system has been rife for decades with constant battles between councils and developers over land values related to the ability to fund social housing contributions[18]. It is unlikely that councils and central government will want to add to their economic burden by allowing financial viability arguments (to reduce developer contributions) that effectively subsidise historic land purchase. Before CV19 such arguments were frequently rejected in order to encourage land to be purchased at a price to reflect its ability not simply to provide market housing but also fund social housing. Government and local authorities continue to want and need social housing. They will not want to see it decrease. 

There is an argument that forcing lower land prices with the spectre of lower house prices on the horizon will correct the market. This is naïve. A market-wide and meaningful price reduction in housing will hurt everyone and thereby the economy[19]. People and businesses have borrowed based on property and land values that did not include an economy effected by CV19. As explained already, people will most likely remain in their homes and not move. As a result, the increasing demand for housing will – as it has always done – fuel house price inflation. The way to avoid this is to ensure more land is available in cheaper locations. This means building outside the established hotspots of urban centres and existing larger settlements.

A fall in house and land prices is therefore likely to be avoided in the medium to long term even if transaction levels stay low or lower in the short to medium term as confidence returns. As already noted, pre-existing stricter mortgage criteria should mean that lending has been done more robustly so that a housing market depression and repossessions are less likely. In addition, and to remind ourselves, the overarching demand for housing remains ever-increasing and the creation of new households continues as the population rises and nuclear families break up to form new households through separation (and divorce) and younger members leave the family nest.

Predictions

In light of the foregoing and taking account of facts relevant to current context in which the housing market is re-opening as lockdown restrictions are relaxed, the following predictions might be made:

  • Prices will fall modestly in short term (up to 12 months) as: 
    • some people will be able to strike bargains with sellers keen to obtain cash flow for
      • moving upwards
      • downscaling for financial security
      • releasing capital in case of developers
  • Landlords might be forced to sell if tenants cannot pay rent but:
    • there are short-term measures currently in place to prevent repossession
    • in the longer term, rental might become more popular if landlords can hang on
  • the fiscal benefits for individuals with buy-to-rent mortgages have dramatically reduced (and gone for non-basic rate taxpayers) so that
    • government needs to revisit whether support for rental accommodation should be encouraged
    • there is a realistic balance between releasing property for prospective owners by making rental investment unattractive and providing much-needed rental housing in a marketplace increasingly predisposed towards renting 
  • Prices will recover in medium term (2021 onwards) as house construction costs including land will not alter significantly[20]
    • there might be a labour surplus in the short term as development schemes are paused
    • labour costs might increase in the very short term if there are limited numbers willing or able to return to work
    • labour costs might reduce in the short term as the workforce is keen to return to work in order to earn money
    • there was already a high demand for labour pre-CV19 
    • some people will be offloading land to help with financial burdens
    • others will be land banking to ride out the storm
    • overall this might balance out
  • Prices will not rise as rapidly in long term as they have done historically (2022 onwards)
    • people were already finding lending more restricted
    • banks/lenders will become more cautious
    • people will be more cautious
    • people will be less willing to take on debt
    • government realises that
      • political popularity that preserves land outside settlements will not provide much needed housing land
      • locating housing in accordance with the desires of the “new normal” make current urban densification unacceptable
      • there is much planning sense in allowing housing outside existing settlements provided proper infrastructure is put in place

Suggestions

If the government really wants to tackle the housing crisis and use the opportunity of CV19 to galvanise people and the market generally, there are a number of things within the political levers of power that could easily be altered. These are:

  • Reduce stamp duty
    • it disincentivises sales
    • net tax revenue was reduced prior to CV19[21]
    • tax banding encourages artificiality in pricing 
  • Simplify land constraint policies including reviewing green belt where councils will “need to reimagine high streets and town centres, [councils] will need to build on green belt land[22]
  • Hold councils properly to account for housing need through: 
    • strict Annual Position Statements submitted to the Planning Inspectorate and scrutinised by inspectors for recently adopted local plans
    • more robust consideration of housing in the local plan process including deliverability
    • Require more or at least better engagement between councils and developers with greater levels of pragmatism around viability (the principle affecting the ability of developers to fund affordable housing as part of overall development)
    • Force banks/lenders to pass on low interest rates to customers

Conclusion

As Robert Jenrick, the housing minister, said (echoing Churchill) we need to build homes, not houses and we need to build places not just homes. To do so, we need to ensure an appropriate lending stream as well as a suitable land supply to meet housing need. The artificiality of historic policy constraints, some going back to WWII, will only fuel the draconian economic slump imposed by lockdown as a reaction to CV19. 

The lead must come from central government, but the drive can come from the development industry. An analysis of how this might play out in the “new normal” of spatial distancing, bio security measures and a desire to work from better quality home environments (including better locations) shows that the domestic economy might benefit as well as the quality of people’s lives. This must be a good thing.

Importantly, the mindset coming out of the lockdown must be one that realistically acknowledges likely house price movements and not simply an unsophisticated but understandable negative assessment. The drivers behind the need for housing remain unaltered. House prices are already stretching buyers and rental values likewise for renters. A key ingredient of house prices is the cost of land supply which itself is the direct result of decades of planning policy directing location. It is time to revisit such policy in light of its effect on land values and the quality of homes we build. People now more than ever appreciate and rightly demand homes fit for purpose, both for living as well as working in.

We recently celebrated 75 years since the end of WWII in Europe, when Britain began to rebuild its housing stock and put in place the highly restrictive green belt policy that remains in place today. The indomitable British spirit has shone through once again during lockdown. As we begin to emerge from the pandemic, hopefully safely and certainly wiser, but with a long journey of recovery ahead, we can come together as a nation stronger and better than before. The reality is that we still need far more homes than we are building and plan to build. House prices are likely to drop slightly in the short term. In the medium to longer term, house prices will resume their upward trend. Hopefully this rise will be gentle to allow people to find places where they can afford to live comfortably. To return finally to Churchill, adapting what he famously said[23]:We shape our homes and then our homes shape us.

KEVIN LEIGH © MAY 2020

BARRISTER

33 BEDFORD ROW

NOTICE: This article is provided free of charge for information purposes only; it does not constitute legal advice and should not be relied on as such. No responsibility for the accuracy and/or correctness of the information and commentary set out in the article, or for any consequences of relying on it, is assumed or accepted by any member of Chambers or by Chambers as a whole.


[1] This paper is my own but was inspired after addressing (and then discussing my thoughts with) the team at Iceni Projects. I am extremely grateful to everyone at Iceni for their feedback.

[2] Household debt in Great Britain, Office for National Statistics

[3] February 2020

[4] R. (on the applications of Holding & Barnes plc & Premier Leisure UK Ltd) v. Secretary of State for the Environment, Transport & the Regions[2003] 2 A.C. 295.

[5] Later echoed in the judgment – see, for example, at para. 48.

[6] Sir Winston Churchill: A Self Portrait (1954) when he was speaking in November 1948 about the birth of Prince Charles.

[7] Zoopla

[8] English Housing Survey by the Ministry of Housing, Communities and Local Government.

[9] Institute for Social and Economic Research, Essex University (May 2020).

[10] MHCLG.

[11] Savills survey (May 2020).

[12] https://www.iceniprojects.com/isite/ 

[13] https://www.google.com/streetview/

[14] Government estimates over 450,000 buyers and renters have been unable to progress deals during lockdown – Robert Jenrick, Housing Secretary, speaking to the Commons on 12 May 2020 when setting out guidelines for the housing market to resume.

[15] RICS UK Residential Market Survey, March 2020.

[16] Around £230K – UK House Prices Index (January 2020).

[17] Based on possible projected changes highlighted earlier of one quarter of the UK workforce becoming unemployed.

[18] The so-called “S.106 agreements”.

[19] Recalling from earlier that half the UK’s wealth is in property. 

[20] The impact of Brexit and whether a deal is achieved by 31 December 2020 is beyond the scope of this article. A simplistic view is that since both the UK and the EU will move forward as the world emerges from CV19, antagonistic trade wars will suit no-one and economically hard hit countries may have less appetite for confrontation now than before the pandemic.

[21] HM Revenues & Customs statistics (October 2019) and Office for Budget Responsibility (September 2019).

[22] Robert Jenrick, Housing Secretary (February 2020).

[23] When speaking in October 1943 about the design of the debating chamber when rebuilding the House of Commons after it was bombed during the Blitz: “We shape our buildings and afterwards our buildings shape us.