The Madness of Housing in the United Kingdom

The Madness of Housing in the United Kingdom


Welcome to the Madness of Housing in the United
Kingdom. In this episode we’ll see how with time
and effort, we have created one of the most dysfunctional, misfiring markets in our nation’s
history. We’ll talk about the facts, figures and
causes of the UK’s housing crisis. This is Show Don’t Tell, so let’s get into
it. House prices in the UK have reached incredible
highs, beyond even the pre-financial crisis peak. Houses are only purchasable through
a combination of Quantitative Easing and rich parents who give money to their kids. High prices create political pressure, and
the Government’s response has been a large number of schemes focussed around delivering
‘affordable housing’. But the economics of housebuilding, are the
same as everything else. You have supply, you have demand, and you have price. All else
being equal, Prices will go up when demand increases and supply declines. But if costs haven’t changed, higher prices
have an automatic response. There’s more profit available to those who deliver supply,
which should incentivise more supply. But in contrast to what you expect, housebuilding
has not recovered to the level achieved before the financial crisis. Why is this? Well let’s we can view supply
as being delivered by two groups, small housebuilders and large housebuilders. Small housebuilders, that is, companies that
build less than 100 houses a year, have practically disappeared. In the 80’s, nearly half of
all houses were built by small housebuilders. Although numbers were recovering prior to
the financial crisis, today, just 12% of houses are built by small housebuilders. That’s
a reduction of around 35,000 houses per year compared to before the financial crisis. Housebuilding
is dominated by large housebuilders. In fact, half of all houses are built by just
eight companies. These large housebuilders trade on the stock market which means their
numbers are publicly available. So, what do they tell us about UK housing?
Comparing pre and post-recession, most large housebuilders are building as many, if not more houses, than they did prior to the financial crisis, which is what we would
expect. However, with the decline in smaller housebuilders, it’s not enough to deliver an
overall increase. Let’s look at the change in gross profit
compared between the same period, it’s clearly increased . There’s no lack of incentive
for small housebuilders to build houses. It appears to defy logic, but there is an
explanation, a barrier to entry. If something stops people from being able to deliver supply,
those firms that can deliver supply capture all of the extra profit. It creates a completely
separate market, and that’s exactly what we see in the UK housing supply.
But how can there be barriers to entry to building a house? Building a house, isn’t
complicated. You need three things. Land, material and labour. That’s it. Get all
three things in the same place at the same time, you’ve created optimal conditions
for building a house. We’ve already built about 28 million of them in the United Kingdom.
It’s not a lost art or a skill that disappeared through time. So why is it not happening,
what stops small housebuilders? The answer is a single word.
Planning. Land, materials and labour aren’t enough
in the UK. You need to get the nod, from, the Man. And The Man, he don’t nod for free.
You see the system in the UK is built around planning permission. You need permission to
build a house from your local authority. They are ‘The Man.’ Local Authorities are Councils. Borough councils,
district councils, town councils, the organisations administer your everyday services social care,
bin collection, road repair,libraries, pub licencing and so on.
But local authorities are in a deep financial crisis. Their income is half council tax and
rates, charges levied on the houses and business within their boundaries. The other half of
their funding comes from a central Government grant. Over the last seven years that central Government
grant has reduced by over 30%, because the Government wants Local Authorities to be more
self-sufficient, or their just cheap, who knows why exactly but they are definitely
doing it. The result is local authorities are under
a huge amount of financial pressure, because on the cost side, things are just as tough.
The largest areas of expenditure by far for a local authority is adult and child social
care, for which there’s about as much enthusiasm to reduce, as there is to raising council
tax. So what’s the significance for housing? Number One, is the planning department. No-one’s
manning the barricades to save the planning department, and spending on planning has reduced
by 50% over the last 7 years, more than any other area of expenditure. At this is at the
time that we have a housing crisis. The other issue is the income the council needs to provide schools, libraries, and community
centres. They do not have the money for it. So what do they do? They need to get access the people who do
have some money. And as I explained earlier, the only people who do have money are those
able to buy a house at the current high prices. But how to get to these people? Well, salvation
came with the combination of large housebuilders and piece of legislation with an innocuous
name, Section 106. Now I dislike Section 106 on principle. It’s
a tax. But unlike all other taxes in a modern economy, it’s an arbitrary tax. There is
no formula for how it’s calculated. It’s a multi-million pound tax individually negotiated
by each local authority. There’s no register, statistics or any way of knowing, when somebody
has got a sweetheart deal because of corruption. This text is here is all there is. Section 106 was created for a simple enough
principle. Local Authorities could ask developer to contribute money if the council
would bear costs as a result of the new development, like the cost of a new access road. Now, however, it’s simply used as a tax
for all the extra stuff councils require. The principle that s.106 and Community Infrastructure
Levy charges would fund benefits for the actual development was completely abandoned. There
is no proportionality or relevance to the actual development itself. This is where small housebuilders got put out of business. Larger housebuilders can afford
to give entire schools, and hundreds of affordable homes. This need is especially true when you
have a tiny, overworked planning department who need to maximise their time.
And this is the dark secret of many local authorities. They don’t put up flags to
celebrate it, but most new schools and libraries built since the financial crisis were constructed
by housebuilders, without any council involvement as a quid pro quo for getting planning permissions
for developments that could be situated miles from the school in question.
This is Show Don’t Tell, so let’s have an example of what I’m talking about. Here’s a new building, that I walk past
most days, recently completed on Finchley High Street. It replaced a dilapidated office
building, with these 2 small towers. There are 77 flats, a shop on the ground floor of
one building, and a library on the ground floor of the other. So, what was demanded
by the council to build 77 new flats in Outer London? Well, the library! And I don’t just mean
a contribution, I mean, the entire library. Fitting out the library space, £945,000.
To the council, £250,000 in cash, for all the computers, books and equipment to go inside.
And finally, the whole space leased back to the council for 125 years for the total cost
of £1. The value of the lease could be well over £1,000,000, even setting that aside, the
library demand alone was £15,500 per flat. So an entire library paid for by 77 people
because they could afford to buy a flat in Outer London. But the library isn’t the
end of it, they also had to pay £470,000 in Community Infrastructure Levy, which is
a fixed rate per sq. ft on top of the s.106 levy, and all the other baubles that have
been glued to planning legislation. Let’s examine financial reports from the
large housebuilders for more numbers. Crest Nicholson disclose they are going to pay 79
million pounds in libraries and schools as a result of housing development, alongside
hundreds of millions for community facilities and affordable homes. Barratt and Persimmon
say similar things about their building of schools and libraries. There are even architectural firms that offer
s106 template schools, so that when you have to build a school you have a cut
and paste version ready to go. And so our vicious cycle turns. Local authorities
under financial pressure demand large contributions of facilities and affordable
homes from developers. Small builders can’t provide these payments so nowadays work on
building extensions to existing houses. Housing supply doesn’t recover, so house prices
increase. There also aren’t more new homes that would make new council tax payments.
Which meant that there was more pressure to deliver affordable houses, which means Local
Authorities ask developers to make greater contributions, and round and round we go. The Government’s response is to spray out
schemes and money for affordable houses, land, financing and anything else they can think
of. It’s an excellent demonstration of how in a fundamentally flawed system, there is
no end to the increasing complexity you have to add to get it closer to where it should
be. Because the alternative is to admit that the underlying system is fundamentally broken. These schemes create a new level of madness.
That increase in gross profit that we have for today’s housebuilders, that’s after
making around 20% of their homes ‘affordable’ and paying other s.106 levies. But as house
prices are so high, the ‘Help to Buy’ Government scheme provides lending and guarantees
so people can actually pay the high prices. Today 35% of the houses are paid for under
these schemes. That’s your tax money buying houses, at the same time housebuilder profits
are at all time highs. What a complete mess. There are other explanations for the housing crisis, and I don’t have time to go into
why I believe what I’ve been speaking about is the most significant. The simplest answer
is that, if the issues were land or financing, then the schemes which target exactly these
issues would have solved the housing crisis. But they havn’t, because in my view they’re
treating the symptoms rather than underlying disease. In fact, amidst the plethora of schemes we
can find supporting evidence for my argument. Let’s look at the “Starter Homes Scheme”,
launched in 2016. The Starter Homes schemes tries to shortcut
the vicious cycle with a nifty premise, commission sort of affordable homes for first time buyers
under the scheme and you don’t have to pay s106 or CIL.
The catch is, you have to sell these homes at 20% discount to market value. What a profit
for the lucky buyers! The National Lottery isn’t struggling, it’s just changed the
ticket price. And building under this scheme is going ahead, as the saving of no s.106
is sufficient to make a profit even at 20% below market value. More significant are the legal developments. In 2013, Central Government changed planning
rules changed to exempt small housebuilders from s.106 charges.
Sounds great, but what was the catch this time? Well, Local Authorities sued the Government
to prevent these changes from being implemented, and it spent the next 3 years in court, eventually
reaching the Court of Appeal. One branch of the Government using your tax money to sue
another branch of the Government, to use tax money to defend it.
In October 2017, a Local Authority went all the way to the Supreme Court, and lost, with
the court stating that it was unlawful to “to restrict development until the Developer
contributed towards infrastructure which has no more than a trivial connection to the development.”
If there’s one thing that you remember from this episode, I hope it’s this. Demands
for s.106 and Affordable Housing are not paid by developers, they are paid by the people
who buy the houses. These demands are created through the high cost of housing caused by
the very lack of development. It’s not beneficial for food to be expensive,
just because some people own the fields, and it’s not beneficial for housing to be expensive,
just because some people own houses. Expensive housing simply means that people
have to spend more and more of their paycheck on rent, or mortgage payments for their homes.
They have to live in smaller, lower quality and more distant houses than they would otherwise
be able to live in. It creates 65 million people who have less money to spend on the things
they actually want. Central Government pays a huge cash price,
because it has to pay housing benefit to accommodate to the needy and they have to pay rents for
many claimants. That bill today is £25 billion per year, it’s increased £5 billion for
the same number of claimants as in 2010. You would think the opportunity to save £5 billion
every year would be a pretty good incentive to fix the system.
The failure of the Government to create a system where people can construct and build
and sell houses, is a basic failure . If the housebuilding system actually worked,
the Government would not have to spend a penny. If houses could be built and sold affordably,
lower prices would make existing houses affordable, rather than specially constructed and doled
out through a lottery. Using Government money to build houses takes money from genuine public
services like healthcare, education and defence to do something that the private economy would
be perfectly capable of delivering if it were allowed. There needs to be a full assessment of the
system and a solution, patching over schemes hasn’t worked and frankly will never work
until the fundamental issues are addressed. I hope you enjoyed this video, this is Show
don’t tell and I’ll see you next time.

Comments

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    MyEconomics101

    There should be a follow-up; covering MPs being Landlords, and London's Financial/Business Interests steering policy for the last decades leading to underinvestment. after all; mortage business in this environment is easy twiddle your thumbs money, if you can't pay your mortage – the bank gets to keeb the house, if your business goes bust, bank got to wrangle with other creditors to get some money back).

    Also, housing is no productive investment, nor should it be can it be a retirement savings account, nor a family social welfare safety net. Thus, Episode 4 should be about investment and productivty in UK.

  3. Post
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    Millennial Thatcherite

    And, of course, the rapid population increase caused by uncontrolled immigration has had no effect on demand for housing…

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    Firsteerr Lastmwwew

    there is no housing crisis the crisis is the fact we have too many people , too many people doing nothing to contribute , it was never about affordable housing thats a lie supply is defined by demand , but what is the drive of demand ?? thats social housing being denied to natives who work , housing in areas where you are the hated minority and are driven from your own area most with centuries of links to the areas , when you make it a LEGAL obligation to house supposed refugees and asylum seekers but NOT natives or service persons you are excluding by RACE a majority who become the minority and what happens ?? they want more housing in those areas because they want FREE HOUSING !!

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    Zest

    Love these videos although it would be great if you could just link some sources in your video description for your audience. Other then that great job.

  9. Post
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    David Robert Gibson

    Show Don't Tell doesn't show and doesn't tell us the dominant reason for the massive rise in housing demand – the Elephant In The Room – Mass Immigration – roughly 10,000,000 immigrants and their descendants since 1948 now live here who wouldn't if natives Brits had the decision on who comes to live with them and us. Why don't you Show and Tell?

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    Heavenschild77

    And we wonder why we have mental health problems? I’m sick of hearing MP’s bang on about Mental Health whilst not seeing the state of Cognitive Dissonance associated with this elephant in the room! It’s repugnant! Politicians should be ASHAMED!

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    JeckL

    This is a great video, thanks for making it. Right now I'm in a CIH Study group, and this seems to summarise a lot of the learning materials which we have covered in the housebuilding/demand section. I'll definately share this around the group, hope that's alright with yourself!

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    NoPants

    Housing benefits dwarfs defence spending.. and it all goes to Tory voting cnuts . I am SICK of the right wing ,dominant media in the uk who DEMONISE the poor by stating how much housing benefit THEY get !!

  17. Post
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    H

    Man know I finally know why my barret stocks are up 43% in 3 months 😛
    These companies have a very strong MOAT and will likely exist for the next 30 years.
    As a dividend investor, I will keep adding these stocks into my portfolio.

  18. Post
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    James SS

    This video makes me realise why we don't take politics seriously in the UK. There are too many rooms filled with years of crap and filth – like those hoarders who live on layers of gathering clutter. It would take superhuman nerve to tackle the constipated wheels of government. We're a rich nation – a 'first world' nation – we're in the global limelight and special attention is needed to address these issues. Unfortunately, agendas block the way and we are always left to limp on. The social situation for all people in the U.K. can be managed with careful consideration and thought, but that will never happen because there is just too much to lose and someone always needs to take the blame.

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    jantek

    A pity there is no mention of ridiculous poor quality of building, small rooms, no light and squeaky wooden floors. Many european colleagues call uk houses "cardboxes".

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    Robert Bevan

    The entire world including England is overpopulated. The human race, the most destructive life form on earth continue to destroy the planet and wipe out what appear to be far more intelligent species for the purposes of expanding economies and making the financial sector and property developers richer. The short termist view of our governments in supporting this sector of society is a disgrace. The answer to the problem is not in increasing house building but reducing the population. In England particularly, restricting couples to having no more than two children, stopping all immigration including asylum seekers, shipping illegals out of the country and no money given in overseas aid would be a start.

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    Arny Alpro

    Will quality housing ever be affordable under the current developer profits, led model?

    https://www.adadesigns.co.uk/

  25. Post
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    David S. O'Connor

    You’re talking specifically about United Kingdom Housing, just wondering why you’re showing € currency? Apart from that I’ve enjoyed this and the Solar Energy video. Extremely well put together, with thought provoking comment and specific data to back up your opinions. Thank you.

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    David

    The only cause of the housing problems is mass immigration, liberal fuckwitz encouraging any old person to come live here and then complain there is nowhere affordable to live, well duh, all the affordable entry level housing is given away to these uneducated scroungers.

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