Lifting the borrowing cap won’t address the biggest housing issue cities face

The Government's proposals will mean more houses are built, but bolder reform is needed to free up land in high-demand cities

The Prime Minister Theresa May danced her way onto stage to the disco sounds of ABBA last week, but the real mood music of Conservative Party Conference was house. Ending the housing shortage is a huge domestic priority for the Government, and one of the things May, Boris Johnson and Jacob Rees-Mogg all agree on is that we need to build more homes.

The key policy the Prime Minister announced during her conference speech is that the Government will relax restrictions on local government borrowing to build new council homes. However, while this might increase the rate of building and especially benefit those on low incomes, it doesn’t solve the key problem in our most high-demand cities – a shortage of land in the planning system that can be developed.

Getting councils building housing for rent is sometimes considered the silver bullet that will end the housing shortage. The Local Government Association itself makes the case that “the last time this country built homes at the scale that we need now was in the 1970s when councils built more than 40 per cent of them”. The Labour Party also pledged to abolish the same restrictions back in April as part of a plan to build 1 million new council houses at social rents.

And broadly, we should expect the removal of the borrowing cap to increase the amount of building by councils. There’s a key role for the public sector to play in providing good quality rented housing for those on low incomes, which would complement the recent private sector boom for those on medium-high incomes through Build to Rent housing.

But there is no guarantee that councils will use the new freedoms to build more homes

The new policy assumes that all councils want to build more homes. And while a few councils in cities are keen on the idea of playing a much larger role in supplying homes, many others in and around high-demand cities are not. Different places have distinct politics and views, and simply giving local government the freedom to build more houses is no guarantee they actually will. The current existence and structure of Right to Buy also discourages councils from building, yet so far it remains untouched.

Moreover, it remains unclear how much freedom councils will have to borrow under the new proposals. The Government expects councils will borrow up to £1bn a year and they will have to comply with the prudential code, but beyond that details are scarce. If councils borrow a lot more or less than expected, this will jumble up the sums that underpin the policy and force a rethink.

In particular, the abolition of the borrowing cap for housing comes at a point when concern is growing in Whitehall that councils are borrowing too much to invest in commercial property to create new revenue streams rather than land assembly. One possible result of the new policy might therefore be a tightening of restrictions around borrowing for commercial purposes, in return for greater freedom for borrowing in residential property.

Housing prices will rise unless more land is released in high-demand cities

Nor will the new proposals address the fact that the UK’s central housing problem is a shortage of land for development in particular cities. In fact, they may actually push up land prices across cities.

If councils take on a much larger role in housing construction and also release much more land for development, then the additional building will dampen housing costs and make their cities more affordable to their residents. But if, hypothetically, no more land was released and the shortage of land continued as before, then adding councils as another developer will only push up prices for land as a whole.

Lower housing costs for families on low incomes – coupled with no change in the amount of land released for housing – would come at the cost of increasing housing costs for the rest of the city. This might be preferable to doing nothing, but it’s just not necessary, as we could make housing in high demand cities cheaper for everyone if enough land was released for development and used efficiently.

There are a number of technical changes that could make this happen, but for the keynote at Conservative conference the announcement has to be big enough to grab headlines, while also acknowledging it will take time for any reforms to filter through to the actual market.

A missed opportunity for green belt reform

Instead, what the Prime Minister should have done and do is announce a radical overhaul of the green belt. Grading green belt land by quality would protect the best countryside, while releasing ordinary scrubland and brownfield land for “button development” of dense housing around train stations would tackle a key cause of the housing shortage.

Doing it at one fell swoop would minimise political risk in a Conservative Party which is united on the need to build more homes, compared to the ongoing nibbling at the green belt which agitates local residents and councillors.

The Government needs a radical domestic agenda to win the next general election (which could be four years or four months away, given the volatile nature of British politics). Housing will inevitably one of the key debates ahead of that election – the Government needs to be bold in making essential reforms if it is to seize the initiative on this issue.

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