In recent weeks cabinet ministers have publicly debated the role of increased Government borrowing in addressing the UK’s housing needs. First, Communities and Local Government Secretary Sajid Javid called for borrowing restrictions to be relaxed to enable the Government to take advantage of low interest rates to boost housing delivery. This was given short shrift by the Chancellor Phillip Hammond, however, who stated that borrowing more would undermine the Government’s efforts to reduce the deficit, and would therefore not feature in next month’s budget.
Yet the Chancellor was wrong to dismiss Javid’s intervention so quickly, as it highlighted two important and overlooked points: the critical place of the private sector in tackling the housing crisis, and how national and local leaders can leverage this through borrowing to support productive investment.
The role of the private sector in getting more homes built
This first point stems from Javid’s argument that while councils and housing associations “have a big part to play” in addressing housing shortages, the private sector also needs to take a leading role. To some degree, this is a contentious point. While no one denies the urgent need to address housing shortages in our most unaffordable cities, there is significantly less consensus about the role the private sector should play in this. The ongoing controversy around Haringey council’s partnership with property developer Lendlease highlights the opposition that exists in some quarters towards private developers taking the lead.
However, setting aside the specifics of the Haringey development, there are many benefits to increasing encouraging private sector involvement in initiatives to build more homes. For a start, it enables the same public resources to cover more ground, reducing the cost to the taxpayer of solving the housing crisis.
It also ensures housing delivery is approached with a commercial mind-set, with developers incentivised to concentrate new stock where there is most demand (and most chronic undersupply) and produce property which closely meets the needs of residents. Delivered alongside additional social housing, this will improve affordability and make private renting cheaper.
Crucially, private sector-led development attracts more private sector development. By demonstrating viability and commercial success, initial schemes can trigger further interest. In contrast, public-led projects may raise concerns, indicating that conditions were insufficient to attract developers.
How borrowing can drive private sector development
This is where borrowing becomes an important tool for leaders to drive productive investment. As Andrew Carter has previously noted, the political narrative around bringing down the deficit that developed following the 2008 financial crisis has meant that politicians have been reluctant to countenance the idea of borrowing. This means that the case for productive investment – that is, borrowing to invest in skills, housing and infrastructure in order to create wealth that outstrips the costs of borrowing – has been overlooked. But as Javid noted, tackling the deficit and taking advantage of low interest rates to invest in infrastructure are two different things, which don’t necessarily preclude each other.
So if the Government did adopt Javid’s proposals to allow more borrowing, how could it use these funds to encourage the private sector to deliver housing? Our research highlights three ways:
- Invest in infrastructure to unlock sites for developers: poor infrastructure (road, rail) can prevent sites being viable developments. Using borrowed funds to release this land can overcome this barrier. In Copenhagen, for example, a publicly-funded bridge and metro resulted in successful sales of land to private developers.
- Kickstart development: by acting as a lead investor, or being an anchor tenant, the public sector can give the private sector confidence in a scheme, encouraging them to step in and get involved further down the line. This approach was taken by Blackburn, where the council invested its own funds in the Cathedral Quarter development. This subsequently attracted investment from Legal & General and several pension funds once its potential was more clearly visible to the private sector.
- Partner with the private sector – where the private sector is not willing to risk acting alone, the public sector can partner with them, reducing risks sufficiently to attract their involvement. For example, a Local Asset Backed Vehicle (LABV) allows partners to pool finance, land, planning powers and expertise to achieve a palatable combination of risk and return for the private sector – as seen in Sunderland’s Siglion LABV.
All three of the steps outlined above will be most successful if the city builds relationships with developers, provides them with a pipeline of investment-ready opportunities to consider, and demonstrates the city’s commitment to successful delivery through senior leadership engagement.
Clearly these steps alone won’t be enough to tackle housing shortages in unaffordable places, and borrowing must be complemented by other policies to open up land and opportunities to developers – for example, opening up some green belt land around high demand cities. But nor can the Government afford to rule out borrowing to drive private sector development if it is to get to grips with the housing crisis. The upcoming budget offers the perfect opportunity for the Chancellor to change the Government’s approach and make borrowing for productive investment a priority.
For more examples of what cities (around the UK and internationally) are doing to deliver housing, see our Case Study Library.