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However, despite getting off lightly, it wasn’t all good news for the government; found in bullet three, point 18, Article IV was the verdict on the Help to Buy scheme. It will have made uncomfortable reading, claiming that without action to increase supply the effect will be a short term boost to house prices, restricting rather than easing access to housing. While it’s clear that it’s too early to see the full effects of a policy that won’t be fully rolled out until January, the IMF verdict is one of many recent critiques that has refocused attention on the scheme.
Announced in the 2013 budget, the Help to Buy scheme has divided opinion from the outset, held up as either the saviour of house sales (by housebuilders such as Barratts,Taylor Wimpey, Galliford Try and RICS) or the re-inflator of another house price bubble (OBR, CEBR, Treasury select committee). However, with the IMF joining the likes ofMervyn King in lining up against the policy, the government along with a few construction industry voices are starting to look a little isolated.
Difficulties in the housing market are clear, prices are too high and (especially first time) buyers are struggling to get mortgages. Help to Buy is focused squarely on easing access to mortgages. It is forecast to boost transaction numbers (7.5% by next year) and could be seen as a qualified success within those tight parameters. While access to mortgages is a significant problem for many though, the real problem is that in certain parts of the country there aren’t enough houses to buy.
The major challenge facing policy makers in the UK housing market is the persistent shortage of housing in the right places. At least 200,000 new homes are needed each year but scarcely half this are actually being built. With an 11% fall in starts last year, this is a growing issue.
The problem with Help to Buy that the IMF and other critics highlight is one of basic economics: support for mortgages boosts already strong demand, but it does nothing to help boost supply to meet that demand. Instead of incentivising buying, we need to incentivise building. One way of addressing supply is to tax those who are holding land with no signs of development, as the IMF noted. This policy would address the very real issue of land supply and the distorting effect that this is having on the housing market.
Housebuilding: shortfall vs potential
House builders’ business models are based on margin and not volume, for housing supply to meet the needs of a growing demand, this needs to change. Part of the problem is too often developers hold on to land with permissions without starting development. This is sometimes due to changes in viability but all too often developers are keeping house prices high by constricting supply, passively benefiting from a rise in both house and land values. The Local Government Association found in 2012 that 400,000 units that had planning permission were not yet started on site. Even in the strongest markets there is a significant amount of land with planning permission that developers are sitting on (for instance 177,000 permitted units in London). This means there were more units with planning permission that had not started on site than there were under construction.
The Government have shown a significant appetite to address stalled sites. For example Communities Secretary Eric Pickles has recognised through schemes such as contribution re-negotiation that leaving sites ‘laying idle’ costs communities and is good for no-one. The Mayor of London last week criticised ‘pernicious land banking’ threatening to use CPO powers to ensure projects are started. In both cases though, renegotiating obligations is relied upon to ensure viability. However the reassessment of obligations placed on developers only looks at a small part of the house-building viability equation. Alongside this, the true value of developable land should be recognised. A tax on undeveloped land with planning permission, capturing the true cost to society, would provide a disincentive to holding land and in turn, an incentive to bring forward development. This would be in the best interests of the economy as a whole, outweighing the cost to profit margins of the individual house builders.
Responding to the IMF proposal, voices from the development industry such as the House Builders Federation have claimed developers holding on to land were not hoarding, that instead it is an issue of viability. However, whatever the motives, the potential of these sites, which are not being brought to market, is significant. A disincentive to holding back developable land would increase this supply.
To ensure implementation of a scheme like this increases supply it would have to be part of a wider agenda. Any revenues raised from such a tax could be retained locally and used for land remediation or assembly at the local level. This would allow cities to work with developers to bring more developable land to market and ensure greater viability on a greater number of sites.
Instead of boosting already unmanageable demand, the government must look at dealing with chronic under supply in the housing market. A tax on idle developable land could bring the real cost to the economy of holding on to land – to the developers. As a result land and in turn housing supply would be boosted, key to addressing significant failures in the housing market. To solve this crisis the country needs help to build, not help to buy.
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