10. The Housing Market
In Britain, over the last 10 years, it was only practical to build houses in the inappropriate locations that the Government's housing policy prescribed because house prices were very high. The Government's policys only ever worked after 2000 because house prices were ridiculously high and all the key players in Whitehall knew that to be the case. Bad investment means not just building merely for the sake of it but building in inappropriate locations as this equates to a waste of resources. Building on brown field sites in the centre of a city like London was a waste of resources. Building in the Thames Gateway area was a ridiculous waste particularly as the area will become increasingly prone to inundation caused by rising sea levels. It only paid to build on previously used land or small plots of land deep in dense existing conurbations once house prices rose by a factor of two and then later three.
The price of a house is totally dependent upon the amount that the banks and building societies are prepared to lend. The Government removed all the limits on lending and prices were able to rise in an uncontrolled manner until the money supply was checked. From the Government's point of view it was vital to keep the price of property at unsustainable levels for the last decade. This meant restricting new buildings to areas where new build costs were high. If society's resources are limited then logic would say build on the cheapest and easiest land possible. This has to mean green field sites and certainly precludes brown field sites. If large areas of cheap, easy to develop land had been zoned for construction ten years ago there would not have been a housing bubble because house prices would not have risen in the way that they did. However, mass housing on easy to build agricultural land was never a political option and the cost of building new houses on expensive sites was used to drive up the housing market.
By allowing an explosion in the price of property the British Government was able to draw out money that would otherwise have been languishing in bank accounts. It also meant that property was built in places where it made no commercial sense to do so and old properties that should have been left alone were refurbished. In other words there was commercial activity in areas when there should have been none. Also individuals took on a massive amount of debt in the certain knowledge, they thought, that they were sitting on something of great value and that they could made a fortune doing little or nothing. Some of this wealth was put back into circulation by the construction industry. In other words, people were prepared to borrow today against the future which meant that extra cash went into circulation which created jobs and which of course was taxed. At the moment no one is asking how the British Government will make good the loss of such an important income stream.
Allowing development on green field sites has always been difficult for politicians in the UK because many older middle class people do not want houses to be built in the countryside. This was good from the Government's point of view as it meant that it could adopt a policy of only allowing new building on difficult and expensive sites which made house price inflation a reality. Eventually house prices reached unsustainable levels and then the market collapsed. What this meant was that for over a decade huge quantities of resources were wasted building houses for three times the price that they were really worth. The waste was not only the actual amount of money that they consumed but also the construction materials, labour and carbon. The housing market is a classic case of what happens when financially illiterate Civil Servants develop policies to achieve short-term objectives. Now the British Government is engaged in the same process with eco homes and zero carbon development. Again, these policies will inflate the cost of new homes by unnecessarily increasing the capital cost of each unit. In a bankrupt country that is fast using up its historic wealth, logic should dictate that everything must be done as cheaply and as efficiently as possible. However, forcing up borrowing as a way of absorbing monetary inflation is vital for the Government.
Politicians loved to proclaim success with their social housing and affordable housing policies but this was almost always dependent upon planning gain or grants. The Government no longer has money for grants and with no new commercial development taking place planning gain can offer nothing. Even if a developer wanted to build it will be years before any project can support the extra burden placed on it by the local authority. This means that the countries housing and planning policies will have to be totally rewritten and a new way of funding dwellings for the less well off in society will have to be found. This will mean abandoning all the existing planning policies as the only way to build quickly and cheaply is on green field sites.
The Government has just announced that Britain in to cut carbon emissions from homes by 80% by 2050. This has to be one of the most unrealistic propositions that has ever been announced. Soon all new dwellings will have to meet strict new environmental standards. Officially, this will only have a small impact upon the price of a home. More knowledgeable sources think that these proposals could increase the cost of a home by 40%. This then raises two questions. Why would anyone pay the extra when they can get a much better older home for the same money particularly when the economy is winding down? More importantly what difference will producing a few thousand new high efficiency homes have when there are 25 million traditional homes in existence? The Government is currently claiming that 8 million new homes will be built by 2050 which shows how out of touch with reality the British Government really is. There certainly will not be many houses built in the next 10 years. It is very difficult to see how house completions will ever reach 100,000 units a year let alone the 200,000 that the government is basing its assumptions upon unless a totally different approach is adopted. In a declining economy building lots of cheap homes has to be the fundamental to any housing policy. A pragmatic person would start from the basic position that cheap and cost effective is the only option. However, such an approach would also lower or at least restrain the housing market so the political establishment will have to continue with its current double talk.
If all the existing buildings are to be upgraded to make them eco friendly then it is important to ask where the money is to come from. It is always possible to upgrade old homes but experience tells us that when you try to upgrade old dwellings that many unforeseen problems always manifest themselves. If a notional cost of £20,000 was attached to upgrading each existing home then the cost would be over £500 billion. If a more realistic figure of £50,000 were used, particularly if micro generation systems are to be added to every house, then the final cost would be £1,250 billion. On top of this figure all the commercial buildings and retail buildings would need to be upgraded. This would give a total investment figure of over £2 trillion. Even over 40 years this is the equivalent of drawing £50 billion per annum out of the economy. This is a completely impossible sum so the Government's policy is clearly nonsense. The policy can only be intended to draw attention away from the real problems of the economy.
The Government now has three problems to deal with. Firstly, house prices can never rise to the level that they were a couple of years ago because the financial crisis is so devastating. This means that the local plans that have been lodged by local authorities with Central Government can never be implemented. Secondly, most of the planning permissions that are currently outstanding will never be built because they are no longer commercially viable. A good example of this is Gordon Brown's Eco New Towns. They made no sense when they were first proposed and now they are commercial nonsense. The third problem is that getting the general population to borrow against the increasing value of property is now a non-starter. It will be at least a decade before the housing market even starts to recover. As a result the British Government has no way of getting mass borrowing going which means that the UK economy is now stuck in a very deep hole as far as borrowing induced growth is concerned. The only borrowing that most people will do is for their survival, unless they are sponsored by the State.
Published: January 2009