Economy: Growth

Lord Stoneham of Droxford Excerpts

Thursday 21st June 2012 Lords Chamber

[Lord Stoneham of Droxford]

My Lords, the essential task and purpose of the coalition is to reduce the government deficit and restore growth. The nature of our partisan politics exaggerates the differences between the Government and the Opposition. Divisions also lead us to overlook what the real dividing lines and problems are. The biggest problem is that the big drivers of the economy between 2000 and 2009 were private borrowing and public spending. Tim Morgan in a recent publication The Quest for Change and Renewal shows that growth in construction, real estate and finance sectors was 42% and growth in health, education and public administration was 28% while the rest of the economy was languishing at -5%, and the real output from manufacturing was plunging by 26% to remain at 12% of GDP.

This suggests that a huge proportion of the economy is currently incapable of growth due to the overdependence on sectors relying on private borrowing and public spending. It is not surprising that we are having difficulties finding a way out. When combined with the huge explosion of private household debt, which individuals are now rebalancing as precautionary motives take hold, it is not surprising that growth remains illusory. There are no short-term fixes.

I want to address my remarks to the importance of the housing sector to restoring growth, and I declare my interest as chair of Housing21. Housing is a great driver of growth. One new house adds at least one new job in construction and two-and-a-half to three jobs with all the associated purchases in the economy. Twenty per cent of the output of housing is sourced through manufacturing. One of the great disappointments of the previous Government is that, despite the boom they created, only 233,000 houses were being built at the top of the boom, and the number has now fallen to below 100,000.

Housing is very cyclical. As demand rises, it soon reaches supply constraints, not just land, but the capacity of the industry to build quickly and cheaply enough. We need to improve capacity. This is a long-term, not short-term, task. A recession and its economic difficulties are often the best time to achieve change in business and to prepare businesses for the future. No good will come if we simply cut back capacity by reducing cost in the short term. Housing has a huge impact on the wider economy and our social objectives. The noble Lord, Lord Best, my friend and colleague in the housing sector, always uses the example of building 100,000 retirement homes. This not only enables 150,000 people to move to more suitable accommodation, but assists 350,000 people to move to the larger accommodation that is released by those moves, and there are associated benefits in savings on health and social spending and in family morale, not to ignore the economic spending as new homes are set up.

There is growing awareness of the importance of housing in the recovery from the previous equivalent economic catastrophe between 1929 and 1932. Recently this has been highlighted in a CentreForum publication by Nick Crafts and in a speech earlier this week by Vince Cable. Those of us brought up on Keynesian teaching all assumed that recovery at that time came from New Deal economics and rearmament. No it did not. They had a devaluation of 25%, which helped, as now. They followed an orthodox fiscal policy of getting the deficit down. Debt at that time was 180% of GDP, and the servicing costs of that debt were 8% of GDP against 3% now. They followed a policy of cheap money. Interest rates fell from 10% to 1%. The only real difference in the 1930s was that then there was no banking crisis and no credit crunch. In addition, there was a network of mutual building societies and locally facing banks ready to fund mortgages at low interest rates. The Government remained in fiscal balance from 1929 throughout the 1930s and from 1932 the economy started to grow by 3% per annum until the end of the decade, and one of the drivers of that was the doubling of housing development to 300,000 houses a year using cheap money.

What can the Government learn from this and what can they do? There are three lessons and five actions. Institutions must start to lend again so that housing borrowers can take advantage of low rates. Confidence has to be rebuilt. A continuing expectation of low rates is essential to the private sector but also important to housing associations and councils. The role of the state, both nationally and locally, must be in partnership with the private sector to incentivise and indeed leverage recovery using the strengths of its own balance sheets without necessarily adding to the deficit.

Turning to the actions required, housing strategy must encompass all forms of housing and not be preoccupied with owner-occupation, as important as that is. There is a huge need for more private rented, affordable and social housing. Partnership activity between the sectors lowers costs and risks and enables flexibility at the margins when houses that cannot be sold can be rented or used for social housing. Keeping housing in silos encourages social apartheid and raises the cost of housing provision. Mixed developments help cross-subsidisation of social housing.

The Government should consider using quantitative easing measures to directly benefit housing development rather than simply improving the balance sheets of banks. A 1% easing of interest rates could lower the cost of financing housing by 20% to 25%, which is very significant over a 30-year repayment period. It could also reduce the need for subsidising social housing directly. Housing associations are already forsaking banks for bond issues to finance their developments. Examining new sources of funding could facilitate more development.

Not enough progress has been made, despite promises that it was going to be, in sourcing pension funds and institutions looking for suitable long-term investment providing real returns, particularly in private rented housing. Certainty on rent policy and even the development of government guarantees would be better than direct government investment. A whole series of government schemes already provides very significant funding: the Growing Places Fund for infrastructure; Get Britain Building for development finance; freeing up public sector land initiatives; the New Homes Bonus. We have to push on these but we must be prepared to consider that we might have to spend £1 billion to produce 40,000 to 50,000 homes if all else fails.

Finally, as I said in the housing strategy debate I initiated earlier this year, the Government need to be ambitious. There needs to be a housing tsar in government to galvanise the private, public and voluntary sectors to drive these policies and to raise our sights from building 100,000 homes this year—if we are lucky—to over 200,000 in 2015.

I always thought it was that great liberal Conservative Harold Macmillan who broke the 300,000 homes ceiling in the 1950s. Actually it was done in the 1930s and, if I dare to say so, it was probably one of the reasons why that one-nation Conservative Stanley Baldwin formed the Government after 1935, despite the great crash in 1929.