Housebuilding

Lord Oakeshott of Seagrove Bay Excerpts

Thursday 24th October 2013 Grand Committee

[Lord Oakeshott of Seagrove Bay (LD)]

My Lords, it is a pleasure to follow the noble Lord, Lord Borwick, and to welcome him to this House. He has a distinguished business career in manufacturing but clearly speaks with great knowledge and expertise about the housing market. Abolishing stamp duty is a nice idea, but I do not know where the money is coming from. Perhaps I can say to him that the best way to raise a significant amount of money without stopping housing supply is to have the Liberal Democrat mansion tax, which goes on existing property and so does not affect supply.

I should declare my interests in the register, as did the noble Lord, particularly the fact that I am chairman of OLIM Property Ltd, which is a commercial property investment management company. I have bought about £100 million-worth of property during the past year all over the country, from Belfast to Ipswich, Preston to Leeds and Peterhead to Exeter. Although I am not operating in the housing market, I am obviously pretty close to what is happening in the local economies in those areas.

There is a simple and very serious problem that house prices are horribly and unaffordably high in this country. I go beyond the people who argue for stability, and say that prices are too high and need to come down. There are two simple reasons for this. We have built far too few houses for many years and we have also, in terms of affordability, sold off so much of the social housing stock. Two million houses were sold since Mrs Thatcher introduced the policy in 1979, of which three-quarters of a million—no less—were sold under Blair and Brown.

Under both Governments we had a failure to build, and a failure even to use what houses we have to best advantage. We are therefore left today with £23 billion of housing benefit being poured down the drain. Much of it is actually spent on the same council houses which were sold off, but the rent now goes to private landlords.

The result of this long-term lack of supply can be seen today in the ratios of earnings to house prices, which is the key measure of affordability. You do not, if you are wise, take a mortgage on the basis of this week’s special mortgage offer. Mortgage rates go up and down, but obviously what matters long-term is how your earnings compare to what you pay for the house. If I were to advise someone to rush out and buy a house on very low mortgage rates today, to be honest I would be guilty of mortgage mis-selling.

Going back to 1997, when Labour came to power, English house prices were three and a half times median annual earnings. Ten years later mortgage lending had trebled but there had been no net increase at all in house building, with the same number being built. The cost of housing index had doubled to a ratio of 7.2 at the peak of the 2007 boom. On the latest official figures, which are for April 2012, 18 months ago, it had only slipped back to 6.7 times annual earnings.

It is very likely that, with house prices rising five times faster than average earnings, that ratio is right back up past the 2007 peak. As a very good map in the Guardian last Saturday showed, the ratio is already above that peak in very many local authorities. These are mainly, although not entirely, in the southern half of the country, all the way from Somerset to Suffolk, in Devon and even one or two in Lancashire. It is not just in the centre of London. For example, housing in Welwyn Hatfield, the constituency of former housing Minister Grant Shapps, is now unaffordable. There houses cost eight times local earnings, even higher than at the peak of the boom.

I have also done some work on auction results and the housing auction market. This is a real market where real volumes change hands. The numbers are quite large, about 5,000 houses a quarter. In the last quarter, July to September 2013, the average price of a house sold at auction across the country rose by 14%. It rose by 16% in London, but still actually by 10% in other parts of the country. That statistic is more up to date than the Government’s Land Registry figures, which are on completions, and it goes further back. House prices are rising fast, and I am afraid that that is accelerating.

My noble friend Lord Stoneham asked for a long-term focus on housing. I do not know if 40 years back is long enough, but I remember buying my first home in 1972. That was in rather similar conditions to today, during the Barber boom. There had been a great relaxation of credit, and house prices had already gone up 40% or so over the previous year. I had quite a struggle to buy a house priced at £8,500 with a £7,500 mortgage. Two years later I had to come to London to be a special adviser in the 1974 Government, and mortgage rates had then gone up to 14%. Having saved up on my own to be a first-time buyer, I then had to be a second stepper with the bank of mum and dad behind me to have any chance at all.

We have had many, many experiences in this country of wild fluctuations in interest rates. Rates may be a little more stable today, but there is clearly a great deal of concern about the way they are going. That is being expressed by commentators from all sorts of backgrounds. I have here the HSBC chief UK economist’s research from last week, which argues that house price inflation will not help the UK rebalance and points out the problems of supply.

To return to what the noble Lord, Lord Borwick, was talking about regarding resistance to development, I am not personally against a bit of nimbyism, “not in my back yard”. After all, that is local democracy and people are able to argue that. What we must fight against is the attitude there often seems to be of BANANAism. I do not know if your Lordships’ know about BANANAism, but it means “build absolutely nothing anywhere near anyone”. I am afraid that that is the attitude of some people.

For a variety of reasons, we have had a serious shortage of housebuilding for many, many years. Lately, as my noble friend Lord Stoneham has said, it has been creeping up to 110,000 or 120,000 a year. It was down a couple of years ago to the lowest level in peacetime, since 1923, so, though it is picking up, supply is still far, far below what is needed even to keep house prices stable, given the growth in population, given the growth in household formation. The best estimates are that we need something like 250,000 completions every year just to keep up with increasing demand. To make any impact on the problem and keep house prices down or even make them a bit more affordable, we would clearly need to be up at 300,000 a year.

I very much hope and believe that the Liberal Democrat manifesto at the next election will have a commitment to that. However, a commitment is one thing—getting on with progress towards it now is quite another. There has been quite a bit of talk about Help to Buy and whether that—as I believe it is—is quite dangerous, given the way it has come in, with a limit of 25 times national average earnings, £600,000 a year. Like my noble friend Lord Stoneham, I think it should be limited to areas where the housing market is not so overheated as the south-east of England. It certainly does not need to be at anything like that high a level when you consider that across a lot of the country house prices, certainly for first-time buyers, are much more like £100,000 or £150,000.

We have another problem. There are two reasons house prices did not fall as much as one would have expected during the crash, and why they have gone up faster than they otherwise would have done. One is, of course, quantitative easing—£370 billion of credit pumped into the economy—which was necessary to avoid the economic patient dying of a heart attack at the time but has a lot of serious after-effects. The other is the Funding for Lending scheme. Just in passing, again, if you think this is wild left-wingery from me, the chief executive of Legal & General, no less, was describing quantitative easing as a policy devised by the rich for the rich. There is no doubt that it has helped push up prices of all sorts of assets, including housing.

The Funding for Lending scheme of the Bank of England has significantly failed to do what it is meant to do, which is to get cash to small businesses. Instead, it has led to a flood of cheap credit in the mortgage market, which is not its point. The Bank of England and the Treasury, I believe, must refocus Funding for Lending on its proper task, which is to rebuild desperately needed business job growth, not to get the house price merry-go-round going again.

When Grant Shapps was Housing Minister, he did make a sustained—and, I thought, quite logical—case for stable house prices, even though I would like to see them lower. I am afraid now that he is party chairman, he seems to be almost in denial. The Government, I am afraid—Conservative Ministers, anyway—seem to be washing their hands of the high-house-price crisis, because that is what it is, in a way reminiscent of Pontius Pilate. We cannot pump up house prices unless we are much more radical about supply. I am afraid Help to Buy without far more active help to build is a potty policy.