Does Britain really face a housing shortage?

A change in the law will make it more difficult for developers to build on urban land. Will this cause a housing shortage? And what will that do to house prices? Simon Wilson reports.

What's happened?

So called 'garden grabbing' just got more difficult. Last week the coalition government's 'decentralisation' minister, Greg Clark, announced that his department is to change planning rules. In future, residential gardens will no longer be classified as 'brownfield' the same category as urban industrial wasteland. So planning decisions on developments in gardens will be devolved back to local councils. They're much more likely to take account of vociferous objections from the Nimby (not in my back yard) brigade. On the face of it the new policy simply "rectifies a quirk of planning policy that was always half-accidental", says Rowan Moore in The Observer.

So no harm done then?

Not quite. The last government, convinced of the need to build large numbers of new homes, promised three million of them by 2020. To minimise damage to the countryside and green belt, the plan was to build the bulk of them at high densities on brownfield sites. But in drawing up the legislation, private gardens in cities were placed in the same category as disused gasworks and railway yards. Developers were all-too eager to take advantage. Gardens often proved cheaper and easier to build on, and developers found it relatively straightforward to get permission to build high-density blocks of flats on urban plots. In all, 'garden grabbing' accounted for more than half of all new housing between 2005 and 2008, according to figures cited by The Economist. So the decision to make it harder to do has revived talk of a catastrophic housing shortage in Britain that is destined to keep house prices rising indefinitely.

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Is there a housing shortage?

All three political parties agree that Britain faces a shortage of new homes due to its rising population and a rise in household numbers as more people live alone. The Office for National Statistics says the population will grow by more than four million to nearly 65 million by 2020, of which almost 12 million will be aged under 30. The number of new households grew 4.2 million between 1981 and 2008 even as the population grew by just 1.8 million. Yet the UK builds fewer new homes each year than almost anywhere else in Europe.

How many?

Despite Gordon Brown's 2007 pledge to build three million homes by 2020 (240,000 a year by 2016), only 206,000 were built that year. In 2009 the figure fell to 123,000, the lowest for 83 years. There are some signs of life in the housebuilding sector as the economy emerges from recession; but no sign of a new homes boom. Besides, the properties that are built are often the wrong sort. For example, the average price of a one-bed flat dropped from £565 per sq ft in 2008 to £520 last year, while the price for a three-bed flat jumped from £550 to £615. So more buyers want larger houses and flats. Yet few are built.

Where is that a problem?

London is the most obvious example. As elsewhere in the country, the buy-to-let boom and under-supply of available land has pushed developers towards building small flats. Property consultants Drivers Jonas Deloitte (DJD) warned last month that the building of family homes will hit historic lows in coming years. A decade ago houses made up a third of all building, but that figure has fallen to just 5%, while one- and two-bed flats account for 77% of the total. According to their survey, just 155 new house builds are underway in inner London and only 1,100 houses in London as a whole.

So will house prices take off?

According to DJD, the shortage means a "real stoking up of house price growth in 2012-2013". But they may not be right. An oversupply of smaller properties suggests a housing market that will continue to fragment into more sectors. Anecdotal evidence from London's estate agents is that smaller flats remain far harder to shift than houses and larger flats. Meanwhile the idea that a shortage of newly built homes must lead to house price inflation fails to account for the hundreds of thousands of homes sitting empty. A recent survey by The Guardian, with input from the Empty Homes Agency (Emptyhomes.com), put the figure at 450,000. Other sources quote 850,000. More to the point, during the credit boom, prices rose across the UK, even in towns and boroughs where the population was falling. And rents have not risen at the same rate as prices, which you'd expect to happen if there was a genuine shortage. This suggests house prices are based more on the level of funds available to prospective buyers than on any shortage. Here the situation looks bad (see below). Latest mortgage approval figures show a quarterly drop of 18%. In the long-term, Britain may be short of the right type of homes, but that won't by itself protect prices from another fall.

The ongoing credit crunch

As George Hay argued recently on Breakingviews, even if potential demand does hold up, fresh credit "will remain scarce as UK banks face a £300bn funding gap when the government withdraws liquidity support measures next year". George Osborne's plans to give the Bank of England more powers to control lending seem likely further to restrict supply. And many over-leveraged borrowers have only avoided defaulting so far because interest rates have remained at historic lows and they have kept their jobs. But with public-sector cuts looming and interest rates already rock bottom, the pressure on homeowners can only increase.