Communities and Local Government CommitteeWritten submission from the Institute for Public Policy Research

I am writing to formally submit IPPR’s recent report “Build Now or Pay Later?” for consideration as part of the Communities and Local Government Committee’s inquiry into housing supply.

The starting point for our research was the challenge of meeting the demand for new homes in the context of severe constraints on the public finances. Unless we find a way to finance new supply the gulf between the homes we need and the homes we’ve got will grow dangerously wide. Against this backdrop, the report briefly outlines the powerful economic case for increasing housing supply—and considers whether current government policy is up to the challenge.

The main focus of the report is an exploration of three new ideas for financing additional housing, in light of the current economic context:

First, we consider the prospects for institutional investment in residential property in the UK. Our analysis emphasises the prospective investor’s perspective. We hone in on the heart of the problem: housing looks low-yield and high-hassle to potential investors. But we then we ask if these obstacles are surmountable, concluding that, with careful product design, they may well be for domestic insurance and pension funds. We then argue that it is local authority pension funds that offer the best prospect.

Second, developing our thinking on the role of local authorities further, we argue that they should release their public land to developers in return for an equity stake in development; hold auctions to secure private land for new homes; and adopt a “use it or lose it” approach to privately held land fit for housing, including through the use of more time-limited planning permissions. We suggest also that local authorities need to make the most of the house-building opportunities that housing revenue account (HRA) reform offers.

Thirdly, we make the case for the recapitalisation, over time, of government expenditure on housing. We describe the dramatic shift that has occurred over the past 40 years away from capital investment in bricks and mortar towards personal subsidy through housing benefit (HB) and then consider how it might gradually be reversed. We suggest integrating housing policy across government, enabling a more deliberate focus on delivering this change. We explore the possibility of introducing a stepped taper to HB and creating a framework for hybrid social-private landlords in order to get more out of the private rented sector, where HB has at times looked like a landlord-enrichment scheme. And we float the idea of localising decision-making responsibility for all housing spend, giving local authorities more of an incentive to keep rents and HB bills down in their area and invest more in new-build.

The report also suggests two other possibilities that we think merit further exploration, and on which IPPR is now undertaking further work:

We advocate the expansion of the new Green Investment Bank into a fully-fledged National Investment Bank and contend that one of the types of infrastructure it should fund should be new housing. This would mean that the state’s resources could be used to enable the private sector to borrow cheaply to build new homes, inverting the operating principles of the private finance initiative.

We urge that serious thought be given to reforming the UK’s development industry. Getting land to market is of little use if developers would rather sit on it than develop. We argue we need to find ways of introducing competitive pressures into the industry to incentivise actual development, rather than mere land acquisition.

To conclude, we find that Britain finds itself in a “catch-22” situation, with low growth, low supply, low finance and low confidence, despite low interest rates. There is clearly no one silver bullet that will break this deadlock; our aim has been to provide food for thought as the government considers its housing strategy. We are clear that this strategy must offer more than a recapitulation of what has been done already, while not resting too heavily on the single proposition of the release of government land.

We would be very happy to provide additional briefing or to discuss these issues further with you or Committee members.

November 2011