The foundations of the housing crisis

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The economic model that underpins the development of places and homes in the UK is fundamentally broken. It serves to extract value that is collectively created through the economic life of these places for the benefit of relatively few private owners. In doing so, it reinforces the stark income and wealth inequalities in the wider economy.

However, this development model is not inevitable. It is the result of policy choices, particularly those that determine the planning, land and housing systems, which can be changed and improved. This position paper is the first output in a New Economics Foundation (NEF) series, Fixing Our Broken Development Model, as part of the multi-year Reclaiming Our Regional Economies (RORE) programme. Here, we argue that by adopting ambitious policies that have been proven here and abroad, the UK can begin to create more equitable, healthier and sustainable places.

An ongoing housing crisis has left at least 8.5 million people in Britain with some form of unmet housing need. Sharp increases in house prices relative to incomes over the past two decades have trapped many in an increasingly unaffordable and poorly regulated private rented sector, where housing costs eat up a large proportion of income and leave people struggling to afford other essentials. A significant increase in the construction of social housing is needed to respond to unmet housing need, but the current developer-led model of housebuilding is poorly equipped to deliver these social homes.

The UK’s dysfunctional land market contributes in large part to these housing issues and serves as an engine of wealth inequality, with the value of land nationwide having risen by over 600% since 1995. Increased financial value created by place development is privately captured as landowners are able to lean on the existence of ​“hope value” to capitalise on their asset. As a result, land cannot be used to provide public goods such as the creation of high-quality public spaces, transport and local amenities. Private land banking has seen sites sit unused for extended periods of time while local authorities are not adequately resourced to play a role in their local land markets.

While the planning system has the potential to address these issues, it is currently not well positioned or equipped to do so. Planning departments have been left under-resourced by deep budget cuts in the past decade and their approach to consultation leaves many local people unable to exercise democratic control over what happens in their area. The mechanisms intended to recapture value for the public during the development process, such as Section 106 (S106) contributions and the Community Infrastructure Levy (CIL), have failed to deliver.

In the face of these challenges, the present political debate on what to do about our development model is often narrow and incremental. Solutions are framed in simplistic terms such as ramping up new housing supply regardless of affordability or tenure, and the planning system is portrayed solely as an obstacle to this desired construction boom. We argue instead for a planning system that redistributes power over land and housing development from private developers and landowners to local government. Doing so would see community need prioritised over profit. We also call for this system to be more democratic, so that ordinary people ultimately determine how local government uses any new powers to meet their needs.

Experience in responding to housing shortages can inform the way forward. An alternative development model would make use of best practice from past UK experience and adopt models applied in countries such as the Netherlands, Germany, France, South Korea and Japan. We outline the broad features of an alternative development model, including:

• Stronger land readjustment powers for local government, allowing public land acquisition of a site at use value, redistribution of ownership within the site, installation of necessary infrastructure, and subsequent development of social housing.
• More substantial public ownership of land and housing over the long term, to recapture the value uplift generated in these places to fund public goods.
• Restored resourcing for local planning departments to pre-austerity funding levels.
• Increased funding and capacity for public sector housebuilders to build higher volumes of social homes and devolving the Right to Buy to allow local leaders to take control of social housing stock.
• Devolved upfront capital funding via social housing grants to parts of the country experiencing underinvestment, to account for regional inequalities that inhibit development in those places.

Housing and land policies are key aspects of the current development model which have the greatest potential to deliver transformative change. What happens in the land and housing markets has significant implications for the wider economy, including the positive consequences that result from access to secure low-cost homes. An alternative development model that delivers those homes has the potential to provide improved financial security, economic resilience and resident wellbeing in turn. Amid an escalating crisis in housing and land, ambitious policies are needed more than ever to reassert the power of the public in providing the places we need.

However, there are opportunities to further improve the development model by pursuing other relevant policies, as this paper also touches upon. These include locking in the provision of public transport and active travel to newly developed areas, creating places that are fully compatible with climate and biodiversity commitments, and providing sufficient affordable community and commercial space to allow for a strong local foundational economy.