New quango sets sights on failure?

Following on from the Barker reviews into housing supply and planning, a new quango (actually they call it a think-tank I believe but it's government funded so I'll call it what it is, another quango), the National Housing and Planning Advice Unit, arrives on the scene today with a manifesto for failure, or so it would seem. Its report, highlighted in the Guardian article - Britain faces 20-year house boom that will split nation - and similarly in the Telegraph, omits any mention of land values. And if it doesn't get to grips with the land question, it is bound to fail.

Stephen Nickell, the chair of the new quango, has a great pedigree, just as Kate Barker had, in economics - a former member of the Monetary Policy Committee at the Bank of England and Professor at LSE. And he has certainly worked on aspects of house prices as his publications list shows. But he doesn't count housing and land economics as amongst his areas of expertise, listed as labour economics, macroeconomics, wages, employment, productivity, corporate performance, monetary policy.

Interestingly, his main housing papers on that page are about house prices and monetary policy, so he should know better than to say, as he did in interviews today, that the "only way [to prevent a generation unable to afford their own home] is to build lots of new houses".

Yes, supply is part of the problem, though it's supply of appropriate housing much more than supply of additional new housing that's the biggest issue and no, I'm not one who believes that addressing that demand will lead to significant reduction in our quality of life, the countryside or anything like that. 2,000,000 new homes over 20 years for example, even at a generous 10 units per acre will consume something like 0.4% of our agricultural land - compared with the 10% that I seem to recall the RICS estimated a couple of years ago has become "residential farms" for the wealthy and their daughters' ponies over the last decade or so.

But, as we are constantly reminded by property development TV programs, house prices are about more than just meeting the demand. Two major factors are of interest to us here: location value and the debt financing normally used to buy houses.

Take Oxford, as Professor Nickell is based here, and I know the numbers here best. We've been told that we ought to build 750 new affordable homes every year for the next ten years to meet the current backlog and new demand. That's affordable homes not total new homes. If we were building 50:50 affordable:market homes, that would be 15,000 new homes in ten years, which would be a net increase in housing units in Oxford of about a third. But where is that demand? Well, 75% of it is housed in Oxford, just in housing that is either overcrowded or overpriced. 25% of it is housed elsewhere and wanting to come into Oxford, supposedly. And, anecdotally, at work I can imagine that might be the case - lots of people live beyond Oxford's green belt because that's where all the new housing in the past decade has gone.

Now I'll bet you a pound to a penny that for every overcrowded home there is a matching under-occupied house somewhere in the city. And there are acres and acres of inter-war housing running at 20-25 dwellings per hectare instead of the nearer 40 dwellings per hectare in and around the city. For all that they are probably every bit their owners' very own castles, these are not, any longer, quality housing. Not for the twenty-first century. Not for the energy requirements and energy supply regime we might have to live with in the near future. Yet they were laid out in estates on virgin land seventy years ago in plots that are little mini-enclosures. They are in fantastically popular locations now, within spitting distance of this little city's business and commercial centers, compared with what they would have been, on the outskirts, when they were laid out.

If we now meet the demand by building on the new outskirts, or even beyond the green belt in the county towns, we will merely be moving the marginal housing and increasing the commuting costs of those who live there compared with where they are often renting in the mature areas of town. The people who can make best use of locations near to their work or to other infrastructure such as existing schools or commuter routes may well be able to afford a house in Bicester or Blackbird Leys, but will still prefer to be closer to work and still will not be able to afford that.

Opposite my office is a former council estate. As the university's expansion roughly coincided with the expansion of the right to buy, these were amongst the first houses to be taken out of the public sector stock, and were amongst the first houses to be sold on by their proud new owner-occupiers. And what have they become? Why student housing of course. Up to 75% of the road opposite the university I am told is now student bedsits. And not terribly appropriate ones at that. The area could be much more densely populated - and without reduction in the quality of life for people currently housed there - if owners had an incentive to make the most appropriate use of the land.

So we have to get to grips with this land issue. The people who own it now did nothing, as owners, to contribute to the increase in value of the location on which they sit. Yet as so many commentators of the housing market point out, the values that have ratcheted up do not actually mean anything. They're not really a store of value unless it is your final home, or your biggest home and you next intend to downsize or die. The only real reason location values for housing have to increase so consistently is because of the debt system of purchasing them. When you're committing to pay two and a half times the purchase price in capital and interest over the lifetime of your loan you've got to be able to see a return for that just to stand still.

Yet, as Prof Nickell must know only too well judging by his articles on house prices and monetary policy, if we were to somehow deflate those land values (relatively, and slowly over time, if we are not brave enough to do it quickly), by using them as the tax base instead of income taxes, and deflate as a result the amount of money needed to be borrowed to finance house purchase, we'll also deflate our money supply, and need to replace it with real money, not debt money.

Fortunately, Prof Nickell has wiser folk than me around him to explain the importance of land taxes in his forthcoming task of making housing more affordable. At Nuffield he has Iain McLean and John Muellbauer to call on, who both understand Land Value Tax very well. I hope he'll call on their expertise as well.