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Labour has to ‘fix the roof’ for working people

Jon Cruddas MP explains why and how the state must step in with radical measures to expand public housing and avert repossessions

The credit crunch has suddenly exposed many failures of free markets but none as starkly as those of the housing market, which are themselves both a cause and a result of the wider economic crisis.

The American mortgage market sparked the fuse for this economic explosion as banks gave out mortgages to people who couldn’t really afford to pay them back. The credit crunch originates in the myriad of debt repackaging to lay off those sub-prime mortgages that fed on the most vulnerable. Now it has come full circle, with people struggling to pay their mortgage or without a home paying the price at the sharp end as repossessions rise and housing construction stalls.

Government policy over most of the last three decades has implicitly assumed that the private sector will provide the solutions to housing need with a minimal role for the state in regulation or investment.

Hands of the developers

Yet meeting genuine housing need is not part of the robust business model developed over decades by the cartel of private house-builders. This relied instead on profits through the banking of land and the consequent excess demand for homes, leading to long term house price inflation. The gradual withdrawal of the state from supplying social housing units has played right into the hands of the developers.

There used to be a genuine mixed economy. In the 1950s and 1960s the state regularly provided some 200,000 units a year through local councils, while total house building reached 350,000 in 1968. This has now ground down to virtually nothing. Housing Associations have not picked up the slack and it is hard to envisage how they could feasibly do so.

The outcome is that barely 150,000 units have been built in most recent years. Construction peaked at 170,000 new units in 2007 but that was the exception – this year even the most optimistic projections are of 100,000 new homes completed, while new construction is close to grinding entirely to a halt. An arm lock has been built around supply; in the good times, this entrenched the rich seam of private sector profit. Now, the developers hope to sit out the crisis until more profitable times return.

Happier days

In the happier days the government also dined out on the consequences, permitting the effective rationing of housing while house price inflation sustained the credit bubble, even as the number of households in need of housing has reached ever greater proportions. We have all been speculating against housing instead of viewing policy in terms of developing homes for people to live in.

As the boom went on it became increasingly reliant on ever wilder financial products to bring more and more people into indentured consumption guaranteed through rising prices. But what happens when the music stops?

Consider these statistics. The government wants to build three million homes. Its stated aim is 240,000 a year by 2016. In reality fewer than 100,000 will be built this year. Next year some analysts assume virtually none will be built.

In need of housing

Next consider these statistics. There are an extra 220,000 family units in need of housing every year – mainly because we live longer, but also because we live separately and also, especially in London, because there is net inward migration, though that may change. 1.75 million households (around four million people) are currently on the housing allocation and transfer lists. Conservative estimates suggest some five million could be in need of social housing within seven years as the full housing crisis shakes down.

What about the private house builders? Their business model was geared to the better times when there was guaranteed excess demand for housing to purchase, especially at the higher end of the market.

Barrett’s acquisition strategy has left it £1.65bn in debt – just slightly less than the net debt of rival Taylor Wimpey. The latter’s share price has fallen from 518p to 11p in barely a year. Crest is in protracted discussions with their bankers. Developers are now considering how to profitably offload the tens of thousands of acres of land they have hoarded before its value plummets – though they seek to hang on to plenty more in areas where location and planning permission for development provides a safe bet for future uplift. The banking sector crisis is quietly being replicated in the housing sector; the two are intrinsically linked together. Many of the now part-nationalised banks own considerable stakes in the developers.

Their problems provide no comfort to those in need of a home – instead, the problem is compounded as private sector supply withers away at every segment of the market. Meanwhile, the banks seek repossessions from those who they happily encouraged to borrow beyond their means or who are simply the first victims of the job losses now biting in the real economy. 

The state must step in

There is no policy status quo. The state must step in. An emergency public sector house building strategy is a pragmatic, rational response.  This is far from an easy task but if the political will was found, there are a number of policy instruments immediately available to the government.

The government has taken the first tentative steps to address repossessions but the scale of the response must match the scale of the problem. By offering struggling households the option to sell their house to the council and rent it back as a social tenant, we can save thousands losing their home in the short term while expanding the social housing stock for the long term.

But the critical objective is to provide homes so that we can meet social need. That might well mean a public stake in some of the house builders themselves so as to recapitalise the sector and to force them to act. Some of the developers, like the banks, may even welcome such a move themselves with a nervous eye on their own capitalisation. But should ministers shy away from extending such an approach beyond the financial sector, they could use the government’s stakes in the banks as a way of achieving this at arms length.

Another option might be a local tax on those ‘land banks’ that developers still hold – but refuse to actually develop – in the expectation of demand and supply reasserting themselves in future and the inevitable return of house price inflation. Where local authorities have designated land for development and granted planning permission, only to be confronted with an effective strike by the developers, they could levy a charge on the value of the land. No longer could developers use land price speculation as an easier cash cow than actual construction and the public purse can receive funds to invest elsewhere, in the absence of the immediate ‘planning gain’ that development would have provided.

There is an even simpler way in which local government could contribute and that is for councils to directly step in to fill the space vacated by the private sector by building houses itself. If councils were granted the same freedom to borrow off their future rent income as other social landlords, tens of thousands of council homes could be built without even requiring a direct injection of investment from central government, though such investment should surely also be provided. 

Radical policy mix

These are just some of the elements that a radical policy mix would contain if we were serious about making the housing market meet the public need rather than just private profit. There are others, and that is a debate that I hope we have only just begun. But it can only happen if government recognises we are in new times, and ones that call for new thinking.

In short, as the nature of risk is being fundamentally recalculated across western market capitalism the link between market and state must be consequentially redrawn. Nowhere is this more acute than in our domestic housing market. This has dramatic implications for the Government – the question is whether it has the political will to act.