Well Naturally you have Questions

Is it like Council Housing?

Yes and No.

No, because this is housing for sale – the occupiers own the homes rather than renting them. 

On the other hand, Councils may well play a leading role in providing them.

Also, the new tenure would resemble the way Council Housing used to work in the middle years of the twentieth century – when massive house building programmes were central to the policy of both Labour and Conservative Governments. The maximum price of Social ownership homes is directly linked to local incomes (as the rents for Council Housing and Social Rented homes are).

Also, the homes are allocated on the basis of a waiting list – households register an interest and, when homes become available, the household at the top of the list is offered the home - if they pass, it is offered to the next on the list. That is how Council Homes were originally offered.

We anticipate that the homes will be occupied by a broad cross-section of working and retired households.

How much would the homes cost?

It will depend on where you live. Social Ownership Housing means homes sold at a price equivalent to a fixed ratio of average household incomes locally plus a modest deposit.

To put it another way, the average household should be able to get a mortgage and buy one.

The ratio of earnings to the price of the home should generate a value sufficient to render development possible without subsidy but it should still be a ratio which bears a relationship to the availability of mortgage credit.

Thus, if the median household income (Z) for a given area is £32,000 then one might have

The product is designed to allow households to move as their circumstances change over time. Thus, we wouldn’t necessarily expect a twenty-something first time buyer on the median income to be able to afford to buy a four-bedroom Social Ownership home – but they are unlikely to need such a large home at that age. They could, however, buy a two-bedroom home using a deposit of 10% and a mortgage of 3.5 times income. And that might be sufficient for now.

In, say, seven years’ time, they could move on to a three-bedroom home based on a slightly more aggressive multiple of income. The larger deposit would be funded by the equity they had built up in their two-bedroom home in the intervening seven years. The four-bedroom home would require a household to take on a more ambitious mortgage but the formula still uses the equity acquired in their first property (albeit this time over 10 years). In reality, it assumes that the household’s income has increased a little since buying their first home or that they have been able generate some savings over the past decade.

So, the costs for different sizes of homes are affordable to a wide range of households over different life stages. The equity acquired by paying off the mortgage on a first home will provide the deposit for the next home.

Social Ownership thus re-creates the missing rungs of the housing “ladder”.

How does it work in practice?

A worked example:

Maria is 25. She has savings of £10,000 and an income of £28,000. To buy a 2-bedroom home, she needs a mortgage of £114,000 (four times her income), which costs £602/month (based on 4% interest over 25 years).

Her mortgage costs about 25% of her gross income and her home is therefore affordable.

After seven years, a great deal has changed in her life. Maria is 32, she has met a partner, Ali, and had a baby. They plan to have another and they want a larger home. Ali works too but would like to go part time to look after the children. During this time, average incomes in their area have continued to rise at about the current rate of 2.25% per annum. The benchmark median household income now stands at £36,500.

Maria’s current home is therefore worth £141,900 and the balance on her mortgage is £92,500. Maria’s original deposit of £10,000 has therefore grown into £50,000 in equity.

But the value of a 3 bedroom Social Ownership home in their area has also risen in line with the formula. Such homes now cost £187,000. Maria and Ali’s deposit of £50,000 means that they need a mortgage of £137,000. Let us imagine that they do not wish to sign onto a new 25 year mortgage and wish to limit the term to 20 years. Their monthly repayment would be £802. Even if Maria’s personal income has not changed at all, Ali would need to earn only £8,500 per annum to take the household income to the median for the area. At this income, the new mortgage would represent 3.75 times the household income and the repayment would represent 26% of the household’s income. Again, their home is affordable.

Compare that to the what this household might expect to be paying if they were living in the private rented sector – where the average tenant pays 34% of their income in housing costs.

Moving to a four-bedroom home would be more of a stretch. Even so, 10 years after Maria bought it, Maria and Ali’s two-bedroom home is worth £152,000 and they have £80,000 owing on their mortgage. This means that they have £72,000 in equity.

The four-bedroom home they need is now worth £250,000 so they need to borrow £178,000. Let’s imagine that, because of their housing costs have been manageable over the past ten years, Maria and Ali have managed to save £1,000 per annum, reducing their mortgage to £168,000. If Maria and Ali together earn £39,000 (which is now the median income for the area) their mortgage would now represent 4.3 times income. That is a stretching multiple of income and they probably need to sign up for a new 25 year mortgage. But they are still only 35 and they will have repaid it in full by age 60. The repayment on the mortgage will be £887 per month and will consume 27% of their gross income.

In none of these calculations do Maria and Ali ever earn more than the median household income for their area yet they are able to access the homes they need at different life stages without difficulty. This means that they can save for their retirement and maintain a good standard of living for themselves and their children.

How much Public Subsidy is required to deliver the homes?

Potentially, very little. It could be provided alongside or instead of other "intermediate" housing products like Shared Ownership, Starter Homes and Rent to Buy. The main sources of those homes are the planning obligations entered into by developers as a condition of planning consent. But, whilst that would be a useful first phase for the new product, we suggest that it could go further and deliver greater impact as a free-standing model.

The main precondition for this is a supply of land at a value below the market value - and local authorities willing to act in an enabling capacity.

A number of initiatives are currently mooted in order to secure such a supply – public sector bodies (including Councils) could be permitted to release land below its market value where there is a social benefit to be achieved, Labour is currently mooting major reforms aimed at permitting the assembly of land at or near current use value etc. Even now, there is a limited supply of small “exception” sites which would permit the concept to be piloted without any Government action at all.

As to the enabling role of the local authority. the delivery model we propose would necessitate the Council (or a Local Housing Company) taking on a number of responsibilities. It would:

• Maintain a waiting list of households who are interested in a Social Ownership home;
• Identify suitable sites and make an assessment of their overall capacity amounting to a design brief;
• Announce and run a design competition – with both households on the Waiting List and the local community having a role in voting;
• Create a presumption in favour of the grant of planning consent.for winning designs selected through competition
• Provide legal support in the creation of a Joint Venture to deliver the homes and a Community Land Trust to manage them once complete.

Subject to those considerations, the delivery of the homes themselves is potentially a commercial venture.

The pricing structure discussed above covers the normal cost of development, a land value of 10% of total value and a small margin to allow for professional fees and profit.

The following table shows an indicative example based upon the same prices as those discussed above and costs from the Build Cost Information Index at the Lower Quartile level (currently £1,076/m2). We recognise that it is hard for developers to achieve quality at this cost level but we would note that part of the overall brief is to stimulate innovation. Moreover, there is an element of contractor profit within the BCIS allowances.

We note that the above costs are highly indicative and they omit several key allowances – notably for contingencies, finance and marketing. However, whilst the developer profit levels are below what would normally be considered acceptable for open market housing (typically 20% of GDV), it should be remembered that profit is a compensation for risk and the model we propose presents far fewer risks than is typically the case for speculative housing development. Rather than complete the homes and then seek buyers, the developers of Social Ownership Housing will have access to a screened pool of buyers at a known value. They are, in effect, building to order.

Moreover, there are a number of other ways in which the procurement model minimises cost and development risk.

• Social Ownership homes are affordable homes – no CIL is payable;
• We propose that developers will enter into a Joint Venture agreement with the land owner. Land payments will therefore take place upon sale of the units rather than up-front, thus minimising the cost of finance;
• We propose that local authorities will prepare outline briefs for Social Ownership sites and that there will be a presumption in favour of granting planning consent to the proposal that wins the design contest – minimising both the cost and risk associated with planning for developers.

Furthermore, the procurement structure we propose is intended to remove much of the role of traditional developers. We anticipate that Social Ownership proposals might come from direct collaborations between main contractors and architects. We anticipate that this will help build organisational capacity for these organisations – drawing new entrants into the house building market. Such direct collaborations should allow builders to play to their own strengths in recognising opportunities for cost savings.

Finally, we started this section by saying that the main subsidy required would be the provision of discounted development land for the homes. However, the model still delivers a significant land value. At a typical development density of 35 homes per hectare, with equal numbers of 2, 3 and 4-bedroom homes generates a guaranteed land value of over £700,000 per hectare. That may be considerably below the level of residential land values in higher value parts of the country but it remains a substantial land value – and may well exceed competing use values across broad swathes of the country.

The tasks undertaken by the Local Authority would necessitate the creation of significant capacity in-house. But the capacities in question are similar to, and compatible with, those required to deliver new Council housing – an initiative in which many Authorities have expressed an interest. Moreover, the burden on Local Authority funding is hugely reduced relative to the delivery of Social Rented homes. The point here is that Social Rented Homes need to be built and financed by the future landlord. Social Rents do not, typically, cover the cost of construction – let alone a land value. These facts mean that, not only do Social Rented homes require an initial capital subsidy to deliver, but the finance remains on the Council (or other Social Landlord’s balance sheet). Local Authorities’ currently face considerable restrictions on what they can do with their balance sheet. Whilst reforms are proposed to permit Councils to invest in developing new Council housing, their borrowing capacity will remain limited by the underlying strength of their balance sheets. In the case of Social Ownership, development finance is the concern of the developer and is then transferred to the owners. There is no material impact on the Local Authority’s balance sheet.

Doesn't Shared Ownership cater to this bit of the market already?

Yes. 

Currently, the most common form of intermediate affordable housing in this country is Shared Ownership.

With Shared Ownership homes, the occupier buys a percentage of the home (generally between 40 and 60%) and they pay a rent on the rest. If the housing market goes up, the value of the occupier’s share goes up, if it goes down, the value of the share goes down. Even after the occupier pays off the mortgage, they have to keep paying the rent.

One problem with the shared ownership model is that, in a rising housing market, a property that was affordable to a middle income household when it was built can rapidly become less affordable. When the owner comes to sell, they will get a much higher price but it may not help them to buy their next home because the value of their next home will also have increased. They may also find it hard to find a buyer because the home has become so much more expensive and there will be fewer households who can afford the new price.

Conversely, if the housing market does not go up, the occupiers of shared ownership homes face slightly different problems. If the price falls a lot, they may end up with negative equity – they may owe more money on their mortgage than the share of the home that they own is actually worth. That is the same problem that ordinary homeowners face in a falling market, but shared owners may be hit harder for two reasons – first, they are encouraged to buy the largest share of equity they can – to take out the largest mortgage they can afford. Second, unlike other homeowners, Shared Owners in negative equity have to pay a rent as well as the cost of the mortgage. Finally, because Shared Ownership represents poor value for money in an uncertain market – homes may be very difficult to sell.

If the housing market neither rises nor falls, there is a third problem. Shared Ownership is often promoted as a temporary stepping stone on the way to buying in the open market in five to ten years. For that to happen, it is important for the occupier to accumulate equity by paying off the mortgage. A Shared Owner, Craig, who bought a 50% share in a Shared Ownership home with an open market value of £160,000 would have the same level of total outgoings as Maria (£602 per month) But, after 7 years, only £15,000 of the mortgage has been paid off. To match Maria’s equity stake, the market value of the Shared Ownership home has to rise by 25% – to £200,000. That is an annual rate of almost 4%. Whilst that has happened in the past, it would not be desirable for it to continue to do so in the future. The advantages of a Social Ownership home over a Shared Ownership home are:

• Social Owners do not have to pay rent – once the mortgage is paid, it is paid.
• The home is affordable to the initial owner and to subsequent owners whatever the market does
• Social Owners are protected from negative equity because average incomes rise far more steadily than the housing market
• The price structure for Social Ownership is designed so that households can always afford to move to a larger home over time

But wouldn’t it be better simply to provide enough Council Houses?

We think that the Government can (and should) do both! Because Social Ownership homes cover their own costs, Social Ownership homes need not come at the expense of Social Rented homes (or Council houses).

The two products complement one another rather than competing for scarce Government funds. And they cater to slightly different needs. The weekly cost of renting a Social Rented/Council house would be lower than the weekly cost of the mortgage on a Social Ownership home. Social Renting would therefore remain the best option for those on the lowest incomes, those whose circumstances do not allow them to work and for those whose income or credit history means that they are unable to obtain a mortgage. However, although the monthly cost of the mortgage on a Social Ownership home is higher initially, the mortgage will eventually be paid off, leaving occupiers with very low housing costs in the long term and in retirement.

However, the differences in initial and long-term cost are only half the story. The fact is that Council Housing (and Social Housing provided by Social Landlords) is no longer accessible to most.

Because there is only a limited stock of these homes, they are made available on the basis of priority. The household who needs the home most urgently is allocated the home. That means that many households who are in work and earning middling incomes are in a difficult situation - they don’t have enough money to be able to afford housing on the open market (or even Shared Ownership homes in some places) but their circumstances are not so urgent that they have any real prospect of ever being allocated a Council house or Social Rented home. In practice, ever higher numbers of working households are being compelled to rent privately at rents which they struggle to afford and with very limited security.

Now that Council housing is so scarce, it would be very difficult to stop allocating the few homes that are available to those who need them most urgently. Because Social Ownership housing is not displacing Social Rented housing – either through direct provision or through planning obligations levied on private housing developments, it can be allocated on a first come first served basis to working households with very few eligibility restrictions. Working households will no longer see households with the most urgent needs leapfrog them and go straight to the head of the queue – easing the resentment that allocation on the basis of need can cause.

How Will the Affordability of Social Ownership Housing be Maintained in the future?

The land on which Social Ownership homes are to be built will be placed into a Community Land Trust. Those who buy the homes will be granted a long lease upon occupation, but the Trust will retain the land and enforce the lease.

All Social Owners will pay an annual service charge of around £150 per annum to the CLT which it will use to defray the cost of carrying out its duties. These are:

To determine the value of the price cap at the time of any sale by applying the formula to the current level of local earnings

• To make determinations as to the acceptability of short term sub-letting.
• To decide whether alterations and improvements may be taken into account for the purposes of the price formula
• To issue new 125 leases upon the sale or transfer of the homes.

The owners of the homes will be allowed to sit on the board of the Community Land Trust that controls the land upon which their homes stand but the local authority will also maintain a statutory presence on the board – without whose consent, the articles of the board’s constitution cannot be amended.

How will speculators be prevented from buying the homes and renting them out for profit?

The lease will stipulate that the homes should be the sole residence of the owners. Enforcement of the terms of the lease would be the job of the Community Land Trust, which will own the land under the homes. Owners could join the board of the Trust but they would have to abide by its constitution.

Renting the homes out to tenants would be a violation of the lease and the Trust could take action against owners who sub-let their homes in violation of the lease. Ultimately, they could be compelled to sell the home – with the sitting tenant given the right of first refusal and the CLT’s legal costs and reasonable expenses deducted from the proceeds of sale.

There could be scope for limited exceptions to this rule at the discretion of the CLT. Such exceptions might include circumstances in which the owner of the property had care responsibilities or an offer of short term employment elsewhere. In such circumstances, the CLT would be able to impose a rent cap and other conditions on the tenancy.

Would Social Owners be able to improve their homes?

Yes. However, not all improvements will be reflected in the price that they receive for the homes when they come to sell.

As noted above, the maximum price that Social Owners can receive from the sale of their home is capped by a formula which is related to the number of bedrooms in the home. Owners who wish to extend in order to add an extra bedroom could apply to the CLT to set out their proposed alterations. If the CLT is satisfied that the extension provides additional bedspaces of acceptable size and quality then the property may be reclassified and the increased price cap would apply.

Extensions and improvements which do not add to the number of bedrooms (such as a conservatory, home office at the bottom of the garden or a stairlift) may be acceptable and may make the home more desirable but they are at the owner’s risk and will not attract any additional value. 

Note that the price caps are just that – maximum prices for which the homes may be sold. They do not function as guarantees that the price will be achieved. Owners who carry out alterations which result in structural damage or otherwise compromise the marketability of the homes may not receive the maximum potential value, if and when when they come to sell.

Which Housing Crisis?

In order to explain the role that Social Ownership can play in helping to ameliorate the current housing crisis in the UK, it is necessary to describe what we mean by the word. In our view, the British housing crisis is actually composed of three overlapping crises.

1. There is a crisis of affordability – people can’t afford suitable homes
2. There is a shortage of supply which increases pressure on affordability
3. There is a problem of desirability – new homes are insufficiently attractive relative to older homes to overcome the problem of location

Affordability

The most obvious aspect of the crisis is that the homes we have are too expensive – that they are not affordable to households on “normal” incomes. The familiar description of this aspect of the crisis takes the form of the following graph – or some version of it.

In the graph, the solid blue line represents the ratio between the value of the median home in England and the median income between 1997 and 2016 (the dark blue line does the same for the value of the lower quartile home and lower quartile incomes). The dotted line shows the mean value of homes sold in England over the same period (right hand scale)

In 1997, house prices were about three and a half times incomes but, by 2016 they had doubled relative to income.

Prospective middle income homeowners in 1997 were able to obtain and repay a mortgage whose value was three and a half times their income. The equivalent household in 2016 would not have been able to obtain a mortgage for seven times their income and would not have been able to sustain the repayments even if they could.

Since they cannot obtain a mortgage to cover the whole cost of a suitable home, households need to save for ever-larger deposits but they need to live somewhere while they do. Unfortunately, rents have also risen faster than incomes and, with the advent of large student debts for younger households, saving for a deposit becomes ever harder. This, in turn, drives inequality as home ownership is increasingly confined to those whose parents can afford to assist with the cost of buying a home – taking a “first step on the housing ladder”.

There have been compensating trends over this time. Notably, the collapse of interest rates over the past decade has kept the cost of mortgages down and increased willingness of lenders to consider joint incomes on mortgage applications has also given households access to more credit. However, the application of ever increasing volumes of debt to the housing market is not a long-term solution – not least because it has tended to further inflate house prices.

Worse still, the Resolution Foundation has found, that each successive generation born since 1900 has, on average, paid a higher proportion of their income on housing costs.[1] Most of those born pre-War paid less than 10% of their income on housing costs but, at age 30, the average Baby Boomer household paid around 17% of income in housing costs, the average Generation X household paid 22% and the average Millennial seems set to be paying even more.

But, despite paying more, younger households are consuming less (smaller) housing. The Council of Mortgage lenders has found that, although a decade of policies focussing on the needs of first time buyers has indeed helped many households to buy their first “starter home” there is now a significant shortfall in the number of households moving on to the larger accommodation their growing families need. These households are trapped in the smallest homes and cannot afford a family home of the type that their parents might have taken for granted. It isn’t just that their homes are more expensive, it is that the increased cost buys less housing.

Households aren’t just being prevented from getting onto the “housing ladder”, each of the rungs has got further apart.

Supply

Despite the immense increase in values, the supply of homes in England has failed to keep up. The problem was particularly marked in the period following the financial crisis but it goes back much further. As long ago as 2004, the Barker Review of Housing Supply concluded that:

“Taking as the baseline the level of private sector build in 2002-03, 140,000 gross starts and 125,000 gross completions, it is estimated that:

• reducing the trend in real house prices to 1.8 per cent, would require an additional 70,000 private sector homes per annum; and
• more ambitiously, to reduce the trend in real house prices to 1.1 per cent, an additional 120,000 private sector homes per annum would be required.”

In other words, stabilising the housing market would mean almost doubling the output of new private sector homes. This finding was conventionally expressed as a need for a total housing output (including affordable homes) of 250,00 new homes per annum. Despite a number of initiatives by Governments of all three major parties, that has never happened in any year since.

By 2016/7 the cumulative shortfall in housing output amounted to over 1m homes. The result, most experts agree, is that the number of homes required each year has increased further. When the Government consulted on a standard methodology for calculating how many homes were required annually for every local authority in England[1], it concluded that England alone would require 265,000 homes annually (from 2016-2026) – equivalent to as many as 330,000 homes a year across the UK.

Basic economics suggest that surging house prices ought to bring forward more supply but the reality is that they have not done so – something else must be holding back a market based solution. Various different factors have been identified as culprits: “red tape” in an unresponsive planning system; land hoarding by developers who recognise that land values rise even faster than house prices; shortages in skills, labour and bricks; the withdrawal of capital funding for affordable housing; over-reliance on a few very large house builders.

Each of these factors plays a minor role at the margin but none can adequately explain a failure of this magnitude. For example, the Coalition Government undertook an immense de-regulation of the planning system in 2012, but its impact on housing supply has been modest. On the other hand, the HBF has repeatedly debunked the charge of land hoarding. The supply of land with implementable planning consent represents approximately three years of output. Since many developments will be built out over five years and the largest may take over a decade, this does not seem excessive. This does not prove that no land hoarding is taking place but it does suggest that it cannot explain under-supply on this scale. As to shortages of materials and labour, Danny Dorling has pointed out that, even as the number of homes we build remained stubbornly low, the number of new bedrooms we build reached an all-time high – a significant proportion of development capacity had been diverted from building new homes to extending the existing stock.

We would therefore draw attention to the interaction of two factors:

First, whilst overall house prices suggest that there is significant demand, it is entirely possible that the current level of housing output is sufficient to satisfy all of the demand from households who can afford prices at their current level. For most goods, this situation would stimulate innovation to lower prices, in order to reach the demand from those who cannot afford the current price. However, housing is not a normal consumer good – it is most household’s largest single purchase and, crucially, it is purchased using long term debt. This brings us to the second factor – a price ratchet;

As we have seen above, the housing market is slow to react to an increase in values by increasing supply but it is very quick to reduce supply in response to a fall in values. The reason for this is debt. As prices rise, buyers are desperate to get into the market – if only to stabilise their housing costs and make sure they do not face still higher prices in the future. However, as values rise, the number of buyers who can afford the increased values gets ever smaller. Developers cannot build houses if they cannot sell them so, even as prices rise, supply does not increase. However, when values fall – even slightly – demand disappears immediately. No rational buyer wishes to buy a home today, using a 25 year mortgage if the home will be worth less the following year – under those circumstances the incentive is to wait and buy later (an extreme case of the wider problem of deflation). Under these circumstances, developers are extremely vulnerable – it takes years to acquire a site, obtain planning permission and bring it to market. If property prices fall in the intervening period, their returns will be insufficient to cover their costs and, if they slash prices to sell the homes more quickly by accessing a wider pool of demand, they risk spooking buyers completely.

Because of this, developers are extremely sensitive to the absorption rate – the rate at which the market will buy up the completed homes on their development. If there is any risk at all of falling prices they have a strong incentive to slow – or stop – development until values stabilise.

Granting planning permissions or easing supply constraints under these circumstances is “pushing on string”. The ultimate bottleneck is not the planning system nor the development industry but the rational economic decisions made by individual households who do not wish to take on a huge debt to buy a home today that might be worth less than they paid for it in a year’s time.

Understanding that dynamic suggests very different solutions to the problems of the housing market than have been put forward to date. The Letwin Review has begun to understand the central role that the absorption rate plays in limiting output and has begun to consider measures that might be used, in order to increase the rate at which the market can absorb new supply. The review has begun to talk of a diversity of housing products and tenures which could reach a wider market. Of the two, it is clearly tenure which has the most scope to create an alternative market.

The alternative, reducing specification in order to make homes cheaper would be very undesirable indeed. This is because there is still a third component to the housing crisis.

Desirability

It may seem strange to suggest that the desirability of new homes is in crisis – let alone saying that it is a crisis on the scale of the affordability and supply problems. After all, new homes generally attract a substantial price premium over equivalent older stock.

Nonetheless, we contend that is a component of the wider housing crisis.

Not only are British homes the most expensive in Europe, they are also far smaller than the European average and, at least until recently, their thermal efficiency was also lower than comparable Northern European neighbours (Germany, the Netherlands and Scandinavia). We pay more, we get less.

Space and thermal efficiency are relatively easy to quantify but we argue that the overall quality of design in new developments simply isn’t as good as it should be. The classical writer, Vitruvius identified three governing principles in architecture – principles that were so durable they were quoted in design guidance published by the Commission for the Built Environment as late as 2012. Those principles are sometimes translated as Utility, Stability, and Delight – buildings should be fit for their purpose, they should be well-built and they should be beautiful. Modern homes may pass these first two tests but, too often, they are not beautiful, alluring places to be proud of. They are not delightful.

In too many cases, volume-built homes fall into one of two categories. Many suburban houses could be characterised by a generic historic-vernacular style – but one whose proportions are often out of kilter with the styles they affect and whose detailing lacks the finesse of their historic models. By contrast, developments of apartments in urban areas are frequently too large to fit in to their immediate surroundings but not good enough to deserve their prominence.

Some would say that Vitruvian delight is a subjective matter and has no place in a discussion of a housing crisis that leaves families over-crowded and impoverished, which absorbs the disposable incomes that are the engine of economic growth. We beg to differ, and for a number of reasons:

The poor quality of homes is a key driver of Nimbyism. Local residents may be expected to object more vigorously to poor quality development than developments that feature excellent design. If they actually like the new buildings proposed – and feel that they have a role in selecting the design – they may even support development.

The enduring lesson of urbanism is that bad buildings cast long shadows. From the jerry-built slums decried by Engels, through the warehoused deprivation that characterised the worst excesses of mid twentieth century system building to modern flats built with no communal or external space – mean-spirited homes blight the lives of their occupants. They also become undesirable places – so that people tend to aspire to older homes around historic cores.

Design is the foundation for people’s emotional connection to their built environment and yet, few developers currently compete on the quality of their design. Hoardings and marketing materials are likelier to focus on fixtures and fittings (solid wood worktops and built in coffee machines) than the involvement of talented architects. We cannot re-invigorate our cities or preserve the character of our towns and villages if our culture of building is so indifferent to the virtues of good design.

In our view, it is every bit as important to ensure that the homes we build today will stand the test of time as it is to address the affordability crisis. The way to do this, in our view, is not to dictate the quality of design through guidance, but to change the incentives in the industry so that design becomes a natural point of differentiation and beneficial innovation is rewarded.

The truth of this is evident from even the briefest consideration of the role that design has played in other industries. Harley Earl and Bill Mitchell’s work for GM in the 50s and 60s, Ettore Sottsass’ for Olivetti in the 70s, Dieter Rams’ for Braun in the 80s or Jony Ive’s for Apple in the 90s could not have been dictated by guidelines – but the desirability of their work was what gave the vast companies for which they worked their competitive edge. Each transformed their industry not only within their companies but far beyond. It is telling that that it is so difficult to think of a more recent example in the field of housing than, perhaps, Eric Lyons at Span in the 60s.

How Does Social Ownership Help to Solve the Housing Crisis?

If the central problem of the housing market is a crisis of affordability then it follows that the housing crisis will be solved when house prices return to a more affordable multiple of average earnings.

However, any move to lower the market value of homes suddenly is likely to have a disastrous impact on the wider economy and would be electorally unpopular. Moreover, as we have seen in our discussion of the price “ratchet” above, any sustained fall in values is likely to lead to a much sharper reduction in the output of new homes. As output, falls the fundamental imbalance between supply and demand worsens until prices stabilise or begin to rise once more.

That being the case, it has become conventional to suggest that the ideal outcome would be a long period of stagnation in house prices – until incomes have a chance to rise to meet the current level of house prices.

The following graph shows what that would look like. For these purposes, we will assume that a housing market that is affordable overall is one in which the mean house price is no more than four times median earnings. In the graph, we have plotted median incomes since 2002 on the left hand axis and the average house price recorded by the Land Registry on the right hand axis (where the scale has been reduced by a factor of four.

On this chart, where the house price line (in red) is below the income line (in blue), the housing market is affordable. Where house prices are above the earnings line, the market is not affordable.

Clearly, at no point since 2002 has the English housing market been affordable (on this measure). The last time that was the case was just two years previously.

However, the point to note is this. Even if house prices stabilised tomorrow and neither fell nor rose at all, it would take more than 30 years for the affordability of the British housing market to return to the conditions that were prevalent in the year 2000.  Even in this best case scenario, the British housing market crisis – which has already lasted around fifteen years – is only around a third of the way through. On this evidence, housing is a longer-term goal than decarbonising the entire economy in order to prevent catastrophic climate change. At least one, and possibly two more generations will have their standard of living curtailed by the housing crisis. That cannot be acceptable.

Absent a major intervention, the housing market will not fix itself. However, the nature of the housing crisis – prices that are too high relative to earnings – suggests the nature of the intervention required. In order to meet the needs of those priced out, we need to create an entirely new housing market for a new housing product whose costs are affordable relative to incomes. Moreover, when considering what type of discounts we should offer on housing, we should not link them to a percentage of the open market price because, when the open market for housing does reach a sustainable level, the value of the affordable homes we now propose to build will be discounted relative to that more affordable market­ – in effect, today’s affordable homes will end up blighted in tomorrow’s sustainable housing market.

The correct way to discount homes is to peg them to a sustainable relationship to incomes.

Notice that this will have two effects, the homes will certainly be affordable but they will also rise in value over time in smooth and predictable way. Look again at the graph above. Incomes rise far more smoothly than house prices. Even in the past ten years – which has seen an almost unprecedented squeeze on earnings – but nominal incomes have still risen.

The immediate salience of this is that it shelters Social Owners from one of the most notorious risks in the housing market, negative equity. In the medium term the possibility that your home will be worth less than the value of your mortgage is virtually nil. But it also has the more important effect of breaking the “ratchet” described above.

When the value of homes can go down as well as up, developers stand to go bankrupt if prices begin to fall but, if the value of these discounted homes will rise smoothly in line with earnings, then they are a good buy in all housing market conditions. Indeed, the demand for Social Ownership is actually likely to rise in a falling market or flat housing market because buyers will see it as a safe haven from the risk of the open market. Lenders too, may see the product as less risky and offer cheaper mortgages to social owners.

And, if the demand for Social Ownership exists in all market conditions, then it presents far lower risks to developers because they know that there will be buyers literally queued up to buy at known prices, even before they finish construction. The risks around the absorption rate disappear – the incentive is now to build out planning permissions as quickly as possible, rather than eke out sales at a rate the market will accept.

The first two of the three linked crises in the housing market dictate the nature of the solution that will resolve them. The third is perhaps less obvious. We have asserted that, alongside the crises of affordability and supply there is a crisis of design quality. We assert that there is comparatively little competition between developers on quality except at the very top end of the market. That should come as no surprise. When essentials are in short supply, we expect standards to suffer. In times of hunger, we expect growers to concentrate of yields and consumers to be less picky. Conversely, during the massive home building programmes that accompanied the expansion of the railways, developers competed fiercely on quality. That the stock of Victorian and interwar homes remains popular today is testament to the power of this competition.

At present, with house prices high and opportunities to build scarce, developers are incentivised to compete not on quality for the consumers but on cost – the lower their build costs, the more they can afford to pay for land – crowding out competitors. This dynamic was illuminated in some detail in the report Building the Homes We Need published by KPMG and Shelter in 2015. As they put it, “In a healthy market, competition will drive a better deal for consumers. But in house building, competition occurs at the wrong stage. The rational business strategy to manage land market risks is to minimise build costs and maximise sale prices by releasing homes slowly.”

We therefore propose to provide different incentives for the builders of Social Ownership homes. The price developers will receive for the homes is capped and the price they will pay for the land will also be fixed. Land and planning consent will go to the bidder whose proposal wins a design competition. The budget available for construction will be limited and margins tight but developers will need to balance their margin against the need to win the competition – which they can do only by offering the most desirable solution.

Too often over recent years, there have been calls to “solve” the housing crisis by encouraging people to accept less: smaller homes and less imaginative designs. There is no reason for this to be the case. Indeed, we argue that a drive to create accessible and desirable homes at the bottom end of the housing market, changes the incentives for the entire industry.

If potential buyers can opt either to buy a good quality Social Ownership home for £165,000 or to save up for an open market home at £240,000, developers of the more expensive homes will have to demonstrate that they provide additional benefits: more space, better environmental standards, higher ceilings, bigger windows, more character. The achievement of these improved specifications will increase costs – which will put downward pressure on land values.

National PLCs, with their immense economies of scale and purchasing power, will still hold considerable cost advantages – but pressure to turn show the value for money to the customer will put those advantages at the service of home buyers rather than land owners.

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