Abandoned housing targets undermine new supply just as we need it most

The abandonment of housebuilding targets could not have come at a worse time. There is already evidence that local authorities are scaling back on plans and NIMBY-dominated councils now have even more leeway to stop any new homes being built, which they are making good use of.

A weakening economy, reflected in a faltering for-sale market, will see volume housebuilders – the main source of new supply – reduce development activity. Giving local authorities greater freedom to block new housing will further reduce incoming supply, worsening housing affordability.

Outside a fringe group of economists and commentators, who attribute the UK’s housing problems to either the last decade and half of low interest rates or the inefficient distribution of existing stock, most experts agree that the UK has a serious undersupply of housing. There is an estimated shortage of 1.4 million homes in the UK and successive governments have failed to ramp up annual housebuilding rates to 300,000 new homes a year, despite promising to do so.

It is this structural undersupply of housing that holds up house prices, and means that even though rising interest rates and a looming downturn are set to reverse recent increases, homeownership will remain unaffordable to many.

The upshot is a continuation of a trend we have already been seeing: more people renting and for longer. Our structural undersupply of housing is also why renting is expensive in the UK. Renters typically spend more than a third of their income on rent, compared with just a quarter in other developed countries.

Rents are the purest signal of housing affordability, as house prices are also an indicator of a residential property’s value as an investment as well as somewhere to live.

Yet, despite inflation eating away at people’s pay packets, all major indices are showing rents continuing to climb even as house prices are falling. Rising rents combined with flatlining wages in real terms will see housing costs take up a greater proportion of household spending, reducing disposable incomes. You don’t need an economics PhD to see that isn’t good for the economy.

Beyond the knock-on effects of worsening housing affordability, the impending slowdown in housebuilding will have detrimental effect on the wider economy. Why? Because the housebuilding industry is a major – if underrated – source of jobs and growth, employing over 235,000 people according to the ONS, and contributing £17bn to the economy, says the Home Builders Federation.

As housebuilding declines, so do the number of jobs and potential for economic growth. That is why governments across the world looked to keep housing markets going during lockdown even as activity in other sectors ground to halt.

So, what are governments to do? Clearly, reintroducing housebuilding targets is a political non-starter.

Given the broader macroeconomic conditions, the focus needs to be on encouraging the delivery of counter-cyclical forms of residential real estate such as build-to-rent and affordable housing.

Yet even investors in those sectors will require a degree of certainty over planning risk, especially against the backdrop of rising development costs. At some point, central government is going to have to grasp the nettle of reform – or risk permanently lowering housing output and all the negative social and economic consequences that entails.