How can we make homes more affordable?

Door knock – opening door,

Sue: Hi Rali, hi Rali, nice to meet you, Shall I leave my shoes just here

Rali: So I'm Raley. Raley Angelovo. I'm 33 year old, and I work as a rehabilitation assistant in a local hospice.....

….I have two little boys. A boy of two years, and another boy of four months. And a husband....

Sue: And when did you move into Citizen's House?

Rali: We moved on the 20th of January this year, 2023.

Sue: So quite recently. And how have you found it so far?

Rali: We have found it amazing. It's like living a bit in a dream......

…... It's an amazing feeling to live here.

Sue: Rali and her family have recently bought and moved into their very first home in South East London. With ever escalating house prices this is an out- of- reach dream for many people in the Capital and other parts of the country. But Citizen’s House is a genuinely and permanently affordable housing project, newly developed by the not-for-profit London Community Land Trust. More about them later.

The question is, what hope is there for other would-be home-owners in a housing market where - until recently- rising prices seemed unstoppable.

Welcome to LSE iQ, the podcast where we ask social scientists and other experts to answer one intelligent question. I’m Sue Windebank from the iQ team where we work with academics to bring you their latest research and ideas, and talk to people affected by the issues we explore.

In this episode I ask, ‘How can we make homes more affordable?’

I’ll hear how a protected viewing corridor established in the early 1700s prevents high rise buildings from being built on some of the most valuable land in London.

I’ll speak to experts who challenge the idea that the green belts surrounding our major cities should never be built on.

And I’ll talk to the Executive Director of London Community Land Trusts, which is delivering genuinely affordable housing with the support of local communities.

First, I spoke to Christian Hilber, a Professor of Economic Geography at LSE, an expert in urban and real estate economics.

Sue: There's a lot of discussion around about housing being unaffordable, but what does that actually mean?

Christian: So if the price to income ratio is below three or at three, we typically consider that to be affordable for a person or a household. If it's above three, it becomes increasingly unaffordable. If we look at England then it doesn't look good. If we look at London, the price to income multiple is close to 11 right now. And even if we look at the most affordable region in the country, which is the north, the price to income ratio ratio is still close to five, slightly under five.

Sue: Let that sink in – houses are considered affordable if average prices are no more than three times average salaries. According to the Office for National Statistics, in England and Wales in the tax year ending in 2022, the median annual earnings for someone on a full-time salary was £33,000. This would mean an affordable home would be £99,000. Instead, the median house price was £267,500. I think we can see the problem here.

Another way to look at affordability is to look at mortgage payments as a percentage of income, which of course is greatly affected by interest rates. An issue of concern to many right now.

Christian: if you take into account the mortgage costs, housing affordability has deteriorated massively in London and in the U.K. So just to give you some numbers, if you look at the first time buyer mortgage payments as a percentage of the take home pay, this was in London, it was 21% in 1995, and today it is 56%. And even if you take the country as a whole, the affordability has been exactly half as much today than in 1995. So a first time buyer spent 17% of their take home pay on a mortgage in 1995, and today it's 34%. Again, this illustrates the situation we are in.

Sue: And what's driving this, why has housing become so unaffordable?

Christian: So in a nutshell, it's demand and supply. So it's a combination of growing demand, which is mainly driven by rising real incomes and to a lesser extent by population growth. So that drives demand for housing. And this is in conjunction with what we call unresponsive supply.

Sue: Essentially, we need to build more homes, but – as Christian explains - there are many obstacles to achieving this.

Christian: So let me first talk about the regulatory constraints, because I think in this country those are the main constraints. So in England, the large cities are surrounded by green belts. And what this means is, it's not what you might think of what the green belt is, it's not the public parks that we love and where we go to on the weekends to take a rest. It's a massive area of lands surrounding the big city. So if we look at London, the London Green Belt is 3.3 times the size of the Great London Authority. So it's absolutely massive, 514,000 hectare and 22% of the Greater London Authority itself is greenbelt land.

Sue: For Christian, large areas of green belt land around London and other major cities have little environmental or aesthetic value. Instead, these are often areas of intensive agriculture. And without reform, the green belt will retain a strangle hold on development and consequently house prices will continue to remain high and increase.

Christian: What the implication is cities in England, they can't grow horizontally, they can't grow outwards. Like what many American cities do, they grow outwards. The British cities can't do that because of these green belts. But then that's not your only constraints, there are also height restrictions and view corridors that prevent how tall you can build. And some of these restrictions are quite extreme. Let me give you one example.

So we have a view corridor to St. Paul's Cathedral from King Henry VIII's Mound that's in Richmond Park. This is 16 kilometers away from St. Paul's Cathedral. So there is a, how do you say it, a looking glass where you can look through and on a good weather day you can actually see St. Paul's Cathedral.....

But the trouble is you can't build anything that obstructs this view from this king Henry VIII's Mound to St. Paul's Cathedral.

And we are talking probably the most expensive commercial real estate in Europe where you can't build tall buildings because of this view corridor. And this was established in 1710 when St. Paul's Cathedral was the tallest building in Europe.....

And the third type of constraints is preservation policies. So conservation areas or listed buildings, so particularly in central areas like in Central London, there are lots of conservation areas, you can't knock down buildings and rebuild at a higher density. And if cities can't grow in either direction and you can't knock down and rebuild, then that can only go into prices. And that's going on in London and in Oxford and in Cambridge and in other places.

Sue: Christian also points out that the tax system makes permitting development unattractive for local authorities, both financially and politically.

Christian: In England, local authorities are the decision makers whether to permit a larger or a smaller residential development project. So if a local authority permits a larger development projects, they have most of the costs they have to provide the infrastructure. Perhaps if you have lots of new houses, the schools get crowded, the school catchment area shrink, you may have to provide an additional school class, roads become more congested. These are all costs to the local authority and the residents of the local authorities who elect the local politicians.

However, there are virtually no benefits from permitting development. So there is a council tax, but the council tax does not compensate for the costs. And this is a major issue that local authorities not only face NIMBY residents, not in my backyard residents who do not want development in their backyard. And so it's not surprising that local authorities in England permits so little housing.

Sue: Even with these constraints on development driving up house prices, there’s an issue that I’ve often wondered about.

Sue: I think a lot of people don't understand, where does the money come from though? Because wages haven't kept up with house prices at all, and yet there seems to me no ceiling to which houses won't go beyond. What's going on there?

Christian: So I would argue that's in large parts driven by sorting of high income households into these superstar cities like London, that highly productive people and wealthy people move into these cities. And because this is a global market and this can go on for a very long time. And if wages increase, prices might increase, but that doesn't make housing more unaffordable. …So if you can't add new housing and it's a desirable location, this pushes up prices and rent.

Sue: High house prices inevitably keep people in rented accommodation and put pressure on both the privately rented and social housing sector. Wanting to understand more about this, I spoke to Kath Scanlon, Distinguished Policy Fellow in the research unit LSE London who does a lot of work on housing policy.

Sue: what proportion of people in the UK live in rented accommodation?

Kath: In rented accommodation, overall it would be about 40% and about half of that would be social rented and about half of that private rented. It's higher in London, it's about 25% in London in the private rented sector.

Sue: And post COVID, we've seen really rapidly rising rental rates, particularly in London, but across the whole country. What's driving that?

Kath: Demand for private renting is up if you look over the long term because migration to this country is strong despite the government's efforts, because households are smaller than they were 20 or 30 years ago, lots of people would rather live singly or in couples. And that demand in terms of more households from whatever source, we have not kept up with it in terms of building enough new housing for those people to live in. So that's behind the affordability issues across the board in housing, there's more demand and not enough supply.

In the private rented sector specifically, there are a few things that could be going on.

People are living in the private rented sector for longer and some of them for their whole lives. So the turnover is slower than it used to be. So that means really what you're interested in, in a market situation where you're trying to look at the prices is not how many people live in this kind of accommodation, but what's happening with vacancies because that's where the prices are set. So if people are staying longer, they're not leaving their flats, so there's not an empty flat to fill, so it means the number that are empty is reduced and that drives the prices up.

It could also be that landlords are getting out of the sector because there have been a lot of changes in the taxation of landlords and tighter regulation of landlords

Sue: And would rent controls make any difference?

Kath: Rent controls are always an attractive option to deal with affordability issues in the private rented sector and the mayor of London has called for the power to be able to put in rent controls in London. They would help the people who are currently living in expensive, private rented housing. They would mean more landlords would be likely to get out and they would make it more difficult for people who are looking for somewhere to live. So they would definitely help some people, definitely hurt other people. Properly designed rent regulation can work for both landlords and tenants, but it has to be very carefully done.

Sue: What role does the lack of social housing play in the rising cost of housing in the UK?

Kath: If you look internationally across all developed countries, England has a social housing sector that's about 19% of the stock. That's far smaller than a country like the Netherlands, which has the biggest social housing stock at about a third of the homes, but way more than in the States where public housing accounts for probably 5% of all homes. So it's broadly in line with the amount of social housing that a lot of developed countries provide.

However, it's less than we used to have because of the right to buy.

Sue: The number of council homes has been in decline since Margaret Thatcher’s government introduced Right to Buy legislation in 1980 – this allows most local authority housing tenants the power to buy their homes at a deeply discounted rate. In 1970 there were 5.5 million homes available for social rent in England. By 2021 this had fallen to 4.1 million – a reduction of 24 per cent. Back to Kath.

Kath: As I said before, what matters is what's happening at the margin, what's happening with the vacancies. There's very, very low turnover in social housing. And the tenants, once they get a tenancy, it's a tenancy for life, which is fantastic in terms of stability and building a home in a neighborhood. But it also means that vacancies are few and far between and we are not building enough social housing to replace what was lost through the right to buy.

Sue: And so that puts increased pressure on the private rental market presumably.

Kath: And it does puts pressure on just the availability of homes. And there's also a mismatch really between the kind of housing that's available in the private rented sector and the kinds of homes that are needed. There's a mismatch in terms of the affordability because the rents are often higher than what benefit will pay for. But there's also a mismatch in terms of the types of homes themselves. You get a lot of families living in overcrowded accommodation or unsuitable homes, people with small children that don't have any access to the outside or to play spaces.

Sue: You’re Listening to LSE iQ. In this episode I’m exploring how we can make housing more affordable. Christian and Kath have highlighted some of the pressures on housing prices.

However, against this rather depressing backdrop there are some interesting projects trying to help ordinary people, with jobs, into their own homes. I spoke to Oliver Bulleid, Executive Director of the London Community Landtrust – the organisation behind Rali’s home at Citizen's House.

Oliver: In terms of what we do as London Community Land Trust, we work with communities to find sites, to lobby politicians, to raise funds, and to then co-design and co-deliver community-led housing on a range of sites around London...

Sue: London Community Land Trust works with teams of local people to campaign and bid for land in their boroughs. This is often local authority or other public land that is being under utilized. For example, Citizen’s House was built on some garages next to a social housing estate which had attracted some anti-social behaviour. Of course, land makes up a large part of the expense of building in London. And the London Community Land Trust also receives substantial grant support from the Greater London Authority which enables it to essentially subsidize its homes.

Oliver: The price of our homes are linked to average salaries for the area, and that's available through Office of National Statistics data every year. Each borough has a slightly different average median income. And then we apply a multiplier in terms of a mortgage, and also a multiplier in terms of the size of the home. What that means is that the home is then genuinely affordable for someone on an average salary.

Typically, what we try and do is make a one-bedroom home available for one average income for that area, so that one person can afford to buy a one-bedroom flat, up to a four-bedroom home, which would be two times average salaries for the area, so that two average salaries could afford a four-bedroom home, and with the other homes priced in between. That's the principle. There is some flexibility in that because different projects cost slightly more or slightly less. And then, if the homes are sold, they're resold on the same basis......

Sue: What kind of demand have you seen for your houses?

Oliver: For our Lewisham project at Citizens House, we had, I think, over 1000 expressions of interest for the 11 homes and over 400 applications. Pretty substantial, and I suppose that's a clear demonstration that there is, well, as we all know, a desperate housing need.

Sue: Rali was lucky enough to selected to be able to buy a two bedroom flat on the development. As part of this, she and her husband had to demonstrate, amongst other things, their commitment to the local community.

Rali: It was a thorough process in fact. There was an application form, a very detailed one we needed to complete and provide lots of evidence. The criteria was quite clear. You need to think how this criteria applies to your own life in terms of having some sort of connection with Lewisham, with the Boroughs of Lewisham, either having lived here. With us, it was my husband who lived in Lewisham previously, and me working in Lewisham. So this is how we met the criteria.

Sue: And what's your experience of renting in London been like?

Rali: It's been really hard because when we reflect on our budget and our savings, at least one salary goes just to rent and bills. Even one of our salaries could not fully cover the rent and the bills that went with it.

So I mean, from what I knew, our salaries were probably average salaries, which kept us going. Able to pay high rent and all our bills and have a bit of savings. Savings even enough to get a deposit. But these salaries were not enough for a bank to approve us as someone who they could lend money to. So when we applied for this particular scheme, basically the bank said that the highest amount that they could lend us was 242,000. The flat was 272,000. ….This is my boy practicing his ukulele.

Sue: So I mean, 240,000 it's not nothing, is it? It's a lot of money you've got to borrow.

Rali: But I mean, it's not enough to buy something decent. It's not enough. And even with this scheme, we were still told that we were at the top of our affordability, even for this scheme.

Sue: Would you say your new home has changed your life?

Rali: Oh, for sure. I mean, we moved here at the period where we were totally exhausted. I mean, mentally, physically having a second boy. And when we moved here, he was just two months and we were really exhausted. But even in the middle of this total exhaustion, physical, mental, from the moment we moved in and we knew, wow, no more wasting money and rent, we are now paying back our own home, our first own home. It was just an amazing feeling. I mean, that feeling kind of changes your brain chemistry. I mean, you are more stable immediately...

Sue: I asked Oliver about the long-term viability of housing provided by community land trusts.

Oliver: I think councils and others looking at in terms of climate crisis and in terms of broader environmental issues, I think they're slowly coming around to the idea that actually, development can be seen as part of a secular economy, where we look at our community assets in the round and we see that, well, really, we're just stewards in the longterm. We have to maintain some sort of community ownership and some sort of community stewardship of our public assets.

I think community land trusts have a key part to play in that role of thinking about the development process as part of a circular economy process, not just a linear extract produce and then you're left with nothing.

Sue: More housing developed by community land trusts is an exciting prospect. It is, however, only ever likely to provide a small part of the puzzle when addressing the housing affordability crisis. I asked Christian Hilber how house prices could be addressed more broadly. But first, I wanted to ask about an issue that is on many would be buyers minds’ right now.

Sue: We're recording this in February 2023 and there's been a lot of talk about a potential housing crash, although there seems to be some debate about whether it'll just be more of a decline or stabilization in prices. But is that what first time buyers need to get on the housing market? Would a house price crash achieve that for them?

Christian: Unfortunately the answer is no, it won't help them. So to summarize it, unfortunately, like this house price bust or possibly crash, not going to help most young would-be buyers because they're real incomes are falling, and that's the reason why the prices fall in the first place. And interest rates are rising, meaning higher mortgage costs. So the only people for whom housing really becomes more affordable, it's those who don't need to finance their housing with mortgages.

Sue: So how can we make housing more affordable?

Christian: what we need is a planning system that focuses on correcting market failures, that is rule-based, doesn't create uncertainties. So what I have in mind is rather a rule-based zoning system rather than the development control system that creates a lot of uncertainty and focuses on urban containment that we currently have in place.

Sue: The UK operates a ‘development control’ system, which is geared towards containing development. It stipulates that any change of ‘use’ of any parcel of land requires permission to be granted by local planning authorities. This sparks a consultation process that gives significant weight to pressures from local opposition. This is in contrast to a rule-based zoning system – used by most of the rest of the developed world. This front-loads many decisions by prescribing the types of development allowed in a particular area – and reduces the need for planning judgements to be made and therefore room for opposition.

Along with planning reform, Christian also advocates changes in tax to create incentives for development.

Christian: So what I have in mind, for example, is to have a meaningful local property tax at the local authority level, where you actually allow local authorities to reap the benefits of residential development. So they can actually form these local public services. Where the money helps maintaining the roads, providing good schools, et cetera, et cetera. Where there are some incentives for local authorities to actually permit development.

Otherwise, vote for political change, vote for meaningful reform to get house building going, because the problem is that in the 1970s we built roughly twice as many housing units that we build today.

Sue: Kath Scanlon agrees with Christian’s assessment of the green belt and how it constrains the expansion of the London. In particular she highlights proposals to build around train stations.

Kath: we have to be realistic about how affordable housing can ever be in London or in England, given the constraints that there are and the demand pressures.

The population of London is going from 6.8 million in the 1991 census to projected to be more than 10 million in 2030. But the footprint can't go out because of the Green Belt, so we've got to build up. That's expensive.

We're building more, that will help. We could relax restrictions on the Green Belt and allow for densification around the existing transport stations in the Green Belt, of which there are a lot. There are a lot of train stations in the Green Belt that serve little tiny villages and it's not allowed to build any more housing around them. I think it would make sense to allow that.

Sue: In a report for the think tank Centre for Cities, LSE academic Paul Cheshire recommended releasing for development almost all Green Belt or agricultural land within 800 metres of any stations which have a service of 45 minutes or less to a major city. The report says that this could provide the space to build more than two million new homes with fast connections into many of Britain’s largest cities.

Finally, I asked Oliver Bullied from London Community Land Trust what he sees as key to tackling the affordability crisis in housing

Oliver: I think, by local authorities and other holders of land to open up to the potential of community-led development, and to see that as an additionality to the housing shortage. It's probably worth remembering that the current government did have a target of 300,000 homes per year. We haven't achieved that in recent history. I think we got close to 200,000 homes per year around about 2019. Historically, we've only ever built the number of homes needed with substantial intervention by the state, building large-scale housing in the 1960s, and earlier and later. And so I think we can't rely on the private sector to deliver the number of homes we needed.

We do need to build more homes. We need to use all the tools that we have, and I think the community involvement and groups like ourselves, I think is a win-win all around.

I can genuinely see this, our model, and other community land trusts, going from strength to strength. But it will need central government support, and it will need grant funding. Unfortunately, that central government support is lacking and hasn't been renewed.

We've had, I think it's six housing ministers in the last 12 months, so it's sad that there isn't a continuity of central government support in that role. I think it needs to be taken really, really seriously by government because it's a really complex problem that can be solved. We're part of the solution, but we're not going to fix it on our own.

Sue: This episode was produced by me, Sue Windebank and edited by Oliver Johnson. If you’d like to find out more about the research in this episode, head to the show note notes. And if you enjoy iQ, please leave us a review.

Coming next on LSE iQ, James Rattee asks, ‘What’s it like to be an animal?’