The Housing Sprint. Finance for Housing in England: money and the market, investment, affordability and tenure

The housing crisis in England is characterised by rising house prices, unsatisfactory living conditions and (for many) the unattainable dream of owning a home. Policymakers have recognized this crisis, and focussed on a lack of new housing supply as the primary problem, deciding to tackle the complicated housing crisis with a policy resolution to build 300,000 affordable homes a year, according to the government’s housing white paper in 2017. This will require land; the skills needed to develop successful communities; and finance. In this report, we set out to examine where the money might be found. The questions we set out to address are as follows. How much private capital will be available over the next 10 years to develop and invest in housing in England? Is there enough private sector/third sector capital available to pay for 300,000 new homes a year? Will the available capital build the homes for which there is a demand? What is the likely distribution of privately-funded housing by housing type and geography? How much of this capital will be employed in land acquisition? If land were acquired at agricultural values, what would be the implications for the number of homes that could be produced? What is the likely distribution of privately-funded housing by tenure type? What are the likely mismatches? What innovations are most likely to increase the supply of new homes? What new forms of tenure would help affordability? What is the likely future role of alternative finance? Our report suggests that a shortage of permitted land is a bigger constraint to building an extra 100,000 homes a year than is the unavailability of finance. In this paper, we find that around £19-25bn of capital is needed to build the extra homes. With moderate reforms and encouragement, UK institutional investors are the natural providers of equity capital, although it has to be noted that almost all of their appetite would be for rental housing, both privately rented and social/affordable. It is possible to envisage the necessary capital being made available, making the large assumption that UK investors will continue their expansion into the residential markets from negligible levels in 1990, and 7.5% today, to the global norm of around 20% or the US figure of 25%. In order for this to happen, some reforms and innovations will be helpful or perhaps necessary. Focussing on investment into the broad rental market will have bigger positive impact on the housing shortage - especially the shortage of affordable units - than will focussing on owner-occupation. To support more construction for owner-occupation will require help for SME builders, who are currently at a commercial, largely finance-based, disadvantage relative to the excessive concentration of large housebuilders. Existing tax breaks and financial support packages for owner occupiers may be necessary to support a market which is so difficult to access given current shortages and high price levels, but some policy support for professional rental investors would release liability-driven and annuity funds into the social and PRS sectors alongside specialist rental property funds encouraged particularly by the returns achieved by student housing investors. In particular, this requires a government commitment not to change social rent indexation or rent levels. This might require an independent housing body to manage this imperative, free from political interference. Less radical would be a scheme for the government to sign long over-riding leases for social housing, as is the case in Ireland. This would produce an irresistible indexed bond-like investment priced in the current interest rate environment at huge multiples of rent, say 50 times (a 2% yield). Also, the re-direction of debt-financed local authority borrowing to affordable housing would almost certainly be of benefit to all interested parties. Under-utilized homes can be part of the solution to the housing crisis. Policy measures are needed to start to free this up, and private sector innovations can help. Equity release products are designed to allow older people to remain in their homes despite a lack of financial wherewithal need for maintenance or living costs. We need a set of measures which encourage movement. Around £19-25bn of capital is needed to build the extra homes. We estimate that potential annual institutional funding will be available at somewhere between £5bn and £18bn. There will be additional potential international investment flows of up to £3bn, and some private savings will also be attracted to the rental sector. The use of reasonable (25% loan to value) debt on top of these equity commitments would reduce an annual capital requirement of £19-25bn to an annual equity requirement of £14-19bn. Given typical annual transaction volumes in the UK of around £50bn annually (RCA, 2019), plus Cushman and Wakefield of around $500bn of new capital targeting real estate globally, an annual requirement of around £14-19bn seems just about achievable, but only at a stretch, requiring both the continued attractiveness of the UK as a destination for capital and the appropriate policy encouragement