Addressing the UK's deepening housing crisis will demand more than just policy tweaks—it will require substantial government intervention and financial investment. Prime Minister Keir Starmer has pledged to increase the supply of affordable homes and reform the planning system, but these efforts alone may not be sufficient to resolve the issues plaguing the housing market. To make a meaningful impact, Starmer will likely need to deploy public funds in addition to relying on private housebuilders.
A worsening crisis
The scale of the housing crisis is daunting. In London, house prices have nearly doubled, rising from seven times the median income in 2002 to 13 times last year. Despite growing demand from a rising population, the Centre for Economic Performance found that 3 million fewer homes were built between 1989 and 2019 compared to the previous 30 years. Starmer's goal to build 1.5 million new homes during his parliamentary term, which translates to 300,000 annually, is ambitious. Yet, the previous Conservative government led by Rishi Sunak only managed to deliver 226,000 homes in its final year.
Planning reforms and private sector challenges
One of the biggest barriers to housebuilding is the current planning system, which allows local authorities to obstruct development due to local opposition. Starmer's government is attempting to tackle this by hiring more planning officers, enforcing strict housing targets on local authorities, and expanding the types of land available for development. However, these measures alone may not spark the housing boom needed. Private developers play a crucial role in building new homes, but they are driven by profit margins. With building and labor costs remaining high, and demand softened by elevated mortgage rates, developers may be reluctant to increase construction rapidly. There is also a concern that a surge in building could lead to lower house prices, which might incentivize developers to hold onto their land rather than build. The top 10 UK housebuilders reportedly have 700,000 undeveloped plots, indicating a significant potential for new construction that remains untapped.
Investor Skepticism
Investor sentiment reflects the uncertainty surrounding the housing market. While housebuilder stocks have risen since Labour's election win in July, most are still trading below their levels from December 2021, when the Bank of England began raising interest rates. Analysts are cautious as well. For instance, Persimmon, a major housebuilder focused on affordable homes, delivered just 9,900 homes in 2023, a significant drop from the previous year. Projections suggest that by 2029, Persimmon will only build slightly more than 14,000 homes annually, still below its 2022 output. Similarly, Barratt Developments is expected to produce fewer homes in 2029 than it did in 2022.
The Need for Public Investment
To truly solve the housing crisis, Starmer will need to focus on increasing the number of affordable homes, which currently make up just 13% of new supply. Developers are required to build a percentage of affordable housing, often sold to local councils or housing associations for rent. However, these organizations are struggling due to reduced funding and rising maintenance costs, limiting their ability to purchase new homes. Chancellor Rachel Reeves is expected to address this by raising rents for affordable homes, which are often subsidized by the government, by more than inflation for the next decade. This move could generate additional revenue for local authorities and housing associations, enabling them to invest in new properties. There is also speculation that the government might introduce a new housing fund worth several billion pounds in the upcoming October budget to further support affordable housing initiatives. However, this would come at a time when the UK faces a £22 billion budget shortfall, making such an investment politically and financially challenging.
The UK's housing crisis is complex and multifaceted, requiring a combination of public and private sector efforts. While Starmer's proposed reforms are a step in the right direction, they may not be enough to meet the country's housing needs. Significant government investment, along with bold and innovative policies, will be necessary to address the long-standing issues in the housing market and provide affordable homes for those in need.