09. Affordable Housing

As with any commodity, it is the combination of the price demanded and the financial means of the prospective buyer, that renders it affordable or not.  Housing is no different. House prices have been rising inexorably at least since the 1960s and continue to do so, especially in the most sought after areas, such as London and the South East.                      

However, since the economic collapse of 2007–8 these increases have not been matched by any commensurate increase of wages and salaries above the general level of inflation. Even in the less sought-after areas of the country, where the increases have been less marked, people still have to struggle to find the down payment for a mortgage. This situation is nothing new, but it has become far more acute in recent years. The consequence is that, since 2000, home ownership has been in decline and private renting has been increasing––as shown in Figure 14.

The problem of housing affordability has been around at least since the end of World War I, when the Homes for Heroes programme was established, leading later to subsidised council housing which, although a form of welfare, was an effective solution to the problem of affordability for many years. The council-housing stock thereafter was added to with greater or lesser enthusiasm by all governments until being set into reverse by the ‘sell-off’ policy of the Thatcher government in the 1980s. This policy of course added to the number of homeowners who then had a vested interest in continually rising house prices, not to mention a new group of grateful Tory voters. But council housing, rightly or wrongly, has always carried a stigma; given the choice and the financial means, the majority of people would choose to live in the leafy suburbs rather than the council estate. And the crucial phrase here is financial means; without the financial means, many things become unaffordable, including housing. At the present time, amongst economists and commentators on housing, various reasons are suggested for high house prices:

  • Low housing supply
  • Low interest rates, and therefore cheap mortgages
  • The attraction, to investors, of an appreciating asset
  • Government policies encouraging home ownership

No doubt all of these factors, either singly or in combination, have an effect on causing house prices to rise, but the one thing that is rarely mentioned is the land-value factor, which is the indicator of the demand for houses. In the most sought-after locations, it is the ownership of the location––rather than the ownership of the house––that provides the best return, which accrues through the economic rent, either directly at the time of sale or indirectly––as explained in Part 3, item 11. It is worth considering each of the above factors individually.

Low housing supply.

The solution to the problem of housing supply offered by politicians (and many economic advisors) is simply to build more houses hoping that, by the law of supply and demand, the increase of supply will bring prices down. But they do not recognise that the price of a house is related not only to the value of the building, but also the value of the site upon which it stands. In high-value areas the site value may be as much as 4 times that of the building value, so any increase of house building can only affect 20% of the total price; the 80% due to site value will continue to rise regardless. Land does not obey the law of supply and demand, because the supply of land is fixed. This last statement has to be qualified: Although no more land can be created, sites can always be supplied for particular purposes through a change of use or simply through demolition and re-use. But these changes of use are rare, and in any case controlled through the planning system..1  Since the 1980s, a substantial amount of public land has been sold to the private sector for commercial development, including housing. So there is a supply, but the competition is intense for such sites, and once acquired, the release for development is strictly controlled to the best advantage of the landholder. (see Part 3, item 10, Land Banking).

A further point on this allocation of value between the house and the site is one relating to actual wealth. Houses represent real wealth, land does not (see Part 3, item 17, Definitions). So, in the example given above, only 20% of the total value is due to real wealth, the remaining 80% is a paper asset, a value that is not based on any tangible asset or productive increase. As Ryan-Collins et al. note, ‘When the value of land under a house goes up, the total productive capacity of the economy is unchanged.’ 3

Housebuilders and developers have a built-in aversion to providing affordable housing; they make the bulk of their profits from building and selling high-priced properties. They will go to any lengths to wriggle out of the section 106 requirements for affordable housing that are a condition imposed by local councils for the granting of planning permission. In 2012, the housebuilders and other property interests strongly influenced the drawing up of the government’s National Planning Policy Framework (NPPF), which included a ‘viability assessment’ clause. This clause made it easier for the housebuilders and developers to negotiate their way out of the section 106 requirements by arguing that if the conditions were too onerous the scheme would become ‘unviable’. This was simply another way of saying that their profits would be reduced. In his book The Property Lobby, Bob Colenutt describes all this in considerable detail. Ireland suffers the same problem with housing as England. Conall Boyle, former lecturer in economics and statistics at Birmingham City University, wrote an interesting article showing that the increase of house building in Ireland between 1975 and 2015 did not help to bring prices down. It is the site-value factor that has the greatest affect on house prices in high-value urban areas and the ever-rising prices are exacerbated through land hoarding and land speculation, creating an artificial shortage. The consequent increase in prices is always to the benefit of the landholders, whose ranks are now increased by the new homeowners.

Low interest rates.

An article of February 2020 for the University College London IIPP blog by Josh Ryan-Collins is entitled ‘When it comes to high house prices, it’s not enough to just blame low interest rates.’ 6  Also in his book Why You Can’t Afford a Home, he notes that, ‘However fast you can build, banks can create new credit faster.’ 7

Low interest rates mean cheaper borrowing, which includes mortgage lending. Whenever a bank lends, it is creating credit for the borrower, and the amount credited is effectively new money. Certainly, greater access to mortgages results in many more prospective buyers looking for houses, which inevitably raises prices, especially in the best locations. There is general agreement that the economic collapse of 2007–8 originated in the US, and was brought on by the irresponsible granting of mortgage credit to so-called sub-prime borrowers. But the same practices were being carried out in the UK and worldwide. In another article, Ryan-Collins suggests that this situation was more the result of de-regulation and entry of the banks into the mortgage industry than by low interest rates. He notes that ‘interest rates were not particularly low in the 1980s.’ 8  So although low interest rates are an encouragement to borrowing, there is some doubt that they are the prime cause of high house prices. (See below, for a brief history of UK interest rates.)

Prior to deregulation, for most people, mortgages were only obtainable through building societies, which were not allowed to lend more than they had from savers’ deposits. The commercial banks, on the other hand, operated under the system of fractional-reserve banking whereby they could lend far more than their reserves. Mortgage loans, in consequence, became more readily accessible, leading eventually to irresponsible lending and the financial crash of 2008.

Attraction to investors of an appreciating asset.

This is a more likely cause. As noted in the previous item, the attraction of housing as a financial asset became more evident in the 1980s and ‘90s, not only to professional investors, but also to ordinary homeowners. Both saw it as an excellent way of increasing their wealth and security, if they were able to buy into an area with good growth prospects. Of course, in the most sought-after areas, the homeowners were competing not only with professional investors but also wealthy foreign buyers who bid prices up to extraordinary levels, especially in the capital.

The great attraction of housing to investors is that, over the long term, it is invariably an appreciating asset (see Figure 15). The house, as with any physical commodity, depreciates in value over time, but the land on which it stands can only appreciate with the demand. Where, as in the example above, the site value is 80% of the total, the appreciating portion––the site value––far outweighs that which is depreciating––the house value. Even in low-value areas, where the proportions may be reversed, but where the house is well maintained and depreciation slight, there may still be an investment interest, however slowly the site value may be increasing.

Government policies.

From the 1980s onwards, governments have pursued policies to encourage home ownership, which could be seen as subsidies for existing and prospective homeowners. The ‘Right to Buy’ policy for council tenants, introduced in the 1980s, is well known, but there was also MIRAS (mortgage interest relief at source), which encouraged mortgage borrowing, and which lasted from 1983 to 2000. Since then there have been a number of schemes designed in different ways to enable homeownership or stimulate housing supply, such as ‘Help to Buy’, ‘Rent to Buy’ and ‘Build to Rent’. These schemes are well described in an article by Christopher Walker, a housing specialist and government advisor. The exemption of capital gains tax on first homes could also be seen as an encouragement to homeownership. All of these schemes in different ways encourage prospective buyers to enter the market, which inevitably has the effect of raising prices.

The best solution to all of these problems would be to introduce a land value tax, which would arrest the rise of the land-value factor, keep prices under control and make land banking and speculation unprofitable. Only then will housing become affordable.

 UK Interest rates

Private banks are able to charge whatever interest rates they wish, but normally these are closely related to the interest rate they in turn have to pay for borrowing from the Bank of England. So effectively interest rates are determined by the Bank of England––which was established in 1694. The history of the rate shows distinct periods of stability and other periods of volatility.

For the first 25 years the rate varied between 6% and 3% then, in 1719, stabilised at 5%. This rate remained constant for the next 103 years until 1822, then for 23 years varied between 2.5% and 6%.  In 1840 the rate entered a long period volatility that lasted till 1932, during which time it varied between 2% and 10%. Another period of stability, for 19 years, from 1932 to 1951, maintained a rate of 2%, except for a brief blip to 4% in 1939 at the start of World War II. From 1951 a second period of volatility, that lasted until 2009, saw the rate vary between 2% and 17%. In 2009 the rate dropped to the unprecedented level of 0.5% and remained at or near this level until March 2022, when it began to rise again.10   At the present time (March 2023) it is at 4%.


(1)  This rule still holds true despite the fact of land reclamation, of which the Dutch have a vast experience over centuries; but the reclaimed land in the Netherlands is generally of only rural value.  The culverting of rivers, such as the Wallbrook and Fleet in London was an early form of ‘making’ land but has long since been absorbed into the overall pattern and does not alter the general rule of fixed supply.

Refer to:  https://www.thoughtco.com/polders-and-dikes-of-the-netherlands-1435535

(2)  Christophers, The New Enclosure. pp.102-3

(3)  Ryan-Collins et al., Rethinking the Economics… p. 173

(4)  Bob Colenutt, The Property lobby, Policy Press, Bristol, 2020, pp. 92–93

(5)  Refer to:  http://housescheaperbettermore.blogspot.fr/2017/07/building-more-houses-wont-bring-down.html

(6)  See Josh Ryan-Collins on housing and interest rates:                                     https://medium.com/iipp-blog/when-it-comes-to-high-house-prices-its-not-enough-to-just-blame-low-interest-rates-here-s-why-c0d91e63b253

(7)  Josh Ryan-Collins, Why Can’t You Afford a Home? Polity Press, Cambridge, UK, 2019, p. 68

(8)  Ryan-Collins, UCL IIPP article, ‘When it comes…p. 5

(9)  Christopher Walker, Council of Mortgage Lenders, Research.2016                 https://thinkhouse.org.uk/site/assets/files/1840/cml.pdf

(10)  Source, Bank of England data, British Landlords Association:  https://thebla.co.uk/uk-interest-rate-history-base-rate-graph/