Here's why building more houses isn't enough to bring prices down

Try harder, you lot.

On Newsnight on Tuesday, there was an interesting debate about housing and homelessness. It was prompted by Wednesday’s BBC2 documentary which follows a London council’s helplessness in finding places for its homeless families to live.

There were great points made by all the participants; including Jon Sparkes from Crisis and campaigner Poppy Noor, who has experienced the homelessness system herself. But the point that struck me most was actually made by the presenter Evan Davies. He said:

“People who, if they’re in the housing market – the market sector – are clearly not going to get a home. They’re not going to afford one whether it’s private rent or to purchase … and… I just wonder whether the most basically obvious fact – and whether it’s accepted now – is that we just don’t have enough of if you like the ‘non-market sector’ homes, the social homes… where they are allocated by other factors than how much money you can afford to pay for a room.”

What struck me about this statement was how it really isn’t accepted within much of the debate on the housing shortage. Instead, there is a strongly held view across many of those who care about the housing crisis and want to solve it that simply building a lot more market homes could solve the crisis we face.

This is wrong.

I’d argue that the proposition being made by those who believe this is something like:

·         Prices in the housing market – rents and house prices – are too high and rising partly because the housing market produces far too few homes.

·         If developers were freed up to match their supply to housing demand, for example by scrapping planning restrictions, this would cause prices and rents to fall.

·         Over the long term, this is the only way to make housing more affordable.

This misses out lots of the detail, but I think it’s the core assumption of a lot of people. So why do I think it is wrong? I think you’ve got to start with the fundamentals of the housing market.

The key point is that prices and rents in the housing market are not set by newly built homes (unlike in lots of other markets, where the supply and demand for new products sets the price). Prices are set by trading within the secondary market.

What this means in plain English is that the price of a new house is determined by how much people are paying for old (secondary) houses in that local area. New build homes do not set prices.

There are around 1m property transactions in England per year, of which perhaps 120,000 are for new build market sale homes (roughly, based on new build figures minus rented homes). At just over 10 per cent of the market, the new builds will not set the price: instead, they’ll be marketed at values which reflect their local second hand market.

(There’s one slight caveat – that this is being distorted at the moment by the fact that buyers can pay more for new build homes, because of the government’s Help to Buy scheme. This adds an extra loan on top of a mortgage to the buyers of new build homes, meaning that they can pay more. According to the latest stats from the ONS, the average new build home now cost between 13 per cent and 64 per cent more than the average second hand home in English regions, and 40 per cent on average for England. Part of the reason for this difference may be the extra demand created by the Help to Buy scheme. But anyway.)

For new build homes to start impacting, let along setting, prices in the wider housing market there would need to an enormous rise in the scale of market building. Kate Barker’s influential review of housing supply in the mid-2000s recognised this. It argued that even if private housebuilding roughly doubled from 120,000 to 240,000, house prices would still continue to rise on a trend of 1.1 per cent above inflation. She said that to stop house prices rising at all would imply a level of market housebuilding that would be “undesirable and unachievable”.

I agree that it would be unachievable to get the market building enough homes to start flatling or reducing house prices overall. The reason is simple: the private housebuilding market can only build when prices are rising.

Private house building operates on a speculative business model. Firms buy land years in advance and they pay a price based on how much they think homes will sell for in the future. If house prices fall, they stop building – as they would not make a return.

You cannot solve the problem of high house prices and rents by over-building market homes.

This is where Evan Davies is spot on. What we need is to build (and retain) a lot more “non-market” homes which are outside of the land price, house price trap. Over time this will moderate price rises in the market sector too, by giving people who can afford the market a viable alternative choice.

There’s an obvious second benefit to building non-market homes, too. It is that, outside of the market, you have scope to set rents and/or prices that people can genuinely afford. In the short term, this is what is needed most – homes that people on normal and low incomes can actually afford.

Many of these non-market homes will be part-funded by through schemes delivered by the private market which also provide full market homes – I’m not saying we should stop building market schemes. But the critical point is that without building thousands more homes outside of the speculative, high-price market we simply won’t make a dent in the housing crisis.

Evan Davies got this point intuitively. But we need to do quite a bit more work to make sure it is widely appreciated so that we build the right sort, as well as the right number, of homes.

 Pete Jefferys is a policy advisor at Shelter. This post was first published on charity’s blog. 


To see how a city embraces remote work, just look to Helsinki

A deeply rooted culture of trust is crucial to the success of remote work. (Sean Gallup/Getty Images)

When I speak to Anssi Salminen, an account manager who lives an hour outside Helsinki, he’s working from a wooden platform on the edge of a Finnish lake. With a blanket laid out and his laptop set up, the sun low in the sky, Anssi’s remote work arrangement seems blissful. 

“I spend around half of my time working somewhere else other than the office,” he says. “I can work from home, or on the go, and I also travel to the Netherlands once a month and work from there.

“The emphasis in my work has always been that it doesn’t matter when or where I work, as long as I get things done.”

For many people around the world, the shift to remote work was sudden, sparked by the coronavirus pandemic. Finland, however, is finding the transition much less significant. Before Covid-19, the Nordic nation already displayed impressive levels of remote working, with 14.1% of its workforce reporting usually working from home. Only the Netherlands has a comparable percentage of remote workers, while the UK lagged behind at 4.7%, and the US’s remote workforce lingered at around 3.6%

Anssi works for one of many Helsinki-based companies that offers its employees flexible policies around when and where they work. That arrangement is in part due to the Finnish capital’s thriving start-up scene. In spite of being a relatively small city by global standards it is home to over 500 technology start-ups. These companies are leading the way when it comes to keeping employees connected wherever they choose to work.

“Our company has a completely location-free working policy,” says Kasper Pöyry, the CEO of Helsinki-headquartered software company Gapps. “All meetings are made available for online participants and facilitated accordingly. Some employees have worked extensively from abroad on a working holiday, whilst others prefer the comfort and social aspects of the well-stocked office. Whatever works for our employees is what works for the company.”

Like Gapps, many Helsinki-based firms are deeply preoccupied with providing the necessary technology to attract talent in a vast and sparsely populated country. Finland has only 15 inhabitants per square kilometre, and companies understand that in order to compose teams of specialised expertise, they may have to seek talent outside of the city. Local governments take a similarly proactive stance toward technological access, and Helsinki offers free, unrestricted, high-speed Wi-Fi from city-wide hotspots, while the country as a whole boasts some of the best coverage in Europe. 

But encouraging remote work isn’t just about optimising the potential of Finland’s workforce – companies in Helsinki also recognise that flexibility has clear benefits for both staff and employees. 

“The idea of a good work-life balance is ingrained in Finnish culture,” says Johannes Anttila, a consultant at organisational think tank Demos Helsinki. “It goes back to our rich history of social dialogue between labour unions and employers, but also to an interest in delineating the rules of working life and pushing towards people being able to enjoy their private life. Helsinki has been named the best city in the world for work-life balance, and I think that this underlies a lot of the mentality around remote work.” 

For Peter Seenan, the extent to which Helsinki residents value their free time and prioritise a work-life balance prompted his move to the city ten years ago. He now works for Finnair, and points to Finland’s summer cottages as an example of how important taking time to switch off is for people in the country. These rural residences, where city residents regularly uproot to enjoy the Nordic countryside, are so embedded in Finnish life that the country boasts around 1.8 million of them for its 5.5 million residents

“Flexible and remote work are very important to me because it means that I don’t feel like I’m getting stuck in a routine that I can’t control easily,” he says. “When I’m working outside of the office I’ll go down to my local sauna and go ice swimming during the working day, typically at lunchtime or mid-morning, and I’ll feel rejuvenated afterwards… In winter time especially, flexibility is important because it makes it easier to go outside during daylight hours. It’s certainly beneficial for my physical and mental health, and as a result my productivity improves.”

The relaxed attitude to working location seems to pay off – Finland is regularly named the happiest country in the world, scoring highly on measures such as how often its residents exercise and how much leisure time they enjoy. With large swathes of unspoiled countryside and a national obsession with the outdoors, sustainability is at the forefront of its inhabitants’ minds, leading to high levels of support for measures to limit commuting. In January, Finland passed a new Working Hours Act, the goal of which was to help better coordinate employee’s work and leisure time. Central to this is cementing in law that employees can independently decide how, when, and where they work.

Yet enacting the new ruling is not as simple as just sending employees home with their laptops. For Kirsimarja Blomqvist, a professor of knowledge management at LUT University, perhaps the most fundamental feature that remote work relies upon is a deeply rooted culture of trust, which Helsinki’s residents speak of with pride. The anecdotal evidence is backed up by data which suggests that Finland boasts one of the highest levels of trust and social cohesion in Europe, and equality and transparency have always been key cornerstones of political thought in the country.

“Trust is part of a national culture in Finland – it’s important and people value it highly,” she explains. “There’s good job independence, and people are valued in terms of what they do, not how many hours they work for. Organisations tend to be non-hierarchical, and there is a rich history of cooperation between trade unions, employers, and employees to set up innovative working practices and make workers feel trusted and valued. 

“It’s now important that we ensure that this trust can continue to be built over technology, when workers might have been more used to building it face-to-face.”

As companies begin to look hopefully toward a post-Covid future, the complexities of remote work are apparent. Yet amid issues of privacy, presenteeism, and social isolation, the Helsinki model demonstrates the potential benefits of a distanced working world. The adjustment to remote work, if continued after the crisis, offers a chance to improve companies’ geographical diversity and for employers to demonstrate trust in their workforce. On these issues, Blomqvist believes other cities and employers can learn a lot from Helsinki.

“People are now beginning to return to their workplaces, but even as they do they are starting to consider the crisis as a jumping point to an even more remote future,” she says. “The coronavirus pandemic has been an eye-opener, and people are now interested in learning from Finland’s good practices… We are able to see the opportunity, and the rapid transition to remote work will allow other countries to do the same.”