Notes on an oligopoly: What did we learn from the Lords' report on the housing crisis?

The good old days. Image: Hulton Archive/Getty.

House of Lords select committee reports are not always the most the riveting of reads. Friday’s, however, from the economic affairs committee was the exception to the rule.

“Building more homes” is a truly devastating assault on recent Whitehall orthodoxy regarding housebuilding, and reveals in great detail much of what has been going wrong. Many of the points contained in the report have been made before – but not often with the authority and heft of a cross-party parliamentary committee.

It is also brilliantly timed (more luck than judgement, one supposes) given that we have a new prime minister and a new communities & local government secretary. If Theresa May and Sajid Javid want to finally get to grips with the endemic undersupply of new homes, they would do well to start with this report.

Here are some of the highlights:

England needs 300,000 homes a year – not 200,000

The government’s commitment to building 1m homes by 2020 (equivalent to 200,000 a year) will not be enough to meet future demand and tackle the backlog after years of undersupply. “To meet that demand and have a moderating effect on house prices, at least 300,000 homes a year need to be built for the foreseeable future,” the committee says. “Otherwise the average age of a first time buyer will continue to rise.”

Note too that the government is nowhere near hitting even 200,000 a year. Completions last year were just 155,000, just over half what is now recommended.

The large housebuilders restrict output to optimise profits

Private developers alone have neither the ability nor the motivation to build all of the homes we need. The housebuilding market is “oligopolistic”: its business model is to restrict the volume of housebuilding in order to maximise profits.

The government’s reliance on the private sector to meet its housebuilding targets is therefore misguided. “To achieve its target the government must recognise the inability of the private sector, as it is currently incentivised, to build the number of homes needed,” the peers say.


Land hoarding should be penalised to stimulate quicker building

There is also too big a gap between the number of planning permissions granted and the number of homes which are built. Councils should therefore be given the power to tax developments that are not completed within an agreed timeframe. 

“We recommend that local authorities are granted the power to levy council tax on developments that are not completed within a set time period,” the report argues. “This time period should be negotiated when planning consent is sought and be varied according to the size and complexity of a development.”

Local authorities should be allowed to borrow build social housing

The government is too fixated on home ownership at the expense of other tenures, and the current cap on council borrowing to invest in social housebuilding is “arbitrary” and should be scrapped.

The committee points to the government’s recent abandonment of its target to achieve a fiscal surplus in 2019-20 and the current low cost of borrowing. “There is no set limit on the amount a local authority can borrow to build a swimming pool,” it notes. “The same should apply to housing.”

Councils should also be encouraged to enter partnerships with housing associations, whose efforts to build more homes have been undermined by reductions in social rents.

Public land is not being released quickly enough

There is surplus public sector land enough in London for at least 130,000 homes – across England there could be enough for 2m. But the government’s efforts to release this for residential development have so far been “ineffective”.

The report recommends that a senior Cabinet minister should be put in charge of this process in future, and the National Infrastructure Commission given responsibility for keeping tabs on the number of homes that are actually built on it. Importantly, the requirement to achieve the best possible market price – often the cause of delay – should be “relaxed”, the committee says.

 

How likely is the government to adopt any of these ideas? On Monday, in her last speech before becoming prime minister, Theresa May spoke of the need to do “far more” to build more homes, which sounds like she may be amenable to a change of strategy. It is not difficult to imagine her getting much more tough on the release of public sector land. And there have been hints already that the new chancellor, Philip Hammond, might be prepared to borrow to invest in infrastructure.

The biggest challenge will come from the major housebuilders, and their many hangers on in the housing and planning industry, who will fiercely resist any effort to make them build faster than they are already. There are many interests vested in the status quo. Whether they are overcome may depend, in the end, on Mrs May’s level of determination.

Daniel Bentley is editorial director of the think tank Civitas and the author of “The Housing Question: Overcoming the shortage of homes”. He tweets @danielbentley

 
 
 
 

High streets and shopping malls face a ‘domino effect’ from major store closures

Another one bites the dust: House of Fraser plans to close the majority of its stores. Image: Getty.

Traditional retail is in the centre of a storm – and British department store chain House of Fraser is the latest to succumb to the tempest. The company plans to close 31 of its 59 shops – including its flagship store in Oxford Street, London – by the beginning of 2019. The closures come as part of a company voluntary arrangement, which is an insolvency deal designed to keep the chain running while it renegotiates terms with landlords. The deal will be voted on by creditors within the month.

Meanwhile in the US, the world’s largest retail market, Sears has just announced that it will be closing more than 70 of its stores in the near future.

This trend of major retailers closing multiple outlets exists in several Western countries – and its magnitude seems to be unrelated to the fundamentals of the economy. The US, for example, has recently experienced a clear decoupling of store closures from overall economic growth. While the US economy grew a healthy 2.3 per cent in 2017, the year ended with a record number of store closings, nearly 9,000 while 50 major chains filed for bankruptcy.

Most analysts and industry experts agree that this is largely due to the growth of e-commerce – and this is not expected to diminish anytime soon. A further 12,000 stores are expected to close in the US before the end of 2018. Similar trends are being seen in markets such as the UK and Canada.

Pushing down profits

Perhaps the most obvious impact of store closures is on the revenues and profitability of established brick-and-mortar retailers, with bankruptcies in the US up by nearly a third in 2017. The cost to investors in the retail sector has been severe – stocks of firms such as Sears have lost upwards of 90 per cent of their market value in the last ten years. By contrast, Amazon’s stock price is up over 2,000 per cent in the same period – more than 49,000 per cent when considering the last 20 years. This is a trend that the market does not expect to change, as the ratio of price to earnings for Amazon stands at ten times that of the best brick-and-mortar retailers.

Although unemployment levels reached a 17-year low in 2017, the retail sector in the US shed a net 66,500 jobs. Landlords are losing longstanding tenants. The expectation is that roughly 25 per cent of shopping malls in the US are at high risk of closing one of their anchor tenants such as a Macy’s, which could set off a series of store closures and challenge the very viability of the mall. One out of every five malls is expected to close by 2022 – a prospect which has put downward pressure on retail real estate prices and on the finances of the firms that own and manage these venues.

In the UK, high streets are struggling through similar issues. And given that high streets have historically been the heart of any UK town or city, there appears to be a fundamental need for businesses and local councils to adapt to the radical changes affecting the retail sector to preserve their high streets’ vitality and financial viability.


The costs to society

While attention is focused on the direct impacts on company finances, employment and landlord rents, store closures can set off a “domino effect” on local governments and businesses, which come at a significant cost to society. For instance, closures can have a knock-on effect for nearby businesses – when large stores close, the foot traffic to neighbouring establishments is also reduced, which endangers the viability of other local businesses. For instance, Starbucks has recently announced plans to close all its 379 Teavana stores. Primarily located inside shopping malls, they have harshly suffered from declining mall traffic in recent years.

Store closures can also spell trouble for local authorities. When retailers and neighbouring businesses close, they reduce the taxable revenue base that many municipalities depend on in order to fund local services. Add to this the reduction in property taxes stemming from bankrupt landlords and the effect on municipal funding can be substantial. Unfortunately, until e-commerce tax laws are adapted, municipalities will continue to face financial challenges as more and more stores close.

It’s not just local councils, but local development which suffers when stores close. For decades, many cities in the US and the UK, for exmaple Detroit and Liverpool, have heavily invested in efforts to rejuvenate their urban cores after years of decay in the 1970s and 1980s. Bringing shops, bars and other businesses back to once derelict areas has been key to this redevelopment. But today, with businesses closing, cities could once again face the prospect of seeing their efforts unravel as their key urban areas become less attractive and populations move elsewhere.

Commercial ecosystems featuring everything from large chain stores to small independent businesses are fragile and sensitive to change. When a store closes it doesn’t just affect employees or shareholders – it can have widespread and lasting impacts on the local community, and beyond. Controlling this “domino effect” is going to be a major challenge for local governments and businesses for years to come.

Omar Toulan, Professor in Strategy and International Management, IMD Business School and Niccolò Pisani, Assistant Professor of International Management, University of Amsterdam.

This article was originally published on The Conversation. Read the original article.