The number that hijacked the UK housing crisis

Britain’s two main political parties don’t agree on much, but they agree on how to tackle the country’s housing crisis: Build 300,000 homes a year. The ruling Conservative Party adopted this target in 2017, downgrading it to an advisory goal in late 2022 after construction repeatedly fell short. The opposition Labour Party, which is favoured to win a general election likely to be held this year, says it too will aim for the same objective. For a number that has inspired such widespread acceptance, it has a curiously murky provenance.

Where does it come from? No one seems entirely sure, including Parliament itself. “The 300,000 figure is not universally accepted as the ‘right’ number of homes to aim for,” a House of Commons research briefing said in May, noting that both the public accounts committee and the housing, communities and local government committee had highlighted “the lack of information on the government’s basis for settling on this figure.”

The origin of the number isn’t an idle query. Some analysts question whether the UK has a shortage at all, arguing this is an affordability crisis that can be only marginally affected by increasing supply. So knowing the rationale behind such estimates is useful to understanding how policymakers should approach one of the country’s biggest economic challenges.

The genesis of the target can be traced to a 2013 report by economist Alan Holmans, who estimated a need for 240,000 to 245,000 homes a year in England through 2031. That number then appears to have been rounded up by government ministers, according to Ian Mulheirn, former chief economist at the London-based Tony Blair Institute and a housing-shortage sceptic. Whether the upward revision was an attempt to compensate for exceptionally low levels of construction in the mid-2010s or simply because politicians (like journalists) are drawn to big round numbers isn’t clear. Either way, 300,000 entered the parliamentary echo chamber and became part of the received wisdom.

Mulheirn calls the 300,000 figure “entirely arbitrary” and says it is about twice what’s indicated by the growth in households. While the Holmans study was authoritative, the demographic projections underpinning his estimate turned out to be more benign in practice. For example, the government repeatedly predicted average household size would keep falling, as it had in the 1980s and 1990s. Smaller households imply a need for more homes. In the event, the trend flattened.

At its most basic, the calculation is simple. Divide population by average household size and you have an idea of the number that need homes. Using Office for National Statistics projections, England’s population in 2035 is expected to be 59.2 million with an average household size of 2.28, compared with 56.6 million and 2.36 in 2020. That equates to 26 million households, up from 24 million. Divide the 2 million growth by 15 and the back of the envelope says we need to build about 135,000 extra houses a year.

From these straightforward beginnings, everything sinks into a morass of statistical and philosophical incertitude. For one thing, projections can turn out to be wrong. Just as critically, there is a question of causality. Does average household size determine the number of homes needed, or does the availability of supply determine household size? It’s easy to see how the latter can apply, as in the case of adult children who continue living with their parents because they can’t afford to move out. These variables influence each other. Then, there is the question of how we define need. For example, a family living in a rented apartment with damp walls is housed but still clearly in need.

Other economists using different methodologies have arrived at far higher estimates of housing need. In a 2018 report, Glen Bramley, a professor at Heriot-Watt University, estimated a backlog of 4.75 million households across Britain requiring help and recommended building 380,000 homes annually for 15 years. There has been “systematic undersupply relative to manifest and latent demand over a long period, particularly in London and the South of England,” Bramley, who has advised UK governments on housing policy for decades, told me.

The argument that building more won’t do much to improve affordability is compelling. Because housing is an investment asset as well as a consumption good, rental returns and the cost of capital tend to be more important in determining prices than supply. UK home prices have risen from less than four times average earnings in the late 1990s to more than eight times, but this happened in tandem with a global property boom driven by declining interest rates. Critics of the 300,000 target point out that prices can surge even as supply expands, as in countries such as Spain and Ireland prior to the global financial crisis (when both suffered painful housing busts).

But trying to influence the market isn’t the only reason to build. Bramley’s more expansive definition includes multifamily households, those living in overcrowded, temporary or poor conditions and people who are defined as living in poverty by the UK standard after paying their housing costs. This approach feels closer to the reality that many of us would recognise. No one living in London is far away from tales or personal experience of the hardship caused by the capital’s property squeeze, while events such as the Grenfell Tower fire and the death of a child from the effects of mold attest to the inadequacy of much of the existing social housing stock. Those priced out of the private market still need to live somewhere, and inadequate shelter takes a toll on health and is a drag on economic productivity.

Perhaps it’s better not to fixate on a single number. Whatever the true figure, Britain needs to build more.

Matthew Brooker is a Bloomberg Opinion columnist. Views do not represent the stand of this publication. 

Credit: Bloomberg