House building after the great depression revived the economy, tackled overcrowding and kept property prices stable for years
Eighty years ago, when Franklin D Roosevelt was waiting to move into the White House and the New Deal was still in the future, Britain was already recovering from the Great Depression. As the first country to come off the gold standard the UK had the advantage of being the first country to devalue, and that – together with the protective wall around the British empire – helped manufacturers to export.
Departure from the gold standard in September 1931 also let the national government run a cheap money policy. The bank rate was cut to 2%, which is where it remained for almost 20 years. The result was the building boom that gave us the 1930s semi.
The contrast with the tepid recovery from the deep recession of 2008-09 is marked. An entire US presidential term has come and gone for Barack Obama without Britain showing signs of meaningful recovery. Two years ago a cold snap in December was blamed for the contraction of the economy in the final three months of 2010, but the fall in national output proved more than a blip. Despite a depreciation of sterling comparable with that which followed departure from the gold standard, manufacturing output has not picked up. The bank rate has been 0.5% for the past four years yet house building last year was at its lowest since the 1920s.
This week’s GDP figures for the fourth quarter of 2012 are likely to show a continuation of the flatlining pattern of the past two years. Having set out with the honourable intention of rebalancing the UK’s lopsided economy away from consumer and public spending towards investment and exports, ministers are no longer bothered where the growth comes from provided there is some.
The Bank of England and the Treasury are excited about the signs from the funding for lending scheme, which provides cheap funds for banks only if they are prepared to lend more at lower rates to their customers. Mortgage lending is on the rise, albeit from low levels.
It’s hard not to think that the approach of the 1930s was a lot more sensible. Building houses, both before and after the second world war, helped not just tackle overcrowding and squalor but also ensured house prices stayed relatively stable until the early 1970s. Government policy today has the avowed intent of pushing up asset prices, which is good news for the haves but not so for the have nots.
It may take many years for this approach to work. Mortgages are still out of reach for first-time buyers unless they can find deposits of 15-20%. That takes some doing when the average cost of a home in the UK is £160,000-plus, and a lot more than that in London and the south-east. The squeeze on real incomes combined with job insecurity explains why housing transactions are half what they were before the 2007 crash.
Vince Cable, the business secretary, has been pressing cabinet colleagues to adopt the 1930s approach. He thinks house building is the way to get real demand into the economy quickly, and has championed the idea of government guarantees for housing associations. He said in a speech last year that there was a virtuous circle in the 1930s in which higher mortgage demand led to an increase in house building, which in turn led to lower prices and greater affordability, leading to still higher demand. “Houses built by the private sector rocketed from around 130,000 in 1931 to almost 300,000 in 1934 and it is estimated that house building contributed almost a third of all employment increases in this period.”
A report out on Monday from the Centre for Cities, a non-partisan research unit, picks up on Cable’s idea. It lists the 10 towns and cities – Oxford, London, Cambridge, Brighton, Bournemouth, Aldershot, Crawley, Reading, Bristol and Worthing – where funds aimed at kick-starting development could unlock economic growth immediately.
The aim, the report says, is to get construction moving on schemes that have planning permission but where development has stalled. Rather than a blanket approach to house building, it says the focus should be on parts of the country where economic growth is strong, demand for housing is high and affordability a significant factor. Property is expensive in all the cities named, with few vacant homes and a significant number of stalled sites.
By contrast, in other cities homes are much more affordable and there the vacancy rates are much higher. There are stalled developments in Burnley, Bradford, Blackpool, Hull, Dundee, Leeds, Liverpool, Bolton, Blackburn, Birkenhead and Hastings, but the Centre for Cities report suggests a better approach here would be to renovate than to build anew.
“For some cities, lack of housing prevents people accessing jobs or means they are stuck in cramped accommodation,” said Alexandra Jones, the centre’s chief executive. “In other cities, incentives to retrofit empty houses could improve quality of life. Both approaches, adapted to local needs, would generate the jobs and growth the UK needs.”
Though the government has introduced policies to get house building moving, the report says the response has been too small, provided perverse incentives for local authorities to build when they should concentrate on retrofitting, and has failed to concentrate on areas where affordability issues are most pressing.
There are deep, structural issues that make a comprehensive solution to Britain’s housing problems hard to achieve. One is the concentration of power in the banking sector and the concomitant loss of local building societies. A second is the concentration of power in the construction sector. In both cases, more competition would be helpful.
Then, of course, there is the tension between central and local government: should Whitehall set targets for house building (as the previous Labour government did) or should it allow local authorities to make their own decisions (albeit with a few sticks and carrots chucked in)?
In the short run, though, this is a question of money. If the government wants more houses renovated it could do so by abolishing VAT on home improvements. If it wants more houses built, it is going to have to scale up substantially programmes such as Get Britain Building, which has a target of just 16,000 new homes.
The budget will almost certainly mean more cash provided for guarantees but what would really make a difference would be a slug of capital spending channelled to local authorities to boost the nation’s housing stock. It could be ringfenced and time-limited.
Doing this, though, requires the government to accept that its economic and budget strategy is failing. It also means taking a big political risk as increasing the supply of homes means property prices will fall. That’s good news for young people and the less well-off trying to get on the housing ladder, but will be resisted by those already sitting pretty.