Housing, Policy and Growth

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Chris Walker, Senior Economist, DCLG, presents to SWO Housing, Planning and the Economy event held at UWE, Bristol on Tuesday 26 February 2013.

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HOUSING, POLICY AND GROWTH Presentation for the South West Observatory event: Housing, Planning and the Economy 22nd February 2013:

1 HOUSING, POLICY AND GROWTH Presentation for the South West Observatory event: Housing, Planning and the Economy 22 nd February 2013 Chris Walker

The purpose of this presentation is to set out::

2 The purpose of this presentation is to set out: An overview of the current macroeconomic situation Housing’s contribution to the economy The role of housing in supporting economic recovery Housing’s contribution to longer term economic growth

PowerPoint Presentation:

3 1) Macroeconomic overview

GDP fell sharply during the recession – by around 6% - and is yet to return to pre-recession levels:

4 GDP fell sharply during the recession – by around 6% - and is yet to return to pre-recession levels London in particular, but also the South East and the South West, appear to have experienced a slightly shallower recession than the rest of the country Data Source: ONS

The economy continues to recover, but more slowly than expected :

5 The economy continues to recover, but more slowly than expected The slower than expected recovery is a product of: A greater than expected impact of the financial crash on GDP Commodity price inflation that has reduced real incomes Global/euro area uncertainties Note: 4th Quarter preliminary GDP estimates will be published on 25 January. Data Source: ONS

The latest forecasts from the Office for Budget Responsibility suggest growth will remain below trend until 2016:

6 The latest forecasts from the Office for Budget Responsibility suggest growth will remain below trend until 2016 Recovery from credit booms and busts can take longer than other types of recession, because of the time it takes to de-leverage debt Data Source: OBR

However, both the OBR and Treasury note, there continue to be significant uncertainties and risks surrounding these forecasts:

7 However, both the OBR and Treasury note, there continue to be significant uncertainties and risks surrounding these forecasts There are significant global uncertainties, including: Euro area – economic momentum remains weak and tensions from the crisis are still evident United States – although the “fiscal cliff” was avoided, the deadline for agreement on spending cuts has been delayed until 1 March, and agreement on raising the “debt ceiling” is still required Growth in developing countries - has slowed. Although, the latest indicators suggest growth, notably in China, may be starting to pick up once more These factors are impacting on business confidence and investment in the UK, and on UK exports.

In contrast to output it is worth noting that employment levels in the UK economy have been more buoyant and now well exceed pre-crash levels:

8 In contrast to output it is worth noting that employment levels in the UK economy have been more buoyant and now well exceed pre-crash levels Since early 2010 the public sector has lost 600,000 jobs. However, the private sector has created 1.2 million new full and part-time jobs – 500,000 more than predicted. Youth unemployment has also been falling recently, down 72,000 in the latest quarter Data Source: ONS

Employment levels are above their recession levels in London. However, the South East and South West are yet to see unemployment return to pre-crash levels:

9 Employment levels are above their recession levels in London. However, the South East and South West are yet to see unemployment return to pre-crash levels The East of England has seen the highest increase in employment levels since the recession, an increase of over 3 per cent. The North East and North West have also seen increases in employment, of 1.9% and 0.8% respectively Data Source: ONS

The Government has put in place a number measures to support economic growth:

10 The Government has put in place a number measures to support economic growth In the short term , it has sought to: Ease credit and funding constraints Providing £375 billion through quantitative easing, by the Bank of England Setting up the Funding for Lending Scheme, to reduce the cost of credit Creating a business bank to help small firms in particular access finance and support Investing £600 million alongside £650 million from the private sector in four new funds that will lend to mid-sized companies Promote infrastructure investment Providing up to £40 billion in government guarantees to ensure that priority projects in the infrastructure pipeline can raise the finance they need Switching resources from resource to capital programmes: £5.5 billion in the Autumn Statement Boost exports Increasing export finance for small firms: £1.5 billion in the Autumn Statement Increasing the resources available to UKTI to support more small and medium size exporters

The Government has put in place a number of measures to support economic growth:

11 The Government has put in place a number of measures to support economic growth For the longer term it has sought to: Maintain and increase investment in science and innovation Protecting programmes in the 2010 spending review Providing £600 million of extra resources in the Autumn Statement for Research Council infrastructure, and facilities for applied research and development (R&D) Creating a new generation of ‘catapult’ technology and innovation centres Creating a Patent Box, with greater tax relief for creative sectors Encouraging the development of a “Tech City” in London – home to 200 high-tech companies Invest in skills and education Providing £1 billion pounds in the Autumn Statement to expand good schools and build 100 new free schools and academies, and a further £270 million to improve further eduction colleges • Taking the number of apprenticeship starts to almost 1 million Back major infrastructure projects E.g. HS2, the Northern Line extension, road and rail projects across England Put in place a more competitive tax system Reducing corporation tax from 28% to 24%, with legislation to reach 21% in 2014 Reducing the top rate of income tax from 50% to 45% Reduce unnecessary and inefficient regulation Moving to a one-in-two-out rule for new regulation: building on reduced burdens on business of £850 million per annum so far

PowerPoint Presentation:

12 2) Housing’s contribution to the economy

Construction output contributes around 8% of GDP. Housing – including, building and maintenance and repairs – accounts for around 3 per cent of GDP :

13 Construction output contributes around 8% of GDP. Housing – including, building and maintenance and repairs – accounts for around 3 per cent of GDP Data Source: ONS

House building has fallen since the recession. Although, there has been some increase in net additions over the last year:

14 House building has fallen since the recession. Although, there has been some increase in net additions over the last year The fall in construction output contributed one fifth of the overall 6.1% contraction in GDP following the financial crash Data Source: ONS and DCLG

Indeed, if construction, North Sea oil and gas and financial services are excluded, the economy has broadly returned to pre-crash levels of output:

15 Indeed, if construction, North Sea oil and gas and financial services are excluded, the economy has broadly returned to pre-crash levels of output Of the current approximately 3% gap between current GDP levels and peak GDP levels construction makes up around 43% of the gap, and within this housing makes up 18%. Financial services and extraction of oil and gas make up 34% and 26% of the gap respectively.* *Note: the numbers sum to over 100% because output excluding these sectors is now slightly above the peak level Data Source: ONS

PowerPoint Presentation:

16 3) The role of housing in supporting economic recovery

Housing can play a key role supporting recovery :

17 Housing can play a key role supporting recovery The sector has spare capacity – meaning it can grow without creating inflation It has strong job multipliers, as building and repairs and maintenance are labour intensive Job growth helps to underpin aggregate demand for goods and services within the economy Housing construction does not rely heavily on imports, which drag on growth It is estimated that there is a supply chain multiplier in construction of 1.78, i.e. 1 construction job supports 0.78 jobs elsewhere in the supply chain. For every £1 million of new housing output, 19.9 workers are needed for a year. For every £1 million of housing repairs and maintenance 30.8 jobs are supported. Source: Scottish Government, and Construction Skills and DCLG analysis

The short term prospects for UK growth are highly dependent on creating the right conditions for greater investment, including in housing :

18 The short term prospects for UK growth are highly dependent on creating the right conditions for greater investment, including in housing Summary of the OBR’s central forecast Source: HMT

A number of factors have been holding back greater housing investment:

19 A number of factors have been holding back greater housing investment Demand-side barriers Lending – banks are less willing to lend as the perceived risk of house prices falling is higher To reduce banks exposure to this risk, higher deposits have been demanded The cost of borrowing for banks has increased due to uncertainty in the economy, and higher risk aversion in the financial sector Supply-side barriers The fall in house prices has reduced the financial viability of building, leading to stalled sites Reduced access to investment finance, particularly for smaller suppliers

The Government has put in place a range of policies to support the housing market in the short term:

20 The Government has put in place a range of policies to support the housing market in the short term Demand-side The NewBuy scheme, enabling households to access 95% mortgages for new build homes FirstBuy, supporting first time buyers by providing an equity loan to reduce the size of the deposit and size of mortgage required Creating a debt guarantee scheme for up to £10 billion to support affordable housing and private rental homes Supply-side Introducing the Get Britain Building fund to unlock building on sites with planning permission Supporting the release of public sector land and reducing planning delays to accelerate major housing projects Affordable homes programme with new affordable rents Increasing the maximum discount available for Right to Buy – for the first time, all the additional sale receipts will be recycled back into new affordable rented homes

The Department monitors the impacts of all initiatives and broader measures impacting on the housing market:

21 The Department monitors the impacts of all initiatives and broader measures impacting on the housing market Demand-side Funding for lending (mortgages): “ The availability of secured credit to households was reported to have increased significantly in the three months to mid-December 2012, driven in part by the Funding for Lending Scheme. A further significant increase was expected over the next three months” BoE Credit Conditions Survey NewBuy Guarantee = could help up to 25,000 additional sales over 3 years, 2,000 reservations so far FirstBuy = up to 27,000 first time buyers by 2014, 10,000 reservations so far Supply-side Get Britain Building = unlocking up to 16,000 new homes, nearly 9,000 already under contract Public Sector land = land for 100,000 homes; land sold for 33,000 affordable homes with new affordable rents Affordable homes programme: target = 170,000 homes by 2015, approx 70,000 so far Right to buy one-for-one replacement, estimated = 20,000 homes funded by 2015, 200,000 Right to Buy enquiries Large sites = to support 50,000 new homes Source: DCLG estimates

PowerPoint Presentation:

22 4) Housing’s contribution to longer term economic performance

The current rate of housebuilding is not keeping pace with the number of new households, which is primarily driven by population growth :

23 The current rate of housebuilding is not keeping pace with the number of new households, which is primarily driven by population growth Over 70% of the projected increase in the number of new households is from population increases. Alongside this an ageing population will lead to a greater number of single person households. These are not forecasts, but projections based on socio-demographic trends Data Source: DCLG

Housing plays a key role in supporting long run economic growth through interactions with the labour market:

24 Housing plays a key role in supporting long run economic growth through interactions with the labour market An adequate supply of housing in the right places is needed to: Ensure housing is affordable and that workers can be retained in and attracted to areas where the jobs are. Unaffordable housing risks raising labour costs and undermining business competitiveness and productivity Support geographical labour mobility, lower levels of unemployment and increase output Support the realisation of agglomeration economies – the increases in productivity associated with geographical clustering of populations and economic activities

There is not a strong correlation between the affordability of housing – measured by house prices divided by incomes – and the supply of housing in an area :

25 There is not a strong correlation between the affordability of housing – measured by house prices divided by incomes – and the supply of housing in an area Not only are we not building enough houses, there is some evidence that we are not building houses in the right places, reflected in a poor correlation between demand (measured by affordability) and new building supply. Completions per 1,000 population Source: DCLG internal analysis

The Government has put in place a range of local growth measures to support the housing market and broader economic development over the longer term:

26 Enablers Introducing a simplified National Planning Policy Framework that creates a presumption in favour of sustainable development Supporting LEPs via the Growing Places Fund which provides up-front funding to get local development under way Capital infrastructure fund for large sites Establishing a £2.6bn Regional Growth Fund leveraging in over £13bn of private investment Creating 24 Enterprise Zones across the country to support both new and expanding businesses New Partnerships Working with local areas to create 39 Local Enterprise Partnerships (LEPs), aligned with functional economic areas, to play a key role in driving economic growth Agreeing 8 City Deals and a second wave Incentives Delivering a New Homes Bonus that rewards local councils when they provide more housing for their local population Community Infrastructure Levy –15% or 25% to go to local communities (depending upon whether they have a neighbourhood plan) Giving local authorities a direct stake in local economic growth by allowing them to keep 50% of the local business rates revenue New freedoms e.g. Tax Increment Financing The Government has put in place a range of local growth measures to support the housing market and broader economic development over the longer term

The Heseltine Review could lead to further measures, including::

27 The Heseltine Review could lead to further measures, including: Central government budgets supporting growth being put into a single funding pot for local areas LEPs developing a long term strategy and business plan to bid for these funds from central government Government is considering the report and Lord Heseltine’s recommendations and will respond in the Spring. However, the Autumn Statement announced that the Government will devolve an increased proportion of growth related spending on the basis of strategic plans developed by LEPs, in line with Lord Heseltine’s recommendations.

Summary and key messages:

28 Summary and key messages The UK economy has come out of recession more slowly than expected – the result of a range of international and other factors, including problems in the Euro zone. OBR forecasts suggest the UK will progressively return to trend growth rates by 2016. Construction and housing, North Sea oil and gas and financial services have contributed significantly to the recession and sluggish recovery. Construction/housing investment has a key role to play in supporting economic recovery in both the short term and the long term but there are both demand side and supply side risks. The Government has taken a range of measures to promote growth both in the housing market and generally – including putting in place a new regime for enabling local economic growth. The evidence suggests recovery from credit booms and busts takes longer than other types of recession because of the time it takes to de-leverage debt but the framework for future growth is in place.

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