Last month, the current Housing Minister promised to halt the ‘financialisation of housing’ and end a perceived reliance on speculative development. Labour wants to take on “dysfunctional” housing and land markets and put an end to “speculative” investors.
Where to begin. Heavy sigh. I am going to break this down into two parts and try to counter the simple rhetoric with simple explanations of how the housing system is funded.
- The financialisation of housing
The LSE produced a lengthy report on the financialisation of housing in 2023. On page 85, it acknowledged there was no specific definition for the term other than it involved money passing through the housing system. It acknowledged organised money investing into the housing system has been around at least since the 19th century but perhaps the distinction now is the weight of capital that is involved.
Despite there not being a robust definition, within certain political circles, financialisation and its evil sister profit have become the ‘other’. In politics throughout the ages, the left and the right always alight on the ‘other’ when seeking to find fault to garner votes and support.
Let’s break it all down into simple terms. New homes require capital, a posh word for cash. This capital is necessary to buy land and build.
Capital comes from a range of sources. Savings, investments and tax.
Let’s start with tax. The UK Government is running a significant monthly deficit. Its spending priorities are ranged across many needs. Housing is lower down the list.
Therefore, if the UK Government wants to build new homes, it must ask others to put their savings and investments at risk to help. These savings and investments are derived from surpluses which people have accumulated and have paid tax on over the years.
For example, when someone does a job, they get a paycheck. With regards to employment, your risk and your opportunity cost is your time and your health i.e. you are spending time doing something which might be unproductive or deleterious to your health. People seek to make a margin on what they earn, if they can. This is a surplus, in effect a profit.
People then have choices. That surplus can simply stay in the bank account, or under the sofa. Or people can choose to invest that either through an organised form of capital – a fund, a pension or directly, into housing. That is capital at work i.e accumulated profits working.
As this wonderful and sometimes opaque cycle continues, people and entities are taxed and regulated. This is to the benefit of society. A material distinction to perhaps the 19th century.
If you invest there are lots of choices. One is into development. The UK Government – but perhaps not the current Housing Minister, really needs you to do this because of what I wrote earlier around the deficit.
That capital is at high risk. Lots can go wrong. The housing doesn’t get built properly, the sales market doesn’t go as well or you don’t get planning. I can go on. The bigger the project, the bigger the margin as when things go wrong a lot is at stake and you need a bigger buffer – otherwise you might as well just leave the cash under the sofa.
We live in a highly regulated economy with multiple ways of taxing. The ‘other’ doesn’t exist in the real world. Financialisation is just the way housing, car manufacturing, wind turbine building and any other form of material infrastructure development works.
We can reduce the level of financialisation by making it cheaper to build homes. Ways to do this are to reduce taxes and do away with unnecessary regulations. That reduces the amount of capital required and therefore the level of real financialisation of the system.
2. Speculative development
Development is by its nature speculation. Its difficult to see how the current Housing Minister is going to be able to stop this other then a complete cessation of housing development unless it is 100% state backed.
Why is development speculative? Put simply, it takes from two to five years to build a home. So anyone putting their capital into such a project is taking a view on what the future may hold.
The last two or three Governments have inadvertently created a more speculative development model. Why?
Firstly, it ended Help to Buy. This has made it harder for people to afford to purchase a new home. Therefore, developers do not know whether they can find buyers who can afford the homes they build.
Secondly, tax breaks supporting buy to let investors and foreign investors have been largely removed. This means there is no longer a market like there was ten years for investors. Again, more speculative as you cannot be certain who is there to buy a new home.
Thirdly, there has been a reduction in registered providers willing to procure the affordable housing element of a new scheme. The affordable element of a scheme without any grant, makes a thumping loss so its double trouble if it makes a loss and no one wants to look after the homes.
In fact, the only thing that is not speculative about development is you will crystalise a loss on the affordable element. This maybe recovered in future years by the private element – the speculative part which MAY happen in the future.
Finally, the other element that has made the system more speculative rather than less is the constant stream of interventions. New levies (not taxes, we don’t use that term) and regulations have been dropping out a plenty.
A system that’s always a changing means there are no longer sustainable operating rules. That in itself is a big bet for those seeking to develop over a five year horizon. If the rules change, you are betting those rules don’t hurt you too much.
To go back to the start of this section, the only effective way to stop speculative development, is to stop private development as it will always be speculative. The one example where this has happened is London planning system. This has now largely and inadvertently halted development across a major global city. The result is no new homes are being built. Is that really the intended outcome. Let’s hope the current Housing Minister takes note.
