The Bank of England’s programmes of Quantitative Easing (QE) and Funding for Lending (FLS) are failing to stimulate GDP and rebalance the economy. Both policies falsely assume that the UK’s risk-averse capital markets, corporate sector and constrained banking system can be nudged into supporting the productive economy.
We propose a new approach: one that channels investment directly into new housing, infrastructure and SME lending, boosting productivity and exports. QE must become less scattergun and more strategic, with reformed governance structures to match.
Even if bank lending does increase, we cannot be sure that it will lead to output, investment and employment rather than a new house price, commodities or stock market boom.
An estimated £550bn of investment in new low-carbon infrastructure is required over the next 10 years in the UK, and housing construction remains at its lowest level in the post-war period.
We therefore propose that the Asset Purchase Facility buys bonds issued by agencies with a specific remit for productive investment within the UK, such as in housing-building and retrofit, infrastructure and small and medium enterprises (SMEs).
And from the paper:
We examine a range of options which either exist already, or could be utilised with relatively little institutional and regulatory change:
1. National development banks, building on the British Business Bank (BBB) and the Green Investment Bank (GIB).
2. Housing construction, via a new intermediary to fund construction of new homes for social and affordable rent.
3. Housing retrofit, via the Green Deal Finance Company.
But even if private sector house building was to recover, the great need in the UK is for more affordable housing, rather than housing per se. Historically, local authorities created social and affordable housing and more recently housing associations have been contributing but the volume remains small. The UK has spent almost £2 billion housing homeless families in short-term temporary accommodation, according to a recent study.
Both the CBI and trade unions have called on the Government to boost capital spending on housing and construction. In an independent inquiry into affordable housing published last summer by a group of housing agencies, NGOs and trade unions, a call for £5–10 billion QE investment in housing was made and it was estimated this would deliver around 60 000 new homes and enable developments that are currently stalled to proceed. In the same report, The National Housing Federation argues that investment to deliver just 10 000 homes would deliver 75,000 jobs and make a contribution of £4 billion to the wider economy. It would also save £290 million from the social security bill by reducing housing benefit and Jobseeker’s Allowance claims.
Addressing structural problems with the UK housing market:
There are numerous issues with the UK housing market, including, as we have seen, a volatile and bubble-prone mortgage lending market, supply constraints due to bureaucratic planning rules, tax arrangements and subsidies that favour private home ownership over other forms of tenure, the house-building sector itself being concentrated in the hands of a handful of large construction companies that are prone to ‘land-banking’ (waiting to build until prices rise) and, relatedly, the windfall benefits of infrastructure development being concentrated in the hands of these developers and private homeowners.
As a result, houses in the UK are increasingly bought as assets or investments rather than places to live. This is in stark contrast to many other countries, where different institutional and tax arrangements and constraints on lending have led to better balanced tenure distributions, a more diverse and competitive home-building sector building better quality homes, and stable home prices, with profits from land appreciation being evenly spread across communities.
Local authorities could do what is standard practice in other European countries, and use their rights to purchase (even compulsorily) agricultural land at agricultural market prices, before changing the land-use permission. Alternatively, innovations in mutual or co-operative land ownership enable the benefits of rising land values to be retained in common, while buildings are privately owned.