Brendan Conway explores the impact of Covid-19 on housing and the property market and asks, how might we build back better?
The old maxim says: “only a common task builds community”. The way communities have responded to Covid 19 is both heartwarming and inspiring. The last ten weeks in lockdown demonstrated a very human response to Covid 19, and the community organising in my own South West London community has shown me how true the old adage is. Home by home, street by street people have rapidly built hyperlocal ecosystems matching need and resources in their communities. Intention has been followed by action from the bottom up. Many community groups are at the front line dealing with the overwhelming demands for support, health, care and economic insecurity that have accompanied Covid 19.
At the same time, governments have begun directing funds toward the Covid-19 health challenge, and until we have a functioning vaccine, there will be no “trade-off between saving lives and saving livelihoods”. Which means that Covid-19 is also set to create the worst economic crisis since the Great Depression of the 1930s. Economies face unprecedented shocks on both the supply-side (investment) and the demand side (consumption). Entire business sectors such as retail, entertainment, catering, hospitality, travel and transport have little to no resilience to deal with this.
Large scale redundancies and insolvencies are inevitable post the government furlough scheme. Many firms are particularly vulnerable as they were reliant on cheap debt available following the post 2008 quantitative easing measures. The Office for Budget Responsibility (OBR) released a stark scenario analysis suggesting that the UK could lose up to 35% of its GDP in the second quarter of this year, with unemployment rising by 2 million people to 10% of the working population.
While the economy is shut down, policymakers have deployed temporary financial stimulus to stem the tide — including credit guarantees, liquidity facilities, loan forbearance, expanded unemployment insurance, enhanced benefits, and tax relief — which have been lifelines to households and businesses. But now, policymakers must plan for the recovery.
The post-Covid property market
This global crisis will affect every area of our lives for many years to come. How we meet, work, eat, socialise and live together have already irrevocably changed. So what does this mean for the housing sector and the property market? Getting “back to normal” may be what everybody claims to want, but we must recognise that this will be a new normal and that we now have an opportunity to “build back better”.
We should also admit that the “normal” property market, was extremely problematic and increasingly exacerbating inequalities. In London, a whole generation has been priced of both the rental and home ownership markets. Josh Ryan Collins from UCL calls this the “housing-finance feedback cycle” where financial deregulation and innovation increases the expectation of future house price increases, creating greater opportunities for rent extraction via capital gains in land values. This financialised housing system has rendered home ownership out of reach to ordinary people who have also weathered a decade of stagnant real wages and weakening welfare provision.
Now, with a government keen to spend money to get the economy moving again, investment will become available for “shovel ready” residential development projects. Can the Community led housing sector respond?
Well, I would caution that the answer is “not if we go back to the ‘old normal’.” Before the crisis, at Community Led Housing London we could see very little investor appetite for our nascent sector and it remains severely under-capitalised. The rhetoric that investors and funders use about social value and environmental, social, and governance (ESG) remains just that. To turn rhetoric into reality for community led housing will need both the cultivation of demand (making social value tangible to property and development market investors) and rapid capacity building of the supply side, which has to date been characterised by longstanding challenges of deliverability and affordability.
Without a recognition and a commitment to change away from the old normal, where the demand side relied on an economic model of value extraction, we cannot hope to cultivate investments that focuses on value creation. So it is vital we don’t waste this crisis. As Mike Sales says: “crises don’t break systems, but reveal what was already broken.” We must use this as an opportunity to look at what we had before, what has changed as a result of the crisis, and which directions we want to take in the future. Let’s start with a quick appraisal of where we are now. Nine weeks into lockdown, what is happening in the London property market?
Private Residential Market
The measures imposed by the government to halt the spread of the virus have put the brakes on the housing market. Current government advice states that house viewings should be avoided, but this messaging remains ambiguous and estate agencies have tentatively reopened in an attempt to reboot. Recent guidelines say “home buyers and renters should, as far as possible, delay moving to a new home”.
Once restrictions are lifted, the market may respond to a pent-up demand for those who need to transact. But the outlook is that values will remain at best flat supported by a shortage of supply and low interest rates. Prime London house prices have already suffered a 25% drop since 2014, with the political uncertainty surrounding Brexit hurting values. Agents had seen a return to house price growth early this year after the Conservative party’s decisive election victory in December helped lift the uncertainty that was weighing on demand. Outside prime central London, values have remained flat for the last 12 months as low supply held prices steady.
Savills suggest that the pandemic will have a more limited and shorter-lived impact on house prices than either the early-1990s recession or the Global Financial Crisis. Short-term price falls could be in the order of -5% to -10%, but on very low levels of transactions. This remains to be seen, as buyers and sellers reassess how and where they want to live, modern development trends like “coliving” may flounder — micro apartments that are below minimum space standards may not seem as attractive as they once did. With greater flexible working to be more common, the lure of the countryside is growing. Searches on Rightmove by Londoners for homes outside the capital were up to 51% year on year since the lockdown.
With new build apartments we may see a return to the post 2008 crash response where developers offer discounted pre sale package deals as developments near completion. Internal layouts of these units may need some modifications to reflect the practicalities of how we actual use our homes now.
Retail, leisure, and offices
The death of the high street has been a long-standing refrain from most property commentators over the last few years. 2019 figures shine a light on a terrible year for the high street during which thousands of stores have closed. Footfall on the high street is down 63% and Covid 19 could be the final nail in the coffin for many retailers that can hardly compete with online shopping alone. Reimagining the high street as a vibrant centre of the community life, based on weaving residential use into retail is a part of the post Covid conversation. Citizenship and community are intimately related. So perhaps active citizenship will be part of the next era for retail. Perhaps the move from consumer to citizen that Jon Alexander advocates is really happening.
As a former publican I can say from experience that pubs and restaurants were already experiencing longstanding challenges prior to Covid 19. There has been an average net loss of 81 pubs per annum since 2001. I have heard anecdotal evidence from former colleagues and industry sources saying that one third of pubs and restaurants fear they will need to close post lockdown. Hospitality owners are a resilient bunch, but the fight has gone out of many of them.
Twitter’s “era-defining” announcement that employees can now permanently work from home is noteworthy. Greater levels of working from home will undoubtedly result in a seismic shift in office occupancy rates and potential office schemes. Companies have already started moving offices to suburban and outer London to accommodate periodic face to face meetings.
This could lead to a rapid surge of interest in change of use, which needs careful monitoring and management. All sorts of landowners may be looking to make quick sales, and there may be opportunities for short-life housing co-ops who specialise in meanwhile or time-limited use of property to house those in need.
Social Housing
The property industry has played fast and loose with the term “affordable” for many years. “Old normal” housing policy has allowed property developers to make enormous profits and minimize their responsibility to build social and affordable housing.
While the high cost of tackling housing issues is often cited as a reason for the lack of progress, the reality is that significant public funds flow to landlords, new homeowners and investors. This occurs in the form of low tariffs on home purchasing (compared with other countries); housing benefit that flows to private landlords (£23.4 billion in 2018); and the “help to buy” programme, in which over £12 billion between 2013–2018 helped mostly wealthier homeowners to buy over 200,000 homes.
The government gives very little to local authorities to build social housing. Although they can now borrow to build, central government’s sudden rise in the interest rate it charges to councils through the Public Works Loan Board was unexpectedly raised.
Government does see that we have a housing shortage and over the next four years, it will give around £10 billion in grants to housing associations. Funds to housing associations are welcome but they have lately become more commercial and have increased their proportion of new developments on sale at full market value. This is a long way from offering substantial high quality, affordable and secure social housing at a time of crisis, and leaves many Housing Associations dependent on cross subsidy, exposed if market values fall. Housing Associations are calling for further funding to convert their exposed market value units into affordable housing.
Development
Any development land valuation is fundamentally an assessment of what will happen in the future. The current expectation is that the changes may not be just cyclical but structural. It is not just a different volume of activity in the same pattern of economic life, but potentially a completely different pattern of activity based on changes as yet unknown, in the way we behave socially and economically. In this context, the uncertainty associated with the various assumptions that are required to undertake development land valuations have now been amplified multiple times.
While the major listed housebuilders and larger housing associations have mostly paused new land spend and are focusing on cash preservation. Privately funded housebuilders are still active and searching for good deals in the land market.
Many housing associations had scaled back their land spending due to uncertainty over rent policy, exposure to sales risk and the need to direct funds towards improving existing stock to meet new safety standards.
Clearly the suspension of development will have an effect on housing delivery and new homes sales this year, and it remains to be seen how much social distancing measures will impact build periods.
Housebuilders will come under pressure to restore their sales rates when restrictions are fully lifted as they need to maintain cash flow because of their funding commitments. It is likely we will see a surge in the use of buyer incentives as activity returns.
Build Costs
Construction sites have been allowed to remain open during lockdown but many major house builders decided to shut down sites as a precaution. Several have now decided to reopen their sites following encouragement from the housing secretary, who said construction “can and should continue”.
A composite measure of building costs increased by 8% in the 6 months prior to the lockdown according the Federation of Master Builders. Post Covid lockdown this trend looks likely to continue. Both labour and materials costs will be pushed higher. Pre-fabricated components may see supply chain issues. The prolonged weakness in sterling due to Brexit against the euro and the dollar has propelled the cost of imported materials and components.
There is a chronic shortage of skilled labour. The skills crisis means that key trades are extremely difficult to recruit with the effect of rising wages in construction. Add the complication of social distancing on sites will inevitably have a cost implication for project deadlines. However stagnant values and development sector may mean construction costs do not rise as much as expected
Building back better — What would a mission oriented response look like?
So the housing market is in crisis, and not one that can be fixed quickly using the same tools that were already defunct. To reimagine housing, asks us to think very differently. Seeing housing as commodity is a foundational tenet of the property market — this will be a paradigm that is hard to shift. “Decommodifying housing” will be no simple task and will demand a mission led response from policy makers and practitioners.
As Mariana Mazzucato at UCL’s Institute for Innovation and Public Purpose has advocated: mission-oriented approach requires rethinking the policy tool kit which is often wed to just fixing market failures and ‘levelling the playing field’. Rather than just ‘fixing’ what is required in a mission-oriented approach is a more active co-creation of markets framework, and rather than levelling what is required is actively tilting the playing field in dynamic ways that reward and assist those organisations willing to engage in new forms of collaborations to tackle difficult missions. Not picking winners but picking the willing. Not just de-risking but sharing risks and rewards.
Early-stage public investment such as the Community Housing Fund helps to create and shape new markets and nurture new landscapes which the private sector can develop further. In other words, it can — if structured well — lead to a dynamic ‘crowding in’ effect to address housing challenges.
Missions require innovation through cross-sectoral and cross-actor investments and bottom up experimentation. Our mission to build a community led housing sector must be bold and inspirational, addressing societal priorities that are set through political leadership but determined more horizontally through multiple stakeholder engagement. They must inspire and reward investments across different types of actors (public, private, and third sector). They must also nurture different forms of bottom up experimentation that lead to different types of solutions.
What can community led housing do post covid?
Many community-led housing groups are actively involved in supporting their communities in the time of need. This vital work reinforces what our connected communities can do. I have noticed a huge surge in people playing a meaningful role in their communities for the first time. Local self-organised groups such as Earlsfield Together have sprung up across London, thickening local networks. Conversations about a future based on community wealth are commonplace as people work alongside each other.
Community led housing groups are ideally placed to curate these conversations. People support what they create. Community led housing groups already have organised around a different crisis — the longstanding affordable housing one.
If additional funding is provided to get housing development moving this could be provided in a way that builds back better. For example funding for estate regen in London gave existing residents a say over redevelopment. Involving existing and future residents in meaningful development decisions could be a condition of funding for large developers or housing associations. Requiring them to offer the opportunity for residents to take on management of new homes.
CLH London is currently working with boroughs across London to help bring small sites forward for community led housing. Creating more of these opportunities for communities to help themselves out of a post covid housing crisis will.
There is an opportunity for the public sector to take advantage of lower land values, purchasing land which is sitting idle, with some sites held specifically for community led housing organisations.
Community led housing can go a long way to building back better, by protecting benefits in perpetuity and de-commodifying housing.