When the coalition government first came to power, it held forth about devolving planning decisions to local communities. The property industry fretted that nimbyism would block all housebuilding. But in his 2011 Budget George Osborne unexpectedly recast the planning system as a "chronic obstacle to economic growth". Hardly a word has been said about localism since. Instead, the chancellor has repeatedly stressed the need to "get Britain building" - the name of yet another initiative.
But as the clamour for development has got louder, the figures have got worse. Housing starts in the second quarter were at their lowest for three years. Indeed, the weak construction industry has been largely responsible for this year's terrible GDP statistics: it shrunk by 4.9 per cent in the first quarter, dragging an otherwise positive performance into the red, and then by 3.9 per cent in the second quarter. Nor is the situation getting better - the latest purchasing-manager surveys suggest the slump continues. The government is desperate to get Britain building because the sector is almost single-handedly undermining its credibility for economic management.
Most of the proposals announced to date - the FirstBuy and NewBuy schemes and the updated Right to Buy for council tenants - have involved the government using its balance sheet to underwrite demand from home-buyers. These have been fairly limited in scope and impact because of constraints on the public purse and weak consumer confidence.
The Montague report is different - and of greater interest to private investors - for two reasons. First, it concerns the expansion of the private rented sector rather than owner-occupation. Some small private landlords, who currently own the vast majority of rented homes, naturally feel threatened by the prospect of insurance companies offering rival services. Second, the idea is to encourage institutional capital into the sector rather than relying directly on public money. It could therefore pave the way for a long-term transformation of the residential sector, rather than simply a short-term fiscal boost to housing starts.
Sir Adrian Montague
The last time I reported on this subject (Why there’s no housing in the City, 7 Mar 2012) I questioned whether the long-awaited transformation would ever happen. After all, the industry has talked about it for years and not one mainstream money manager has yet to invest in a residential portfolio, despite various opportunities. The cash yields on offer from housing are not high enough to appeal to investors that have ongoing liabilities to fund.
However, the Montague Review addresses this problem head on. Sir Adrian has identified a number of ways in which the cost of building private-rented blocks could be suppressed, improving the yields. The one seized upon by the mainstream media was the recommendation that social housing requirements for developers be waived for private rented schemes. But the key point was that planning tools could be used to lock land into the private rented sector for at least 10 years. The land would then be priced more cheaply, in line with investors' yield requirements. Central government land could be used to set an example, with the first developments backed by government debt if necessary (from the Get Britain Building fund, for example).
Sir Adrian did not go so far as to create a new planning class for private rented homes - the most powerful tool in the box. But these proposals do address the core economics that have been keeping institutional investors away. If the government embraces them, as it has every incentive to, build-to-let could well take off.
That would have clear social benefits by boosting the economy and housing supply. But would landlords suffer? Modelling by the Centre for Economics and Business Research suggests rents would fall by 11 per cent by 2015 if housebuilding rose to the 300,000 level that sustained Britain's economy during the Great Depression.
Yet the National Landlords' Association is relaxed. Head of policy Chris Norris points out that the sector's ills - such as 'sheds with beds' - can be attributed to tight supply. Increasing supply might therefore expose shoddy landlords without the need for the kind of heavy-handed regulation currently being introduced in the London borough of Newham, which also punishes good landlords. "We have to take a more philosophical approach," he says.
The wider investor community also has reason to welcome build-to-let - it could pave the way for the flotation of residential real-estate investment trusts (Reits). Commercial landlord London & Stamford is in the process of floating its private-rented portfolio, and social-housing Reits are also likely to emerge from a current Treasury consultation. But build-to-let would lay the foundations of a more mainstream residential sector listed on the stock exchange. Then investors would finally have an easy way to buy and sell the volatile housing sector without the costly business of buying and selling houses.
*UPDATE: The specific measures have since been announced. They were fronted by a relaxation of planning requirements for home extensions and a £280m expansion of the FirstBuy scheme - policies designed to appeal to middle England. But these are trivial compared with the £10bn of debt guarantees for developers, which will apply specifically to the construction of private-rented and affordable homes. Promisingly, Local Government minister Eric Pickles also announced that £200m would be invested in "housing sites to ensure that the high-quality rented homes that are needed are available to institutional investors quickly" - a clear nod to the Montague report.
