The real culprit behind the current shortage is that local authorities have sold off a large chunk of former council houses as a result of a right-to-buy campaign started by Mrs Thatcher, and at the same time, new construction of council houses has dropped from a peak of over 400,000 a year in the late 1960s to zero. The government is also making things difficult for itself by making loud noises on the subject of immigration. During the recession, over 300,000 skilled workers left the construction industry, and contractors are finding it tough to recruit new bricklayers, electricians and carpenters.
The latest in a long line of initiatives is a plan to build 200,000 starter homes by 2020. It's a start, although that number needs to be built every year to match demand. The new homes will be on offer to first-time buyers under the age of 40, and they attract a 20 per cent discount to current market values. Section 106 planning constraints have also been loosened up. Previously, a builder was cajoled into including an element of affordable housing in any development for rent. Under new proposals, builders can now build affordable housing for sale to owner occupiers. It sounds good, but the maximum sale price has been capped at £250,000 outside London and £450,000 inside. These are the sort of prices that builders will aim for in order to protect margins. It's still hard to see which part of £450,000 is the affordable bit. For housebuilders, there could also be a sting in the tail because although margins on affordable homes are smaller, there are cash flow advantages because payments are received up front, which helps to sustain a higher return on capital. This will vanish if the builder has to wait for the property to be sold before getting paid. What remains unclear is where does the money come from to fund the 20 per cent discount? There have been suggestions that public sector-owned land could be sold to builders at a discounted rate. Or more likely, the government might remove Section 106 affordable housing contributions and Community Infrastructure Levy charges.
This is all well and good, but does nothing to ease the plight of the rental sector. Forget about the glitzy buy-to-let set where rents can hit thousands of pounds a week; we're talking about low-cost rental properties that people on low incomes can afford. These are becoming rare; social rent dwellings, owned by local authorities or social landlords and rented out at half the market rate, saw 30,000 new builds in 2010; by 2013 that had fallen to just 11,000. This is a direct result of funding cuts to local authorities. Whereas 40 per cent of the cost of development was covered by housing grants five years ago, the percentage now is just 14 per cent. In place of social rent dwellings came so called affordable rent homes, where the rent is around 80 per cent of the market rate, the lowest that is possible in economic terms. However, these rents are still too much for people in the lower income bracket.
And proposals to allow housing associations to sell their homes have sparked further controversy because simply switching from a rented property to an owned property does nothing towards providing more houses. For example, a promise to build a new council house for every one sold has never been enacted. The average replacement rate is nearer one in nine.
Building more starter homes to buy means that there will fewer homes built to rent. Pressure on rents is likely to increase as supply is constrained. And landlords will already be considering rent rises in response to the latest kick in the teeth that will see mortgage interest rate relief cut back. Not surprisingly, the new-build initiative will look more appealing the further away from London you are willing to go. That's because the pendulum between the cost of buying and the cost of renting swings predominantly in favour of buying the further out of London you travel. According to data compiled by Zoopla, an average asking price of £80,000 in Hull would cost £397 a month in mortgage payments whereas rents command a 14 per cent premium. Closer in, an average mortgage repayment of £1,341 in Reading is nearly a third higher than the average rent.
