Opinion is unanimous: Britain needs more houses. Despite plans for three new garden cities by 2020 commentators are calling for more, suggesting that it’s time to re-evaluate relaxing planning restrictions on the green belt.

This isn’t just a concern from housing charities, planning officials and frustrated would-be first time buyers. The impacts ripple across the wider economy, affecting UK companies. As the majority of British investors choose to put a portion of their funds in British businesses, even those who seem to have benefitted most from the current boom could find that the inelastic housing supply and consequent high housing costs are harming them. 

If a much-anticipated boom in house building occurred, would it benefit British investors?

Housing squeezing household budgets

For years the dictum has been that, whether they’re tenants or owner-occupiers, people should spend no more than a third of their disposable income on housing. In many places, this now sounds almost antiquated, as 31% of people spend more than this on housing costs – and the problem is far worse in London.

Wages simply aren’t keeping up, meaning that disposable incomes are being squeezed even further. For the households on the lowest incomes this can mean a choice between heating and eating. What’s more, as the cost of living in city centres rises those on lowest incomes are forced outwards, often adding expensive commutes to their already-overstrained budgets.

Those on middling incomes might not face such severe choices, but every pound being spent on rapidly rising rents is a pound that won’t be spent in shops or restaurants, on services or holidays, or saved. While this might be good news for buy-to-let landlords, it’s not so positive for consumer businesses.

Barrier to economic growth

Businesses don’t just need customers – they need staff. In London and the South East house prices are frequently ten times the average salary, and a recent YouGov poll found that 70% of Londoners between 20 and 39 say that the cost of housing in London makes it difficult to work there.

The result is that there are fears of a ‘reverse brain drain’ and according to the YouGov survey 38% of businesses are concerned that expensive housing is making it harder to recruit and retain staff. This isn’t just affecting small companies either. Even Vodafone is reporting difficulty attracting the best talent.

As even middle earners are forced to live in London’s outer boroughs or dormitory communities, with consequent long commutes, employers need to factor the cost of this into their pay packages too. According to the CBI this is putting additional financial pressure onto businesses. 

This all adds up to a significant barrier to economic growth. 

Building in the wrong places

Where new housing is being built, it’s being built in the wrong places, according to Paul Cheshire, Professor of Economic Geography at the LSE. Writing about recent house building programmes in City AM he says, “We have concentrated new supply where prices relative to earnings are least unaffordable and job prospects worst.”

This holds true across the country. If this continues it raises the alarming possibility of tens of thousands of houses being built in places where people don’t want to live and where there is low employment. This could end up doing little to reduce the cost of housing in more popular areas, or simply adding a lengthy and costly commute onto already high rents and mortgage payments. 

Businesses who are struggling to recruit and retain staff owing to high local living costs need new housing to be linked to local employment prospects.

Increasing exposure to debt

Rapidly rising house prices aren’t diminishing people’s aspiration towards home ownership. They’re just pushing buyers into taking on bigger mortgages, resulting in a population with ever greater exposure to debt. It is also creating a greater vulnerability to interest rate rises. 

As the economy recovers there will come a point when raising interest rates is necessary to avoid destabilising inflation. Yet if this makes mortgage payments more unaffordable, leading to repossessions, as it did it the early 90s, the Bank of England will face an unenviable decision between tolerating inflation and squeezing home-owners. 

Whatever happens the most vulnerable will bear the brunt, while neither scenario is likely to benefit businesses.

Knock-on effect on investors

We’re now at a stage where the housing affordability crisis is not just affecting first time buyers, the young, low-waged or those living in London or the South East. For investors in British business the main concern has to be the damage unaffordable housing is doing to competitiveness, reducing the mobility of workers and increasing pay demands, while at the same time stoking a situation which could lead to future economic instability.

A building boom would help to alleviate these pressures while in turn bolstering the construction industry, providing jobs and contributing to overall economic growth. But this house building needs to be planned around what people – and the businesses they work for – really need. 

This is housing in the areas of greatest need and least affordability, like Sutton and Preston. While recent proposals to build more garden cities in the Home Counties might help, building needs to include Greater London, the South West and Midlands too. 

Contributed by Terri Engels 

Image by DennisM2