How to solve the housing crisis by harnessing the market power of the City

One of the curiosities of the UK’s long-running and perplexing argument over affordability and the need to build more houses is the absence of any serious discussion about whether from the vast resources of the highly successful City of London might be found a way to harness the financial firepower needed.

The question – how to unleash City institutions in solving a housing problem that could if it is not solved let the far left into government to destroy the City and the economy – has nagged at me through the post-crisis period in which the reputation of finance was trashed and more recently as both political parties struggled at Westminster in such abject fashion to find solutions to a pressing problem for the young in those parts of Britain where prices have risen fastest.

In policy-making terms the juxtaposition is jarring and baffling. It makes no sense. Year after year, well-meaning reports are published on the housing crisis by charities and others. Often the launches of these papers, calling for this or that contested planning change, or for yet more government spending, or for an end to the scandal of rough sleeping in our cities, take place within a few miles of the Square Mile or even within sight of the City and in the shadow of its glass towers.

Weirdly, a global giant, a leader, pulsating with money and innovative ideas, is barely ever considered as the source of a potential answer. If it is ever mentioned in the context of housing, it will be negatively by a left-winger suggesting a programme of social housing paid for by an inefficient and self-defeating tax rise on finance that will only lead to the wealthy leaving and a reduction in revenues.

That is the wrong way of looking at it. The City is awash with capital, in pension funds, banks and investment houses, looking for a return. In parts of the country there is a housing crisis, with youngsters and others feeling ignored when they want a chance to build some capital, to become owners, to get a stake in a free society.

Surely there must be a way to put the two together in some great, national patriotic endeavour to improve the condition of the lives of millions of Britons without the bill falling on the stretched taxpayer?

There is. The City and global institutions can fund an epic, innovative programme of housebuilding aimed at the two groups most in need of houses – that is first time buyers struggling to get a foot on the ladder of ownership, and key workers in the public services, paid salaries that will buy them and their families very little in or near major centres of population where they work.

The role for the City in this hit me earlier this year in conversation with one of Britain’s leading property developers, now retired. Sir David Garrard’s career culminated in the flotation of Minerva, the property giant. He became a funder and energetic driver of the Academy school reform programme and the largest donor to the Labour party.

He left Labour, warning that Jeremy Corbyn must be stopped from getting power and destroying the British economy, national security and institutions. Preventing the election of a Marxist government, which in an election will offer alluring freebies as a way into grumpy voters’ affections, cannot be guaranteed without fixing the housing crisis.

Look, Garrard said to me, you lot (free marketeers) have got it wrong on the housing question, fiddling about aiming for purity in planning laws, proposing measures that work in theory and not practice that will come to nothing because they are politically impractical, while naively expecting salvation from the developers and British house builders with their massive margins. Wake up. Create a benevolent serious scheme that will over the course of a decade grow until it builds perhaps 150,000 extra homes every year. Solve the problem. Do it without costing the taxpayer a penny.

To achieve this, the following scheme is proposed.

The government creates an independent national commission, with statutory powers, formed from an existing body such as Homes England. Call it the English Housing Commission, or the British Housing Commission if the other devolved parts of the UK decide that they want to join in and pool resources, which they will when voters, hearing how positive this endeavour is, apply pressure and demand that they do.

The Commission acquires greenbelt land, high quality land not the brownfield land which is often presented as the answer when in reality it is expensive to salvage and often in unattractive locations. That greenbelt land the Commission is purchasing is the “no hope” land near motorway junctions and major railway lines, the country’s main arteries. Huge swathes of land that has agricultural value, of course and sometimes maybe a little more, that must be paid for fairly by the Commission.

But it is land that – even with house prices high – has not been utilised under the current system and might not be for 100 years, if there is anything left of Britain after a Corbyn experiment.

Back to now. The Commission would acquire its first batches of land and get building a “pool” of housing, using the nation’s leading building firms and contractors employed on a fair margin. With the epic developer margins eliminated, the units can be built for between a third and a half of the market value.

The houses are constructed and then rented, not sold initially, for five years to first time buyers and to key workers under a tight definition. The latter are nurses, firefighters, teachers, police officers, military personnel and other public servants who if they are to stay in such posts – and we want gifted, skilled people encouraged in the public sector, surely – want a foothold on the ladder of the property-owning democracy.

After five years renting, the tenant converts his or her option into a right to buy at the original cost to the Housing Commission. They take a thirty year mortgage for 100% of the purchase price. That purchase price discounts inflation, either in the residential market or generally. Significant equity builds up. The freeholder must hold his or her property for at least five years, and can if they want sell after that.

But here is the beauty of it. He or she must offer to sell back into “the pool” at a price which reflects the same level of discount to the open market value as existed ten years previously. The seller has had use and then ownership of a nice property, had the opportunity to get out of renting and to accumulate capital, and then at the end the property they are selling goes back into the Housing Commission “pool” where it can be rented to a new tenant and prospective buyer at 5% per annum of the new price of the house.

Via their own hard work and the help of the Housing Commission, anyone selling leaves the programme with a decent block of capital. The Housing Commission will have helped create new purchasers for the open market.

Tenants and buyers are not even bound to stick with the programme for a decade if their circumstances change at any point. If they choose to leave early they lose out on the equity gain, their choice, but another first time buyer signs a contract and begins the process again.

Simultaneously, the pool is expanding all the time. Over the course of a decade as many as 1.5m new homes and possibly more come on stream. This does not replace the existing housing market, it is not meant to, but it supercharges supply, and for the first time buyer or key worker increases their range of options. It creates more competition. It forces major developers to work harder, to not just rely on the existing shortage and political inaction for their record profits. And there is work to be done too building for the Commission.

But how will this be paid for? The first batch of 100,000 homes in the early years would cost in the region of £10bn – at an average cost of £100,000 per unit. The government will make a terrible mess of raising even that, increasing taxation or ballsing it up in some other manner.

So, tap the City, where those sums are perfectly manageable, a blip even. The Housing Commission thus makes the City a vital partner in this enterprise.

The City of London and its institutions will provide the funding for the Housing Commission’s building programme, not out of the kindness of their hearts or the benevolence of their shareholders, but because there is a a decent return on an asset that is – built below the inflated open market price, with a willing supply of renters and buyers – as safe as houses or as close to that as can be claimed.

The Housing Corporation provides a steady stream of constantly expanding and reliable income from tenants, and then mortgage payments.

I envisage the scheme harnessing the City in three stages.

The initial amount needed to get the Commission building can be raised as syndicated loans from major banks. The return involved would be healthy, thanks in part to the elimination or reduction of the developer cost.

Then create with City help a British Housing Bond to fund the next stage of building. The national call to action implicit in that name is obvious. One or more City institutions can advise on structuring the bond. In its initial stages, in the first five years, the purchase of these bonds would be best restricted to pension funds looking for steady income or to banks.

In addition – the City being as innovative as it is – opportunities will emerge during the project to create secondary markets, as yet unenvisaged, and opportunities for insurance.

The City is always inventing and reinventing, and often to the public good. In the form of Siegmund Warburg – it invented the eurobond in 1963, out of a clever piece of engineering designed to channel capital looking for a return – dollars stuck off shore by the US tax system – into rebuilding Europe. That turned into one of the largest debt markets in the world and infrastructure and economic expansion.

Time and again the City has done it.

Personally, my view is that if the scheme is taken up we should leave open the possibility of a subsequent offer of British Housing Bonds to retail investors, which is more complicated thanks to the regulatory hassle involved, but it should be considered in time as it would allow smaller investors across the land to support building homes for the next generation while turning a profit and growing their own investments.

“This really can work,” a member of the cabinet said to me when we discussed it recently.

Indeed, it can.

When this new venture is underway under a new Prime Minister, and some enemy of the market and opponent of property rights asks what the City and capital has ever done for the people of this country, it will be possible to point to the Housing Commission and say emphatically “that.”

Now, the objection from a pure market point of view is easy to spot. I’m an advocate of free markets and this plan involves compromises. Some of the existing developers will squeal because no-one likes change. It involves compulsory purchase, albeit of no hope land, and a national Commission rather than relying on individual developers.

But it harnesses the might of capital markets to get millions more Britons on the ladder accumulating capital. And it can be – deftly handled – immensely popular as a national scheme building hundreds of thousands and then several million new homes for those who need them. Politicians have a funny habit of backing proposals and making them work politically when the proposals are popular.

The challenge is not to design the perfect market, or to prove a theoretical point, but to design something that can work and be popular. On market purity an old saying applies here – far better half a loaf, than no bread.

Solving the housing problem will require a bold programme, but contrary to the prevailing gloom it can be done. Sure, right now the domestic debate is moribund at Westminster. When the talk is not of Brexit it is of increasing government spending. When housing comes up at all the attitude is too often despair at the shortage of resources available.

The current answer from the Labour party, in the grip of the far left, is to increase government spending and borrowing, to build council housing. The Conservatives are confused. Their senior figures know that voters want more housing, and that this poses an existential challenge not only to their electoral prospects but much more importantly to the economic health of the country. But they have since 2010 put their faith in botched reforms to planning (that stall a government whenever attempted).

Then they transferred their attention to fiddly schemes that have achieved little and sometimes done damage.

After 2010 the Conservative and Liberal Democrat coalition government invented the Help to Buy scheme – offering support to first time buyers. It was designed by then Chancellor George Osborne and predictably the result has been a disaster, pushing up prices and aiding wealthier house hunters. The government is reviewing the scheme and expected to scrap it or reform it out of existence.

But this administration, under Theresa May’s leadership, will not last for ever and a new generation of leaders will take over what is, for now, the largest party in the House of Commons. If they are sensible and want to stay in power they will be hungry for new, practical ideas that fuse the power of markets to increase opportunity combined with a national effort at improvement.

This, the proposal suggested by Garrard, is that scheme.

The establishment of British Housing Commission will not on its own solve all the UK’s housing difficulties – of course. The scheme is not a replacement for the existing developer model either. But the creation of a National Housing Commission, and then the issue of British Housing Bonds, will harness the power of one of the nation’s great assets, the City.

The message sent by the implementation of this plan would be extremely powerful, a counter to the bogus but too popular allegation that markets and capital fail and are of no use to the wider community. Year on year, the housing shortage would be being alleviated, funded by commercial investors.

Imagine it. The power and expertise of one of Britain’s most successful markets – the City of London, an epic pool of capital looking for a return, a leader with international clout – helping the aspirational and the hardworking of this country to meet their ambitions to be part of the property owning democracy.