Unsqueezing the middle

How an efficient land market can ease cost pressures for UK households

26 May 2019

By Thomas Aubrey

The housing crisis, marked by an increase in housing prices and lack of affordable housing presents a barrier to inclusive growth. The latest Centre for Progressive Policy (CPP) analysis shows that house prices have increased in the last 20 years at a much faster rate than earnings, resulting in a decrease in disposable income across median households in the UK. Building on our previous analysis we call for a reform of the Land Compensation Act 1961, to increase investment in infrastructure.

Housing costs for both renters and owner occupiers have been the major driver in the cost of living over the last 20 years. An analysis of household incomes and housing costs between 1997-98 and 2016-17 indicates that:

  • Unlike other income groups, median income households have seen their household income fall relative to housing costs by 8%. This is due to lower nominal wage growth compared to other income distributions, the limited availability of social housing with subsidised rent and higher private rental costs. For renters in this quintile wishing to make the switch to owning a house with a mortgage, higher housing costs relative to income have extended the period required to save for a deposit.
  • The richest 20% have seen their household income after housing costs grow more than 50% over the period. This is due to a combination of faster earnings growth and above all a fall in the cost of housing through home ownership due to falling interest rates.
  • The poorest 20% of households have seen their housing costs rise at more than twice the rate as the top 20%. But their total household income has risen marginally faster than costs due to an increase in the number of people working in each household, in addition to the introduction of the minimum and living wage. Benefits including housing benefit, which make up around half of household income for this quintile, have grown more slowly than total income over the period.

Recognising the need to increase supply to tackle high housing costs, the government set the housebuilding target for England to 300,000 p.a. However, the gap between output today and this target remains significant. Centre for Progressive Policy analysis suggests that if the 300,000 target is met year on year then this would significantly help improve the living standards of the squeezed middle. Instead of the median quintile experiencing an 8% fall in household income, it would have experienced a 4% increase over the period 1997/98 to 2016/17. But such an increase in output in both social and private sector housing will not be achieved unless infrastructure investment is dramatically increased.

One policy recommendation that could facilitate a significant increase in investment would be to amend the Land Compensation Act 1961 thereby enabling development corporations to receive a greater share of the uplift in land values as recommended by the cross-party House of Commons Select Committee on Housing and Local Government.

Prior research by CPP estimates that such a policy shift could unlock over £200bn of potential investment in infrastructure and affordable housing over the next 20 years which would enable the government to meet its target of 300,000 for England.