The UK is facing a housing crisis. Open any newspaper today and there will be articles on spiralling house prices and an imminent bubble. Yet the greatest and fundamental factor underpinning these dire warnings and predictions is quite simply a lack of supply.

The country is building around 140,000 fewer homes each year than are needed for the booming population. London in particular is building around half the homes it needs to house its residents.

The government has unveiled programme after programme intended to boost the market: Help to Buy, Help to Buy mortgage guarantee, the Build to Rent fund, the Get Britain Building Fund, Funding for Lending and so on. But is the coalition simply tinkering around the edges in an area that needs more dramatic intervention?

Will private housebuilders ever bridge that supply gap and should they really be expected to? Does there simply need to be more public sector involvement in housebuilding? Or perhaps even some form of national housebuilder to build on less profitable sites?

The gap between supply and demand is dramatic. Academic Alan Holmans, from the Cambridge Centre for Housing & Planning Research at Cambridge University, estimates that housing requirements are on average around 240,000 to 245,000 per year, with around 60% of all demand and need in the south.

Although housebuilding levels are slowly rising with Help to Buy stimulating the market, the numbers are coming up from their lowest levels since the 1920s, around 100,000 per year, which Savills estimates could reach 132,000 in 2017.

In the big housebuilding spurts of the 20th century, local authorities played a much bigger role. In the building booms of the 1940s, 1950s and 1960s, local authorities accounted for more than half of all output, depending on the year, but then dwindled dramatically in the 1980s under Margaret Thatcher’s government. While there has never been a national housebuilder as such, at a local level government has previously been willing to intervene to build homes.

This could happen again, with local authorities primed to build more mid- to low-income housing after the relaxation of their funding models. Chancellor George Osborne raised the borrowing cap to £300m in his autumn statement in December, which was previously preventing local authorities from building substantially in their area.

Susan Emmett, director of residential research at Savills, says: “We’re seeing this already. We are seeing more local authorities build themselves and greater encouragement to that would be a good thing.

“If you look at the years when we have had the biggest amount of housebuilding, the public sector was doing half, so if they can start to do more that would be a massive contribution. We are already beginning to see this but it’s small. The private housebuilders are still by far the dominant players in this market at the moment.”

Savills research shows Camden and Newcastle upon Tyne councils respectively built 66.3% and 45.8% of all homes in their boroughs in 2013-14.

Emmett adds: “Local authorities are building a range [of tenures] because they can cross-subsidise. They might build a scheme and sell some, rent some and then the rest are social housing, so the proceeds from the first two subsidise the third.

“Housing associations have done this for quite some time very successfully, and now local authorities are also doing it.”

Building starts 2013/14
Local Authority	LA	Total	% LA
Camden	670	1,010	66.3%
Newcastle upon Tyne	330	720	45.8%
Fareham	60	240	25.0%
Pendle	10	50	20.0%
Plymouth	110	620	17.7%
Southwark	200	1,620	12.3%
Ealing	80	690	11.6%
Hounslow	80	700	11.4%
Salford	50	590	8.5%
Lincoln	10	130	7.7%

Shortfall in affordable homes

In London, 22,000 homes were built in 2013 against demand of at least 42,000. Within this shortfall, Savills has highlighted that 82% of demand is for homes costing less than £700/sq ft, with the bulk of that requirement under £450/sq ft. Yet housebuilding has focused on the prime markets since the recession, and they are now fully supplied. The gaps at the affordable and mid-market ranges need to be plugged.

Camden, for instance, created a £300m community investment programme three years ago to invest in schools, homes and community facilities by redeveloping or selling buildings or land that are underused or expensive to maintain.

The London borough plans to deliver 3,050 homes over a 15-year period, with 450 new council homes - the first new council homes to rent in the borough for nearly 20 years - along with 300 new shared ownership homes, 650 replacement council rented homes for those falling into disrepair and 1,650 new private homes.

But could a spree of new council homes come with its own fallout? Sir Peter Hall, Bartlett professor of planning and regeneration at University College London, says public housing is still viewed negatively. “There has been a big reaction against conventional public sector building. If you go back 30 years, public housing was always identified as council housing and there was a big reaction against council housebuilding in the 1980s.”

Instead, Hall says the answer to the country’s housing woes could be a return to the development corporation and localised housing associations, rather than on-balance-sheet council building.

“In the 1940s and again in the 1960s we built large numbers of houses through new town development corporations. This was the preferred model of the 1945 government and again the 1964 Wilson government — both Labour — to build large numbers of new towns.

“These were all built by the same model, by development corporations set up with loans from the Treasury and it was not subsidised, it was guaranteed loan money, but they had to pay it back — and they did and gave a very good return to us, the taxpayers, but it took time to do the repayment.”

Hall argues these development corporations backed by the Treasury could be used for urban renewal and the creation of new urban villages. He points to Ebbsfleet, where Osborne has decided to use an urban development corporation to drive through an initial 15,000 new homes.

Hall adds: “Once Thatcher cut out council housing that gap was never filled by the housing associations or by the private sector. The private sector has never built on that scale and never will so the gap has got to be filled by new forms of public housing intervention.”

There are other forms of public intervention being considered. Clive Betts, Labour MP and chair of the Communities and Local Government Committee, says that to build a quarter of a million homes a year there has to be more public investment into housing. “It’s a national crisis, and given we have achieved these figures in the past there is no obvious reason why we can’t achieve them in the future,” he says.

While he dismisses the idea of a national housebuilder, Betts backs a housing investment bank, which would sit within central government and allow organisations to borrow easily, matching private investment from pension funds with building and infrastructure work at a local level. He also calls for a subsidy to get brownfield sites up and running.

“In order to make brownfield sites more attractive, you need an element of public subsidy maybe to clean them up, remove contamination, just to make them more attractive for development, whether in the public or private sector,” he argues.

Dr Nicholas Falk goes one step further. In a recently published paper for the Smith Institute, entitled Funding house and local growth: how a British investment bank can help, he argues for a municipal investment corporation (MIC) which would help direct the money held by the investment bank into projects that would promote long-term growth, with local authorities committed to allocating sites.

The report proposes the MIC would be established in collaboration with local authorities or city regions and the Treasury. It would be modelled on the Dutch BNG Bank, which is made up of and for local authorities and public sector institutions in the Netherlands.

“My proposal is to motivate local authorities to provide the site by making available supplies of capital to invest in the infrastructure and the land assembly,” Falk says. “It’s all predicated on the question: how do you double housing output? It doesn’t displace private housebuilders but it supplements them with a vehicle that is about building communities, with all the infrastructure required: schools, energy and public transport to make them attractive.”

Falk argues the plan should win all-party support to unlock the increasingly unaffordable land market. He describes it as a variation on a development corporation, but with local authorities in the driving seat.

Free thinking

A more radical proposal for the public sector comes from Generation Rent, a lobby group campaigning for the increasing number of people trapped in poor-quality rented accommodation in London.

The group proposes a secondary market for private rented homes, built by government and sold to buyers at close to cost price to produce affordable homes for renters. Alex Hilton, director of Generation Rent, says the government could invest £1bn to build 10,000 units of £100,000 homes on requisitioned public land, and receive a return of £1.1bn once the houses were sold to homeowners.

He says buyers would get a home they owned but would only make a return on their money equivalent to investing in the bank. He argues this secondary market could also be applied to affordable housing requirements for developers, who would then deliver cost-price homes into the market.

“Anything that’s going to have any impact on the housing market on the supply side, targeting workers who have been priced out of economic activity in London and the South East, is going to require state intervention,” Hilton claims.

“What we’re saying is that this is the cheapest state intervention you can get because you can sell these as leaseholds - the state still owns that land and 100 years later they have got that property back if they want it.”

But what would a private housebuilder say about all this? Is it right for the public sector to be more involved in delivering homes?

Tony Pidgley, chairman of Berkeley Group, says the focus should still be on releasing public land and speeding up the planning process. “When you’ve got a shortage of supply, the way to move forward is more land,” says Pidgley. “The government is doing all it can, it’s trying to release it through various initiatives, but we’ve had this shortfall for more than 20 years. We’re not going to mend it overnight, but you need to get more land into the hands of credible developers.”

He says supporting small builders, who cannot afford to go through the planning process and have struggled to gain business since 2008, is also critical to boost supply.

“When I was a young man, many years ago, when I first started and Berkeley first started, I built one house in the first year. I went into the planners with a piece of paper and a red line round it and said: ‘Can I build a house here?’

“They would say: ‘Ooh you’re a bit close to that one . . . If you move it over a bit, yes.’ Today, we have to pay to see the planners.”

Pidgley said a national body backed by the government could actually lock up development. “I’ve been running Berkeley for 40 years and it takes a long time to get the depth and breadth of expertise. Building in London on brownfield sites is complex . . . it’s got to go into the hands of experts who understand it.”

There is a simple solution to the housing crisis: build more. It seems likely the public sector will have to do more to help to plug the gap. In what guise, though, is still up for debate.