Is the government on track to deliver 1.5 million new homes?

Good afternoon from New Economy Brief.

The government has put housing at the heart of its political offer – pledging a new target of 1.5 million new homes by the end of this Parliament. Increasing supply is a key part of tackling the UK’s long-running and multi-faceted housing crisis. But there is growing scepticism that the target will be met. 

This week we’re taking a closer look at the government’s housing target, how progress is going, and what really needs to happen to build more homes across the UK.

What is Labour’s housing target?

1.5 million new homes. In its 2024 manifesto Labour promised to deliver 1.5 million new homes over the parliament. This averages out at 300,000 homes a year, but with delivery expected to build gradually over the Parliament, the target implies England would need to reach 370,000 homes a year by 2029.

And with over 130,000 households living in temporary accommodation, years-long waiting lists for social housing and house prices still out of reach for many, a significant increase in new homes is sorely needed. Well-designed new housing brings many other benefits: it can improve health, strengthen communities and make homes more energy efficient.  

Binding local targets are back. Alongside the national objective, the government moved quickly post-election to bring back binding housebuilding targets for local authorities. The Conservatives had effectively scrapped these in 2022, demoting them to advisory status following a backbench revolt.

A significant increase – if achieved. The last time 300,000 homes were built a year in England was in 1969. That rate was not sustained, and we have not come close to matching it since. On average, building around 300-370,000 homes a year would be 80-150,000 more than we’re currently managing.

Is the government on track to hit its target?

In short: no. In fact, housebuilding has dropped in recent years. In the decade up to the 2024 election, England added around 223,000 new homes a year. By contrast, in the first year of the Government’s new housebuilding target (2024-25), this fell by 6% to less than 209,000 – a drop of 14,000.

Housebuilding is notoriously hard to measure, but other indicators back up this story. After the election, data on housing starts (how many houses begin construction in a period) fell by 43,000 relative to the previous ten-year average. Data on applications for planning permission show a similar drop off in activity.

Signs of recovery? There are signs the market is picking up again, but it’s not settling at levels anywhere near the government’s target. Savills finds that rates of construction are slightly turning upward and that housebuilding is stable at around 200,000 units a year - a very long way from where the Government needs it to be. 

Why is housebuilding faltering?

Macroeconomic factors. The drop in housebuilding is driven by changes in the wider economy that the government inherited; in particular, low effective demand, with high interest rates weighing heavily on several kinds of buyers including residential buyers, private landlords and social housing providers. 

High mortgage costs. Increases in the Bank of England base rate in response to high inflation in recent years have raised mortgage costs. In turn, this has constrained households’ ability and willingness to buy new homes. Output of new housing has dropped to reflect this lower demand.

Building costs. Depressed demand has softened house prices. But at the same time, the cost of housebuilding has increased due to the rising cost of labour and building materials. Behind this are the long-run effects of shortages caused by Covid-19 and Brexit, and by the global energy price crisis which has made it more expensive to manufacture certain materials. This is causing a pressure on the viability of building new homes in many areas, with modelling from Zoopla suggesting that across much of the country, build costs now exceed sale prices.

England is particularly exposed to these issues given its reliance on a small number of speculative housebuilders whose business model makes them highly vulnerable to changes in prices and costs. 

Constrained capacity in the social housing sector. Historically, councils built around half of all homes, and the social housing sector has helped keep housebuilding going when private construction slumps.

However, social housing providers currently have limited ability to do this. They are also facing higher interest costs, and rent cuts in recent years have reduced their rental income. They also have to find the money to make their existing stock better and more energy efficient, and to undertake remediation work to meet post-Grenfell building safety requirements. Recent policy on funding and a new rent settlement have eased this pressure, but the sector is not currently in a position to significantly increase its building beyond recent averages.

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What more could be done to build more?

If the government wants to build more homes, it needs to think more about who builds them. This means diversifying the building sector so we are not so reliant on a small number of speculative housebuilders and their boom-and-bust cycles.

Letting the public sector play a bigger role in land assembly and master planning. The government could adopt an approach to development commonly found in other European countries and partner with developers to assemble and build out sites, using the profits from rising land values to pay for infrastructure. Doing so could support smaller or more specialist housebuilders, which can deliver faster build out of homes (as they are less reliant on booms in the market).

The government has shown positive steps with its New Towns programme, which it describes as “the most ambitious town-building effort ever undertaken in the UK.” The programme could pay for itself if it follows a similar approach to that used for historic new towns through the creation of Development Corporations. These could use compulsory purchase powers to acquire land at agricultural value, then capture the uplift in land values that planning permission generates – using this to pay for building homes and providing infrastructure. However, it will be important to ensure that Development Corporations have access to the funding they need – either by providing them with loans from the Treasury or allowing them to raise their own finance through issuing bonds.

Properly resourcing housing associations and (particularly) councils to build. This could be done with additional grant funding and support to cover other costs, such as decarbonising existing housing stock, and would free up their financial capacity to invest in new homes.

Councils are particularly constrained, as the budgets they use to collect rents and to invest in old and new homes (their housing revenue accounts) are near breaking point. This is because the previous government cut their incomes and increased costs. Either injecting cash into or lifting debt from these accounts could boost councils’ capacity to build much-needed new housing.

The wider fiscal context is undeniably challenging. But building more social housing is a strong candidate for further public spending because it attracts additional private investment, creates economic growth through construction activity, and reduces other public spending such as on housing benefit and temporary accommodation.

There is no silver bullet to increasing housing supply. But focusing on who builds homes and how could go a long way towards helping the government reach its 1.5 million target. Ultimately, success should be measured not just by how many are built, but by whether they are right homes, being delivered in the right places for the people who need them most.