A new design era is coming that might mean your house becomes worthless

6 MAY 2020 BY PHILIP GRAHAM

The UK government’s “war on housing shortage” simplifies a complex problem in order to incentivise home ownership at all costs. However, this policy project ignores evidence that cultural norms, perceived status, interest rates and the land market may be more significant than supply alone. This has implications for the long-term value of housing design - value which architects know exists but which we struggle to sell in a market distorted by the current institutional system.

To interrogate these factors, we invited a “Look, no architects!” panel to test the boundaries between homeownership and design outcomes as part of the 2019 London Festival of Architecture.

Stephen Ashworth, partner and planning advisor at global law firm, Dentons, joined Chris Foye, Knowledge Exchange Associate at the UK Collaborative Centre for Housing Evidence (CaCHE) and Yolande Barnes, Chair of UCL’s Bartlett Real Estate Institute (BREI). Like our other ‘Common Good’ discussion series events (which will continue into 2020), this interdisciplinary approach helps us to break down the industry silos that make good design outcomes so hard to deliver.

The theme of ownership is important to design because it affects consumers’ choice of tenure and typology. However, new research at Cullinan Studio shows that the ‘housing ladder’ may no longer function as it used to for some groups, rendering moving house unaffordable. This is because UK first-time buyers are now 33 on average when they enter homeownership, meaning they have less time to accumulate home equity before the need to move arises.

Meanwhile, due to more cautious lending rules since 2008, new borrowers’ ability to leverage any equity growth is limited by smaller loan-to-value ratios. As a result, home equity is less likely to meet the costs and taxes associated with moving house. This means that if an initial choice of home is constrained at the point of purchase, the design of that home will have long-term consequences.

But what drives these initial choices and why does the system continue to provide small, inflexible homes, poor place-making, unaffordable land and the debt risk associated with homeownership in the first place?

Stephen Ashworth makes the case that the planning system has proven inflexible to new ideas because of its aversion to failure. This has under-nourished design in the process. However, a more adventurous approach - one that accepts the risk of controversy and unintended consequences - would also be more responsive to alternative housing models and could put design value back at the centre of housing policy.

The Great Estates model - Grosvenor for example - shows that some types of landowner deserve an easier ride through the planning system. In contrast, development models such as that used at Ebsfleet would have benefitted from less trust. The difference, says Yolande Barnes, lies in the landownership and financial models. This is because everybody pays some sort of rent, regardless of tenure, including owners who still pay the cost of capital.

This means that the level of rent, and its timing, are fundamental to the design outcome. This is demonstrated in the contrast between Butlers’ Wharf and Wapping High Street - two schemes which started from a similar point at similar times but delivered completely different results. Butler’s Wharf was delivered piecemeal according to developers’ short-term capital requirements, whilst Wapping was the exact opposite. However, until such differences are recognised by planning, land use classes will continue to resemble global asset classes and be traded accordingly.

What planning powers do achieve though, is to deprive landowners of the preconception that ownership gives them an unfettered right to the fruits of production. This, says Ashworth, includes the production of homes, places and infrastructure.

The requirement for affordable housing has taken wealth away from landowners, just as the infrastructure levy has effectively extracted c£600m from landowners to pay for Crossrail. For some landowners, this may mean that the land value of a decent quality new town may not be much more than agricultural value, after the landowner has been deprived of the right to develop land without schools, infrastructure or affordable housing.

However, this process of ‘right-pricing’ or ‘land value capture’ doesn’t necessarily deliver design value, says Barnes, because ‘residual land valuation’ is something of a myth. In practice there isn’t a direct correlation between land prices and house prices because volume housebuilders are ‘the only show in town’ in terms of supply. Furthermore, they have to compete hard for market share because only 20% of households would consider buying from them, meaning that they are trading in a niche product.

As a result, for speculators, the game is simply to acquire land in a futures market in which they have incomplete information and deal with the housing consequences later. This means that an unrealistic density will often be necessary to make up for the unrealistic land purchase price that was paid in the first place, driving down design quality in the process.

This behaviour shows that planners’ influence over land values is limited and therefore the solution cannot be a continuation of the late-20th Century practice of competitive land-buying. Instead, says Barnes, different sorts of builders or even contractors are needed, who are prepared to find non-adversarial solutions that ring-fence a realistic margin for good design and sustainable building performance.

However, it is not just the supply-side and planners who have the power to change housing design outcomes. Consumers have more influence over the market than many people realise. In Milton Keynes, for example, Stephen Ashworth highlights the fact that 50% Code For Sustainable Homes level four homes were a response to purchasers’ demands, far in excess of the 10% Code four requirement set initially in the planning conditions.

What is less understood though, is why households consume housing as they do. Research by Chris Foye has demonstrated that housing consumption is linked to cultural capital. This means that lower income groups experience housing space inequality as a ‘double whammy’. For these groups, affordability constraints mean that their absolute housing space consumption has stagnated whilst others enjoy increasing living space in relative terms. This is compounded by, ‘class dynamics’ which causes ‘dream home’ aspirations of lower income groups to be characterised by privacy, leading them towards a low density, suburban typology surrounded by outdoor space.

These perceptions and expectations sit uneasily with other income groups who enjoy higher levels of cultural capital and are therefore more likely to define ‘good housing’ in terms of design, performance, sustainability and social infrastructure. However, because a significant minority of UK households would prefer a world in which they consume less absolute space so long as they have more relative to others, the value of housing should be understood as a reflection of the status that it confers as a ‘positional good’.

These factors mean UK households may always perceive a shortage of living space so long as we remain a home-owning nation with a deregulated housing market, making space inequality inevitable. Furthermore, a culture in which housing is perceived as a positional good is reflected in voting habits. This means that it is in the interests of existing homeowners to pull the housing ladder out from behind them by obstructing new development whilst downsizing remains counter-cultural.

However, behind cultural and regulatory drivers of high prices and space inequality, what Barnes calls ‘The Great Inflation’ has had an enormous part to play in turning tenants into homeowners. This was because the inflation era of the 1970s / 80s had the effect of creating a money illusion where debts were devalued over a short period. This encouraged the first generation of the ‘home-owning democracy’ to take out large amounts of debt in relation to their incomes, in pursuit of asset prices that were rising with inflation. Homeownership came to be seen as a one-way escalator to unearned wealth, and price rose generally as a result.

This post-war era of high inflation was also the period in which the current real estate industry was brought up and therefore many in the sector still believe high interest rates to be normal. However, far from the peak interest rate of 17% in 1979, the previous two centuries were more stable, fluctuating only between 2-6% with an average around 4%. Barnes predicts that interest rates will return to this norm of previous centuries and indeed the yields on corporate bonds, equities, real estate and other assets are converging at around this level.

What is far less understood is the fact that asset prices automatically inflate when interest rates fall, as they have done since the 1990s, long before the global financial crisis began. However, as this downward ‘yield shift’ reaches its natural end, and prices begin to plateau, the expectation of capital gains will drop away. Although this coming change is mostly overlooked by the real estate sector, it will fundamentally change the way that consumers use real estate and has restorative implications for design value.

Land ownership on the ‘price plateau’, says Barnes, will become more about controlling the land rather than profiting from asset value, because there can be no capital gain without rental growth. This means that whoever controls the land will need to align their interests with those of their occupiers. Conversely, depreciation and running costs will become far more important than they were in a rising market, as stark divisions emerge between assets and liabilities.

This is welcome news for practices like Cullinan Studio, where ‘long life, loose fit’, well-loved, sustainable buildings have long been central tenets. The expected stabilisation of asset prices will incentivise simply-constructed, flexible housing - such as terraced and mansion block typologies. In contrast, owners of large-volume, steel and glass apartment-type housing will be left with huge recladding and reglazing costs over the next 20-30 years, as well as high on-going service costs reflecting excess communal circulation. These features will weigh on rental incomes, increasing the risk that poor design will lead to high service costs and economic obsolescence.

Likewise, as the climate emergency shoots up the agenda, poor energy performance and overheating will be harder to sell once the expectation of capital gain drops away. However, despite this, Barnes believes that the value of sustainable housing will continue to be linked to its scarcity, rather than its performance, so long as the current housing stock has too few high-performance buildings. The problem is therefore not that good housing doesn’t have value, but that the landowner (rather than the supplier) will make more from better housing, so long as they are prepared to take an income over a land receipt. Therefore the job of creating a market for design and building performance requires changes in perception, product and patience.

For Stephen Ashowrth, such a change will come through a shift to more outcomes-led regulation. Likewise, Chris Foye sees a more interventionist planning system as key to pushing down land values, so that consumers can worry less about being locked out of homeownership and start to price for good design again.

However, whilst tax reform is key, Yolande Barnes sees the need for long-term equity partnerships to replace debt-finance, in order to unlock new tenure alternatives to conventional ownership. This requires a whole-life approach to which pension funds and local authorities are uniquely suited. This is because their need to make real, long-term income means their interests are aligned with human outcomes and valuable places.

The moment that designers of good homes have been waiting for may be close at hand.

Philip Graham is a partner and research lead at Cullinan Studio, as well as a PhD student at the University of Reading, funded by the UK Collaborative Centre for Housing Evidence

Listen to an audio recording of the event here:

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