Trades, apprenticeships and government targets

 

Britain can’t build without a trades revolution

Both parties must address the woeful shortage of skilled labour or their promises of 300,000 homes a year are empty

William Hague

Monday January 22 2024, 5.00pm, The Times

In the coming general election campaign, 300,000 will be one of the magic numbers, constantly on the lips of candidates throughout the land: 300,000 is the number of new homes a year that everyone agrees needs to be built, to keep up with population growth and young people being able to find somewhere to live. It is the government’s target, although they have actually managed about 200,000 a year. In particular, 300,000 is the number Sir Keir Starmer is sworn to make reality by “bulldozing” through regulations and mandating new building on the green belt.

Yet the truth is that no one in the near future is going to be building 300,000 homes a year. Even if the green belt was declared to be a giant New Town, and Nimbyism was made illegal, and anyone who thought of putting up a house was instantly given planning permission, it is very unlikely that such a number could be reached. Regulations could be bulldozed, councils mandated to hit targets, developers forced to get on with it, and still there would not be 300,000 new homes per year. At present it is a fantasy.

This is because we do not have in this country the electricians, plumbers, bricklayers, plasterers, tilers, scaffolders, bathroom fitters and roofers who would be needed to build 300,000 homes every year. Their skills cannot just be conjured up, but need training and apprenticeships that can take years. They are the very skills that will also be in demand to retrofit existing homes with heat pumps, change cladding that should never have been installed, and work on big infrastructure projects such as HS2. And they are skills that we — we as a society, including industry and schools, as well as ministers of all parties — have not been producing in sufficient numbers for a long time.

Brexit has not helped: the number of construction workers from EU countries has fallen sharply. Last year the government had to put a wide range of building skills on the shortage occupation list to allow in more migrants with relevant expertise. Ministers have been busy trying to fill the obvious gaps in the nation’s skills, pushing forward with Institutes of Technology, announcing skills bootcamps and a local skills improvement fund, all of which are very good initiatives. They have tried for years to improve apprenticeships, with mixed results. But moving the dial on construction skills, and moving it quickly, will still prove very difficult despite all these efforts.

One reason it is so difficult is the great scale of the problem. The Construction Industry Training Board forecasts that an extra 225,000 workers will be needed by 2027. Kingfisher has estimated that the UK will lose £98 billion of output due to a shortage of tradespeople. An analysis of OECD data by the think tank Onward suggests that building and construction is the sector in which we have the biggest skills shortfall, with mechanical and engineering skills not far behind. By contrast we have a surplus of skills in clerical work, sales, accounting and human resources. The number of new, trained building workers would need to be many tens of thousands each year, particularly as one in five of the current workforce is over fifty.

Another reason is cultural. We have for decades celebrated a university education and looked down on practical but vital skills. In the Kingfisher survey, only 13 per cent of 16 to 25-year-olds said they had been encouraged at school to consider trade career options, even though 42 per cent of them would have liked more information on such roles before deciding on their career. Young women in particular are unlikely to be given encouragement or relevant information. Deep-seated attitudes in careers advice and teaching will need changing.

A further and crucial obstacle is the way in which a very small business actually works. Many people in this industry are sole traders. Training an apprentice for two years is a cost and commitment that may extend further than an order book, and for the apprentice means lower pay, for a time, than alternative jobs. To have some hope of filling the huge gap in future skills, government policies would need to change the incentives at this micro level.

Yet if policies could be drawn together of sufficient scale, reaching deeply into the nation’s culture and changing the calculations of sole traders, the prize is huge. Unlike many European countries where populations have begun to fall, Britain still has an expanding population, bringing investment in housing, energy and infrastructure if we can supply the skills. Those acquiring the right skills will have a job for life: however impressive artificial intelligence programmes become they will struggle to install the electrical wires in your bathroom, guarantee they are safe and connect the right wires to the fuse box. Such jobs will be better paid than the national average. They will generally be a source of pride and satisfaction — part of the answer to a YouGov finding in 2015 that 37 per cent of British adults said their jobs were meaningless.

We really ought to be able to crack this problem. Rishi Sunak talks passionately about skills and was doing so on Monday. The many fresh efforts by ministers need drawing together in a major national drive to equip the country for housebuilding and energy transition. The Labour Party no doubt has similar good intentions, but as it finalises its manifesto it will need to focus heavily on this issue if promises about houses are to have any credibility.

There is no shortage of ideas for what to do. More apprenticeships could be fully funded or allowed tax credits. A one-stop advice service could help tradespeople through bureaucratic complications. Schools could give much greater prominence to tradespeople, particularly to female role models. There could be a new national online platform for work experience, a social media campaign to highlight lifelong skills, virtual reality educational technology to inspire young people to be part of building things for the future, and a new employment brokering service for construction and trades.

All these and other proposals have been made by think tanks, employers’ organisations or MPs.
Everybody in Britain knows it can be difficult to find an electrician or plumber. In one survey, a fifth of respondents said they had postponed a project in their home because they could not find people to do it. It is one of the factors holding our economy back. Voters would welcome some big and serious answers in the party manifestos. And in the endless interviews and debates to come, no candidate should be allowed to claim they will build 300,000 homes a year without explaining where they will find the skills to do it.

Would long-term fixed rate mortgages improve our housing market?

 

RYAN BOURNE | COMMENT

State-backed, long mortgages at fixed rates are not the answer

The latest idea to stimulate demand in the housing market would involve government support to encourage long-term fixed-rate low-deposit mortgages

Ryan Bourne

Thursday January 04 2024, 12.01am, The Times

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Our government will go to truly remarkable lengths to avoid allowing significantly more housebuilding to increase homeownership. The latest idea to stimulate demand instead would see government support (read: subsidies) to encourage long-term fixed-rate low-deposit mortgages, as seen in the United States. This policy, from the Conservatives’ 2019 manifesto, lost appeal as interest and mortgage rates soared, but now, with rates falling again, it’s being discussed as a potential election vote-winner for young families.

The government’s logic is straightforward: 30-year fixed-rate mortgages safeguard holders against rising interest rates while allowing them to benefit from any house price inflation. Consequently, a government guarantee for these mortgages (implicit or explicit) could reduce the bite of regulatory “stress tests” — assessments of a borrower’s ability to withstand higher mortgage rates — thus expanding affordable mortgage access to more families with lower deposits.

I didn’t have to travel far to find an expert sceptical of this idea. Mark Calabria, my Cato Institute colleague, previously was director of the US Federal Housing Finance Agency, the regulator for Fannie Mae, Freddie Mac and other federal home loan banks. When asked about the wisdom of the British government wading into state-backed long-term mortgages, he grimaced, before highlighting three truths that the Tories must bear in mind.

First, interest rate risk will always exist. Government-backed 30-year fixed-rate mortgages simply aim to make mortgage holders bear less of it and lenders more. In the United States, mortgage holders can refinance to capitalise on lower rates, yet remain insulated as rates rise. The catch? Surging interest rates cause substantial financial losses for mortgage providers. Households, as taxpayers, then often become exposed to massive contingent liabilities through bailouts and crises (see, for example, the 1980s’ American “savings and loan crisis”).

Next, government-backed long-term fixed-rate mortgages make macroeconomic stabilisation policy more difficult. Typically, mortgage rates fall in a spending downturn and rise when the economy overheats. This acts as an automatic stabiliser for the broader economy. Falling rates boost mortgage holders’ disposable incomes when aggregate demand is too low and rising rates reduce their income when demand is too high. Long-term fixed-rate mortgages obviously weaken this mechanism, making the Bank of England’s job at stabilising spending more difficult.

Which brings us to the distributional implications. The Conservatives want to help people they think could afford mortgage payments but who would struggle with deposits. In general, though, homeownership and having a mortgage are positively correlated with income. So this would subsidise the relatively lifetime-affluent, paid for by taxes or risks also borne by poorer households. The costs of monetary tightening, in particular, inevitably would fall more heavily under this policy on interest-rate-sensitive sectors, such as construction.

At the moment, the American property market is suffering from people being unwilling to move, precisely because more than 70 per cent of mortgages have 30-year fixed rates and new mortgage rates are much higher than most mortgage holders enjoy at the moment. Sales of existing homes have fallen by more than 15 per cent this past year to their lowest level in a decade. That, of course, harms first-time buyers who could otherwise afford properties, the very people the Conservatives say they want to help.

Prioritising long-term mortgages over housebuilding does not address the problem of housing supply

MATT CARDY/GETTY IMAGES

Although a government-backed 30-year mortgage clearly would be attractive to many homebuyers, then, it risks exacerbating Britain’s broader housing market dysfunction. Even outside proponents, such as the Centre for Policy Studies think tank, concede that without increasing the housing supply through planning reform, easier mortgage finance would mainly inflate house prices rather than homeownership rates.

Indeed, mortgage providers are at liberty to offer long-term fixed rates already, and some do. But the reason they are uncommon is these inherent risks. Paying for those risks should be the responsibility of the mortgage holder, not British taxpayers as part of an electoral giveaway.

Ryan Bourne is R Evan Scharf chair for the public understanding of economics at the Cato Institute

And if you don't do wider reading...

 You miss snippets that help grow your understanding, and which will stop you making daft claims for policies and their efficacy. Have a look at these points:

Fattening up America’s farmers

Editorial
The Washington Post

Recent data shows there’s enough food in the US to “meet everyone’s minimum calorific needs almost twice over” while net farm income is projected to be 26% above the 20-year average this year, says The Washington Post. Yet Congress is “gearing up” to reauthorise America’s agricultural safety net, the Farm Bill, conceived to help farmers cope with the Great Depression. For reasons “both of fairness and spending control”, the system, which results in a “disproportionate share of the benefits” flowing to high-income farmers, requires an overhaul. Take the “lavishly subsidised insurance” (the government pays about three-fifths of premiums), which reduces incentives to mitigate risks and improve the resilience of the land. A scheme to protect farmers against “truly catastrophic disasters” might be more appropriate, and tightening criteria by which payouts are awarded would save $24.4bn over ten years. Instead, House Republicans are proposing to tighten eligibility for food benefits for the poor, saving $11bn over ten years. “No decent fiscal strategy would demand this sacrifice from the poor while asking nothing of the myriad special interests that feed off the Farm Bill’s wasteful largesse.”

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SNP statism strangled Scotland

Oliver Shah
The Sunday Times

The “damage done to business confidence by the Scottish National Party and the Greens” reveal the “dangers of excessive statism”, says Oliver Shah. Frustration amongst business leaders has reached a “new level”. Towards the end of Nicola Sturgeon’s “reign” the government announced measures that “went down like a lead balloon”, including capping residential rent increases at 3% for the duration of a tenancy, “prompting some landlords to turf out occupants early and putting an estimated £2.5bn of build-to-rent investment at risk”. Such measures come against a “backdrop that is generally anti-wealth”. New “progressive” tax rises have taken the top rate, paid by just 33,000, to 47%. The next highest rate is 42%. The Ferguson Marine ferries shambles “shocks anyone who understands big projects”. The oft-criticised Scottish National Investment Bank, funded with up to £2bn of public money, had no CEO for 14 months. Excessive statism isn’t the “whole picture”; there is also a sense that the public sector, with its “sclerotic” working-from-home culture, is failing to provide the services you would expect from such a high tax base. “Tories, with their windfall taxes… and Labour, with their plans for Great British Energy”, take note.

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A political prize for the Tories

Liam Halligan
The Telegraph

Rishi Sunak has been defending last year’s decision to drop compulsory housebuilding targets for local authorities, but the unavoidable fact is the UK has a shortage of homes, says Liam Halligan. Owner-occupancy among the young has “plunged” and our housing benefit bill has tripled to nearly £30bn in two decades. Our “once vibrant” building sector has been eviscerated by big developers that stage a “deliberate go-slow” to keep demand and prices high. When residential planning permissions are granted, the “vast planning uplift” goes almost entirely to landowners and developers and, by stoking demand in the face of inadequate supply, the “absurd” Help to Buy scheme is also ramping up prices. There is an urgent need for “radical supply-side reform” but it’s doubtful it will happen. Another idea would be to use state-owned land, amounting to 6% of all freehold acreage, rising to 15% in urban areas and enough for a minimum of two million homes. Sales should be restricted to small, local builders and include strict conditions so that affordable housing is built quickly. Boosting housing supply quickly while rebooting our small and medium-sized builders are “political prizes”. The Tories would be “wise to grab them”.

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It’s time to embrace the youth

Isabel Berwick
Financial Times

“Intergenerational tensions” are coming to the boil in the workplace, says Isabel Berwick. “Seething resentments” against the young may be “hidden behind a wall of basic courtesy, terrible HR ‘inclusion and belonging’ jargon and lofty words”, but reports from two of the Big Four consultancy firms, PwC and Deloitte, show that newly hired graduates do have weaker teamwork and communication skills than previous cohorts. PwC is to appoint older staff as coaches; Deloitte will ask new joiners to attend sessions on “mental resilience, overcoming adversity and the importance of mindset” to counter their tendency to “overshare” about health matters. But Gen Z-ers, born from 1997 onwards, have grown up in the online era of instant connection and global reach, so it’s little wonder they can seem “overfamiliar”. It’s unfair to expect the newcomers to do all the adapting. Workplace norms shift when the young move in, and by 2025 Gen Z will make up 27% of the workforce in OECD countries. To keep them on board, the rest of us will have to be more understanding of the habits of people practically born online. Leaders who blunder by complaining about snowflakes face punishment by online mobs. “Bosses, take note.”

A quick way to help in housing

 

COMMENT

Stamping on stamp duty would free empty nesters to fly their coops

Paul Johnson

Monday January 16 2023, 12.01am, The Times

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This is my first column since the Christmas holidays, so I hope you will forgive me for starting by recalling a party I attended over the festive period. Not, I’m afraid, a recollection about the superb drink, stunning food or great company, but rather a reflection on the housing market.

The event was held in a large suburban house. It had once been home to a family, but is now occupied by a single man in his eighties, children long gone, wife deceased some years ago. A number of the guests were from a similar generation and in a similar position, still occupying the large family home, either alone or with a partner.

It’s not only those I meet at Christmas parties who are in this position. More than half of owner-occupied homes are under-occupied, in the sense of having two or more spare bedrooms. And this is a growing trend. On this definition, fewer than 40 per cent were under-occupied in the mid-1990s. Few renters under-occupy their accommodation. They have to pay hard cash for that spare space.

Being adept at the sort of small talk appropriate for such social gatherings, I quizzed a few of those present on their housing choices. “Why haven’t you moved somewhere smaller and more appropriate to your needs, unlocked the capital in your unnecessarily big house and made it available to someone who actually needs it?” It was not quite my conversational gambit, but I think they got the point.

Broadly speaking, I got two answers. First, moving house is a huge and time-consuming upheaval. Bluntly, if you’re in the last decade or two of life, you don’t want to waste a significant fraction of that time going through the sort of hassle involved in moving house. Fair enough.

Second, though, was stamp duty. Awareness of this as a significant cost and a disincentive to move seemed pretty much universal. Hurrah, I said, we economists are on just the same page. Of all the taxes levied at present, Stamp Duty Land Tax — the tax you pay on purchasing a property — has a pretty good claim to be the most damaging and pernicious of the lot. The more often you move, the more tax you pay. It gums up the housing market and, by extension, the labour market. Mutually beneficial transactions, for example an older person in a big house trading places with a younger family in a smaller house, are disincentivised.

This isn’t merely theory or anecdote, either. The best evidence we have is that stamp duty makes a big difference to the number of housing transactions. In a very careful study, Michael Best and Henrik Kleven, the latter a professor at Princeton, estimated that getting rid of a tax rate of only 1 per cent on purchases could increase housing transactions by as much as 10 per cent. If that’s even in the right ballpark, it suggests that even low rates of stamp duty are likely to be very damaging, and the very high rates we levy on expensive properties dramatically more so.

There are only two feasible excuses for the continued existence of stamp duty. The first is that it is a relatively easy way of raising tax. That’s why it was introduced in 1694, making it among the most venerable of all our taxes. But that, frankly, is no longer much of an excuse. We could perfectly easily raise the revenue that it brings in in other ways. Yet stamp duty has been increased time and again in recent years, reaching a top rate of 12 per cent on the most costly properties — and more for those buying a second property or who are not UK-resident.

The second is that it already exists. Abolishing it now would mean a windfall gain for, especially well-off, present home owners. Two responses to that: first, given that stamp duty has been increased over the past couple of decades, for a reasonable fraction of home owners, certainly most of those I was speaking to over Christmas, this would largely be a reversal of windfall losses imposed by previous increases; second, this could be at least partially undone by reforming council tax and raising it on more valuable properties.

Council tax is levied at a lower fraction of property value the more valuable is the property. That is inequitable. There is a single person discount, so single people occupying big expensive properties get a double bonus. And not having been updated in 30 years, it results in especially low rates of tax on family homes in London and the southeast.

It is likely that this is where my yuletide interlocutors and I would part company. I suspect they would not be keen on their council tax going up, even if stamp duty were cut. I understand the political problem. But the corollary of relatively low council tax, as a fraction of property value, enjoyed by the well-heeled occupants of expensive houses in London and the southeast is high tax on the occupants of less expensive properties, especially in the Midlands and the north.

The high cost of trading down is gumming up the housing market

YUI MOK/PA WIRE

Let me be clear. I am not saying anyone should be forced from their family home. What I am saying is that we absolutely should not be penalising those who want to move home. That is deeply damaging. I could make a better argument for subsidising such moves than for penalising them.

We hear much about the housing crisis and the crisis of housing affordability. We hear rather less about the millions of houses that are underutilised and often bigger than their occupants either need or want. The two are not unrelated. There are many contributors to our sclerotic, dysfunctional housing market. Our tax system, in particular stamp duty, without question is one of them. It is one that is readily amenable to government action.

Paul Johnson is director of the Institute for Fiscal Studies
Follow him on @PJTheEconomist

Housing crash? Opposing view:

 

Matthew Lynn

City columnist

Get set for another debt binge

Despite the fuss about rising interest rates, they’re falling in real terms. That will blow up a wild bubble

BANK CHIEF ANDREW BAILEY: DON’T BE FOOLED BY WHAT HE SAYS

It says something about how we have acclimatised to interest rates at 300-year lows that the move by the Bank of England to put rates up to a whole one percentage point was treated as a shock. On one level, of course it is. It is the highest rate we have seen since the dramatic cuts that followed the financial crash of 2008/09. In the space of just a few months the price of money has risen ten-fold, and that is a dramatic rise, at least in percentage terms. At the margins it will make a difference. Yet the really important number is the real rate; the cost of money after you allow for inflation. And that tells a different story. Inflation is already above 7%. The Bank now expects it to rise to 10% by the end of this year or early next. Right now, the real interest rate is -6%, and soon it is going to hit -9%, historically an extraordinarily low figure.

SAILING INTO UNCHARTED WATERS

This is uncharted territory. No major developed economy has ever seen real rates as deep into negative territory as that. When inflation spiked at 8% in 1992, the last time we saw a surge in inflation at the rate we are seeing it today, interest rates were at 12%, a real rate of plus 4%. Even when rates were cut close to zero in the wake of the financial crisis of 2008, inflation was close to nothing as well, so the real rate hovered around -1% or -2%. In the inflationary spiral of the 1970s, inflation touched 20% in the UK, but interest rates also went as high as 16%, so the real rate remained relatively stable. A real rate of -9% is something very new.

It’s not just the Old Lady, of course. Every major central bank is engaged in a similar experiment. In the US, real interest rates are now -8% and will probably go deeper into negative territory. In the eurozone, the numbers are even more dramatic. With inflation hitting 16%, Lithuania now has negative rates of 15.9%, given that the European Central Bank still hasn’t moved to raise the cost of money. Most eurozone countries are already at -6% or -7%.

The upshot is that we should expect all the distortions that affect an economy when money is massively cheap. Such as? First, a boom in consumer credit. Individuals will borrow more to pour into property or other real asset. And why not? When the value of your debt is falling by 9% a year in real terms it will be wiped out very quickly, assuming that house prices keep up with inflation. At the same time, savings will be all but wiped out. There is no point at all in keeping cash in the bank when it is losing almost a tenth of its value by sitting there. We will see a huge expansion of credit, while the saving to finance it collapses – hardly the recipe for a healthy economy.

Second, companies will go on a borrowing spree as well, leveraging themselves to the hilt. Again, why not when money is this cheap? You can  borrow a ton of money, take over a business with stable cash flow, and then, assuming it can raise its prices in line  with inflation, you can easily pay back the price you paid from its own revenues. Given that many major British companies started out with too much debt on their balance sheet to start with, that can hardly be a positive development either.

A SHOT IN THE ARM FOR ZOMBIES

Finally, zombie companies will be kept afloat. We have lived with this problem ever since rates went down close to zero. Businesses that had no real future could stagger on because they could borrow to keep going even though they were hardly profitable. But real rates of -9% will make this problem far, far worse. In the long run, that will be a disaster for the economy.

It is easy to be fooled by quarter-point rises into thinking that rates are being tightened. That is what the Bank says it is doing, and that is what the headlines say. That is to completely mis-read what is actually happening. In truth, as inflation continues to accelerate at a far faster rate than the cost of money, in real terms rates are being cut, and dramatically so. We have a few decades of history to tell us that is only going to stoke another wild bubble in borrowing and asset prices – and with this one we don’t even know when it will end.