What does the literature tell us about the social and economic impact of housing? Report to the Scottish Government: Communities Analytical Services

Listen

2. Direct economic impacts

Key points

  • The construction industry is a significant contributor to the Scottish economy. It contributed around 10% of Scottish GDP in 2009.
  • The construction sector employed about 126,900 or 5.4% of the total workforce in September 2009. It also makes a crucial contribution to improving the skills level of the workforce in Scotland.
  • The input-out tables for Scotland for 2004 showed that the construction industry had a much larger economic impact on Scottish economy than other industries.
  • A fiscal stimulus for additional housing investment in Scotland to combat the effects of the recession has saved private sector jobs and enabled public agencies to retain skills in the construction industry.
  • The Scottish Housing Quality Standard has been important in stimulating economic activity and providing job opportunities for skilled tradesman and those in construction-related work.
  • The most important impact of additional house building is to improve affordability.
  • If new houses are taken up by people moving from less to more desirable housing or areas, there will be no net impact on employment or income.
  • Additional dwellings in a local area may induce the formation of additional households; however, these households could be located anywhere in the wider region.
  • The impacts of new house building on prices and affordability vary between high growth, high demand and low growth, low demand areas.
  • The options to demolish or to refurbish residential stock also vary by type of settlement and type of dwelling. But negative environmental impacts between renovation and rebuilding can be offset.
  • The impacts of new housing investment vary by tenure. Private renting provides a more flexible tenure which can contribute importantly to labour mobility. Investment in social housing can improve people's lives. Investment in owner-occupation has larger employment and consumption impacts.
  • The location of new housing is important. The impacts will be greater if it is located close to expanding markets rather than declining ones.
  • Current housing market instability and macroeconomic uncertainty present an opportunity for policy-makers to support a stronger private rented sector.

2.1 Investment in housing

The first order impacts of housing investment - regeneration, decent homes, repairs and maintenance as well as new construction - vary by tenure, location and timescale.

Taking new construction first, in principle, other things remaining equal, increased investment in new housing supply relative to demand would cause house prices to fall. This would make housing more affordable to people aspiring to buy, and some new households would form because they can now access a separate home. However, as noted in the Barker Review of Housing Supply (Barker, 2003, 2004), the new construction story is a long run story, because new construction is only 2% of the total housing stock. This means that the short run impacts on price are virtually zero, as house builders only build what they can sell at what they have estimated as the going price (Adams, et al., 2009) - they will offer white goods and other incentives before they will reduce prices, and they will allow sites to remain half completed rather than complete and sell at a loss (until they are forced into liquidation in which case the whole site is sold at a loss). Any short to medium term impact is on new household formation, as additional new housing allows new households to form rather than remaining living with parents or sharing with friends (Meen and Andrew, 2008).

There is a different impact if the new homes are used as second homes or holiday lets, for example in rural areas (Communities Scotland, 2005). The loss of rural employment has caused many villages to struggle to maintain local services, and new dwellings would be expected to help support school rolls, etc. But if these are used as second homes there will be no impact on school rolls and the impacts on the viability of local services and facilities will depend on whether holiday visitors spend locally or, if self-catering, bring their provisions with them.

House prices fall in the short run when there is an economic or housing market downturn, not simply because of new supply. The current recession was led by a fairly sudden credit crunch, whereby even those able to afford to purchase could not get mortgages, and developers similarly could not get the short term bank funding that they needed. The impact of falling house prices is that there will be less investment in new housing, and so in the long run house prices will rise again because there will be a shortage of supply.

The repairs and maintenance - and decent homes in the public sector - aspect is more helpful in terms of economic impacts at the local level, supporting jobs and skills over the medium to longer term.

2.1.1 Impact on GDP

The impacts on GDP work through

  • investment in housing - including new build, remodelled existing buildings, manufactured components, intermediary fees and repairs and maintenance.
  • consumption spending on housing services - including rent, service charges and utility services, and also owners' imputed rent.
  • the labour and consumption multiplier effects of housing investment on employment and economic growth.

In Scotland, construction is a significant contributor to the Scottish economy. Despite the ravages of the recession, it employed over 126,000 people and contributed around 10% of Scottish GDP in 2009. 1

Table 1, taken from the latest report of the Profile of Scottish Construction Sector, shows that the total turnover in the Scottish construction sector increased by 59% between 2000 and 2007 (from £9.8 billion to £15.6 billion). In the same period, Scottish construction gross value added ( GVA) increased by 65% (from £3.9 billion to £6.4 billion). This was twice the contribution of the agriculture sector and almost three times that of the combined utility services. Its GVA was around 47% of total manufacturing GVA in 2007 (Scottish Government, 2009f).

Table 1 Outputs and employees in the Scottish construction sector, 1998-2007

Year

No. of Business Units

Total Turnover £m

Gross Value Added £m

Total Employees

Gross Value Added Per Employee £

1998

14,200

8,400

3,200

138,000

23,200

1999

14,200

9,500

3,600

132,700

27,000

2000

14,300

9,800

3,900

133,000

29,000

2001

14,100

9,600

3,800

119,100

31,500

2002

14,000

9,900

3,900

119,400

32,700

2003

14,000

11,000

4,400

117,600

37,500

2004

14,200

11,900

4,700

122,500

38,000

2005

15,000

13,300

5,300

129,600

40,600

2006

15,400

14,700

6,000

126,600

47,700

2007

16,300

15,600

6,400

127,300

50,100

Source: Scottish Government (2009f) Profile of Scottish Construction Sector ( SIC45). ( http://www.scotland.gov.uk/Topics/Statistics/16170/Construction). Last update September 2009.

In the construction sector, 97% of businesses were Scottish-owned and accounted for 76% of turnover and 80% of GVA in 2007. By comparison, in manufacturing, only 89% of businesses were Scottish-owned and accounted for only 37% of turnover and 41% of GVA in the sector (Scottish Government, 2009f). Table 2 shows that in 2007, Glasgow City and Edinburgh City together accounted for around 20-25% of the construction sector in terms of turnover (24%) and GVA (20%). These two local authorities together with Aberdeenshire, North Lanarkshire, South Lanarkshire and West Lothian accounted for around half of Scottish construction output.

Table 2 Geographical split: Top 6 local authorities in terms of construction GVA, 2007

Local Authority

No. of Business Units

Total Turnover £m

GVA £m

Total Employees

GVA Per Employee £

Glasgow, City

1,120

2,070

740

15,600

47,600

Edinburgh, City

1,090

1,680

510

9,900

51,200

Aberdeenshire

1,210

940

450

6,800

65,900

North Lanarkshire

950

1,080

440

10,000

43,800

South Lanarkshire

1,020

1,090

430

9,400

46,000

West Lothian

530

730

380

6,100

61,400

Scotland

16,310

15,570

6,370

127,300

50,100

Source: Scottish Government (2009f) Profile of Scottish Construction Sector ( SIC45). ( http://www.scotland.gov.uk/Topics/Statistics/16170/Construction). Last update September 2009.

2.1.2 Impact on local employment

House building generates substantial local economic activity. It creates construction and housing-related jobs (such as legal services, real estate, housing management, etc.), and service jobs to supply the new residents (education, health, retail, leisure, transport and local government services). In the US, the National Association of Home Builders ( NAHB) has developed a model to estimate the economic benefits of the construction activity on the local economy. It estimates that 324 local jobs will be created in building 100 single-family private homes for owner occupation in a typical metropolitan area during the construction stage and 53 jobs when the new homes are occupied. In the case of 100 private rental apartments, the estimates are 122 construction and 32 local jobs, respectively ( NAHB, 2009). This suggests that owner occupied family homes have a greater economic impact than smaller rental apartments. The impact probably reflects the way the different types of housing are built and the consumption spending of the eventual residents - owner occupied households tend to be larger and better off than private renters.

Scotland has the highest employment rate of the four countries in the United Kingdom. The employment rate in Scotland has been steadily increasing since the mid 1990's, reaching a peak of 77.0% during the second calendar quarter of 2007 (Apr-Jun). Scotland has an employment rate of 73.9% for the latest calendar quarter (Jul-Sep 2009; Scottish Government, 2009a). Employment in the construction sector now accounts for slightly over 5% of all employees (Scottish Government, 2009g). The construction sector employed about 152,700 or 7.2% of total workforce in September 1981, and has steadily declined over the years to 5.4% (126,900) in September 2009. However, Munro and Karley (2005, p.10) are cautious about these statistics as they underestimate the importance of the economic activity of the sector in Scotland. This is because self-employment is not included, which is, of course, of particular significance in the construction sector. It is estimated that in the UK one third of all those working in construction are self-employed. What these figures cannot do, though, is to identify the types of construction activity that are specifically tied to housing, nor to identify housing-related employment as a whole.

The construction industry also makes a crucial contribution to improving the skills level of the workforce in Scotland with one third of all Scottish apprentices employed in the construction sector and an additional 15-20% working in associated trades. The Scottish Building Federation reports on its website that the Scottish Building Apprenticeship and Training Council registers 2,800 new apprentices a year, and if the entrants to the electrical and plumbing trades are included, this total is consistently in excess of 4,000, a 42% rise over the last four years - in fact, 45% of all construction apprentices are trained in Scotland. Thus, amongst the total employees in the construction industry, 90% of those employed are skilled professionals (Scottish Building Federation, undated).

2.1.3 Multiplier effects

In addition to job creation, house building generates additional income for existing residents, and additional revenues for local governments. For example, NAHB provides an estimate of a one-year impact that includes both the direct and indirect impact of the construction activity itself, and the impact of local residents who earn money from the construction activity spending part of it within the local area. The estimated one-year local impact of building 100 single-family private homes in a typical metro area in the US includes $21.1 million in local income and $2.2 million in taxes and other revenue for local governments. The equivalent figures for 100 private rental apartments are $7.9 million in local income and $827,000 in taxes and other revenue for local governments ( NAHB, 2009). Unfortunately no similar modelling exists for Scotland.

In the UK, Munday, Pickernell and Roberts (2004) used input-output tables to establish the multiplier effect of the construction activities to other sectors of the Welsh economy. Using the same technique, Munro and Karley (2005) calculated the multiplier effects of construction and financial industries to the Scottish economy in 2001. They found that 39% of inputs to the construction sector were drawn from within Scotland (Munro and Karley 2005, Table 13). For the latest set of input-output tables, for 2004, Table 3 presents the industry multipliers for the construction industry in terms of creating demands for other Scottish goods and services and compares these with a selection of other sectors.

Table 3 Multipliers: broader economic effects of the construction, housing-related and non-housing related industries, Scotland, 2004

Type I multiplier

Type II multiplier

Output multiplier

Income multiplier

Employment multiplier

GVA multiplier

Output multiplier

Income multiplier

Employment multiplier

GVA multiplier

Housing-related industries

Construction

1.59

1.61

1.58

1.62

1.88

1.91

1.93

1.95

Owning & dealing in real estate

1.39

1.54

2.55

1.27

1.59

1.82

3.65

1.43

Letting of dwellings

1.37

5.24

2.85

1.27

1.46

6.19

3.38

1.34

Estate agent activities

1.40

1.38

1.20

1.34

1.72

1.63

1.37

1.61

Non-housing-related industries

Motor vehicles

1.20

1.22

1.19

1.33

1.40

1.44

1.45

1.71

Retail distribution

1.40

1.28

1.16

1.34

1.73

1.52

1.33

1.63

Hotels, catering & pubs etc.

1.20

1.11

1.07

1.13

1.53

1.31

1.20

1.39

Banking & finance

1.38

1.50

1.54

1.34

1.63

1.77

1.93

1.57

Education

1.22

1.12

1.14

1.16

1.74

1.33

1.42

1.54

Health & veterinary services

1.16

1.10

1.10

1.12

1.62

1.30

1.36

1.46

Notes: Type I multipliers sum together direct and indirect effects. Type II multipliers include direct, indirect and induced effects.

Source: Scottish Government (2009d) Input-Output Tables ( http://www.scotland.gov.uk/Topics/Statistics/Browse/Economy/Input-Output/Downloads)

There are basically four types of multipliers: output, employment, income and GVA multipliers.

  • Output multipliers measure the ratio of direct and indirect output changes to direct output changes due to a unit increase in final demand.
  • Employment multipliers measure total ( i.e., direct and indirect) changes in employment due to a unit increase in direct employment (number of full-time equivalent ( FTE) jobs).
  • Income multipliers measure changes in direct and indirect changes in income ( i.e., compensation of employees) due to a change in final demand.
  • GVA multipliers measure changes in total ( i.e., direct and indirect) changes in GVA as a result of a direct GVA change, due to a unit increase in final demand.

All these multipliers are grouped into two types. Type I multipliers are the combined multiplier impacts of the direct and indirect effects. The direct effects are the direct contribution to the Scottish economy due to an increase in output and employment in the construction industry, as producers react to meet an increase in demand. As these producers increase their output, there will also be an increase in demand on their suppliers and so on down the supply chain of the construction industry; these are the indirect effects. Type II multipliers additionally include the induced effects, the impacts from those directly and indirectly employed in the construction industry using their earnings to buy other goods and services.

According to Table 3, the output multipliers (Type I and Type II) for the construction industry were estimated to be around 2.0 in 2004. This means that for every £1 increase in final demand for construction, an additional £0.88 (Type II) was generated through the supply chain, including through the impact on households' income and expenditure. Similarly, the employment multipliers are interpreted as showing that every extra job generated directly in the construction sector would support a further 0.58 jobs (Type I) directly and indirectly through supply effects, and ultimately an additional 0.93 jobs (Type II) were created in Scotland. The Type 1 GVA multiplier showed that the GVA created per £1 from the additional direct and indirect employment was £0.62 (Type I) to the Scottish economy, and £0.95 (Type II) if the induced additional employment is included.

Official statistics do not disentangle the purely housing-related activity from other activity within the construction and real estate industries. For comparison purpose, Table 3 also presents the multiplier effects of some housing-related and non-housing related industries. Output multipliers (Type I and Type II) for the construction industry in 2004 were, in general, much larger than those for other housing-related and non-housing related industries. The activity in the lettings of dwellings had a bigger impact on income multipliers (Type 1 and Type II) and on employment multipliers (Type I). But, GVA multipliers (Type I and Type II) showed that the overall impact was still the highest for the construction industry. Banking and finance was the only non-housing related industry where all the different multiplier effects were close to those in the construction industry. In contrast, health and veterinary services presented the lowest multiplier effects in terms of output (Type I), income (Type I and Type II) and GVA (Type I).

With limited data availability to obtain an input-output table for Scotland for 2009, the overall results using the 2004 input-output tables confirmed that the construction industry had a much larger economic impact on Scottish economy than other industries. Compared to other housing-related and non-housing related industries, the construction industry exhibited significantly large overall output and GVA multipliers - a unit increase in final demand generating output growth and productivity growth throughout the Scottish economy.

2.1.4 Housing policy

The overall goals of Scottish housing policy include raising the quality of homes, building sustainable communities and ensuring that an affordable home is within everyone's reach. This includes increasing new housing construction as well as improving the quality of the existing stock, both of which impact on employment and incomes locally and nationally. Recent figures show that the number of new government funded affordable homes rose to 7,701 in 2008-09, the highest annual figure since the government introduced its Affordable Housing Investment Programme in 2000. These figures reflect the Scottish Government's decision to accelerate investment in affordable housing which speeded up the supply while at the same time supporting the construction industry in terms of jobs and skills and its impact on the wider economy.

Investment stimulus

Housing policy can be an explicit part of economic policy (Munday, Pickernell and Roberts, 2004, pp.222-223). They argue that for example in the Welsh context, direct and indirect government financial assistance (through grants, loan guarantees, partnerships and council house repair schemes) for housing repairs, tied to conditions of upgrading skills and training levels in construction (possibly through courses supplied through economic development initiatives) would improve both the demand and supply sides of housing construction, and generate economic growth.

In the USA, the Homebuyer tax credit in the Housing and Economic Recovery Act of 2008 was aimed at generating economic effects to stimulate home buying so that

- some housing currently being rented will become owner occupied;

- vacant units on sale will be sold more quickly; and

- new construction will be stimulated.

The new construction will in turn generate income and employment in a range of industries, and tax revenues for national and local governments. The additional home purchase activity will generate fees for legal and financial professionals, and additional spending on new appliances, furnishings and removals.

Shelter Scotland published a paper in early 2009 on the case for a fiscal stimulus for additional housing investment in Scotland (Shelter Scotland, 2009). It noted that in order to combat the effects of the recession, the Scottish Government redistributed some of its spending on housing, bringing forward some investment earmarked for the next year. This has saved private sector jobs and enabled public agencies to retain skills in building that would otherwise have been lost. But unless entirely new funds are found, this action will mean that there will be less money for next year.

In a second paper, Building Solutions, Shelter Scotland outlines its ideas about how a sustained programme of housing investment can bring the economy out of recession. Shelter argues that in total, over the three years 2008-11 the amount secured for housing was well below what was needed. The Shelter submission to the Comprehensive Spending Review argued for 10,000 affordable rented homes per annum were needed. An illustrative estimate of what this would cost is given as £650m, just under 2% of the total Scottish budget. Since £450m has already been allocated to affordable housing, the Shelter proposals would cost an additional £200m. In turn this would lever in additional money from private finance: for every £64 of public money spent by a housing association on new rented housing, £36 is brought in through loans from financial institutions, something that does not occur with most other types of public investment, so housing is a good investment in this respect. The paper goes on to argue that such investment would act as a brake on future inflation, it would sustain many jobs and skills in the construction industry and it could help dampen housing market volatility which has had an impact on wider economic volatility in the past.

Scottish Housing Quality Standard

Another important housing policy that can stimulate economic activities is the setting of quality standards, in Scotland the Scottish Housing Quality Standard ( SHQS). In 2004, the Scottish Executive took the decision to set a SHQS, which all social housing providers were required to meet by 2015. This is similar to the Decent Homes Standard in England which has recently been expanded to cover private housing. About 64% of dwellings (1,503,000) in Scotland failed the SHQS in 2008, of which 1,115,000 dwellings were in the private sector and 387,000 dwellings were in the social sector. The majority of dwellings that failed the SHQS failed on the energy efficiency criterion because of the more exacting energy efficiency standards (Scottish Government, 2009b). There was also a higher level of 'extensive disrepair': 79% of dwellings in Scotland have some disrepair. Older dwellings are more likely to have some form of disrepair with 90% of those built before 1919 having some disrepair compared with 50% of dwellings built after 1982. Around three quarters (77%) of private sector dwellings have some form of disrepair, compared to 83% of dwellings in the social sector. In just under half of dwellings (48%) with some form of disrepair, that disrepair is urgent. Tackling disrepair in the private sector, supported in part by Repairs and Improvement Grant funding, will provide job opportunities for skilled tradesmen and those in construction-related work. If this type of renovation project is managed over an extended period, there may be opportunities for creating new construction trade skills development processes.

In the social rented sector, with the expansion of Large Scale Voluntary Transfers, more repair and maintenance work is required to bring previous council houses up to the level of the SHQS. Despite the extent of such relatively poor state of the housing stock, the target to meet the SHQS helps to sustain jobs in the construction industry (Munday, Pickernell and Roberts, 2004, p.214). A consequence of such improvement programmes is the provision of warm, well-insulated homes. This can mean that households spend less money on energy consumption and therefore have a higher level of disposable income to spend in the local economy. This in turn can help create and maintain local jobs.

2.2 New construction

2.2.1 Price impacts

The degree to which an increase in new housing supply impacts on average house prices depends on whether house prices are determined by trade within the existing stock or whether the flow of new housing has a direct impact on prices (the 'stock versus flow' issue in the literature). A traditional textbook view is that because new building is such a tiny proportion of the existing stock, it cannot affect market prices directly, and developers are seen as 'price takers' in a competitive industry. However, Bramley (2003) and others argue that only a small proportion of the existing stock is actually traded at any one time, so that new housing coming onto the market can have a direct impact on price. The model used in CLG's (and now NHPAU's) affordability analysis ( ODPM, 2005) suggests that both stock and flow effects are significant, but that the long run price is determined by the stock, whereas the speed of adjustment is affected by the flow.

From a housing market point of view, the most important impact of additional house building is to improve affordability. This enables more households to be 'priced back' into the market. The problem in assessing the impact of affordability in the long run is that there is no estimate of how many households would be priced back into the market if affordability is improved.

2.2.2 Population

If people move from their current (inadequate or less desirable) housing into the new housing, there will be no net impact on employment and income. The exception would be if there are important non-linearities, i.e., if people behave differently in terms of consumption, investment and savings, employment and commuting, in the new location compared with their previous location. One example might be if poorer households moved into a more middle class area and began to behave differently, such as spending more on car travel or leisure activities. The evidence from the literature does not provide much basis for believing this, because consumption and investment patterns are determined far more by the type and age of the household than by its location. The only difference might be if incomes rose in the new location, for example, by providing access to better paid employment. This difference is however very important in terms of decisions about where new housing should be located. If individuals can access better paid work by living in the new housing, this would have stronger multiplier effects on the local economy.

2.2.3 Households

It is likely that additional households will form as a result of the additional dwellings, as evidenced by increased housing provision during the 1970s when new household formation rose. Also reduced housing provision in recent years has seen a fall in new household formation, a rise in the average age of leaving the parental home and an increase in sharing. The problem is that the relationship between new household formation and additional housing supply is not clear, although some implications can be drawn from the model developed for ODPM (2005). That model concluded that 100,000 additional dwellings would produce extra 30-35,000 new households at a national and regional scale. However, while 100 additional dwellings would create 30 to 35 new households, these households could be located anywhere in the wider region.

2.2.4 Tenure

The evidence for differences in employment and unemployment in relation to tenure is not strong, although there is some information concerning those on incapacity benefit in the social sector. Certainly those on incapacity benefit are more likely to be living in the social sector and to have multiple disadvantages including numeracy and literacy problems, no recent work experience and no access to private transport (Ashworth et al, 2001). They also tended to be older and most commonly male. However, these people are not disadvantaged because they live in the social sector; they are in the social sector because of their multiple disadvantages. Nevertheless, much depends on the allocation system and on the extent to which access to a decent home is associated with access to training and/or employment.

2.2.5 Location

A significant amount of the effect on affordability will depend on where the new housing is located, as many of the impacts vary by location. Thus for example, the impacts of investment in an area of relatively low demand will depend on whether the wider region is also low demand, or whether the rest of the region is high demand. When additional housing is provided in a high growth location, making housing more affordable, this can act as a catalyst to further economic growth by removing a constraint on labour supply. To locate new housing in the lower priced parts of the region would make that area more attractive because it would be cheaper so provided there was sufficient suitable transport infrastructure, the impacts would be positive in terms of the existing housing market as well as the new homes themselves. However, the additional jobs created could draw in labour from other areas (and abroad), which would fuel house prices in the locality, thus removing the improvement in affordability there.

There is an important issue over whether different household structures or different housing locations generate different likelihoods of being employed. This is sometimes termed the 'people attributes versus place attributes' question. For example, Tower Hamlets is one of the most deprived boroughs in London, with above average unemployment rates among its residents, yet it contains the Docklands re-development which is booming. Clearly its residents are not being sucked into the expansion of employment which has occurred in the borough. This would suggest that 'people attributes' are more important than 'place attributes'. However, an early study by Ashton and Maguire (1986) of young males in Sunderland and Reading matched for age and educational attainment found that those in Reading had experienced several temporary spells of employment whereas those in Sunderland had been on several training programmes. This suggests that even if on average the place effects are not important, they can clearly be very important to particular individuals.

The implication for investment in housing in Scotland is that it will make a difference to employment probabilities and life-chances of individuals if the new housing is located close to expanding labour markets rather than declining ones. For example, locating new housing within easy access to growth sectors such as high tech (Cambridge) or financial services (City of London) enables those with the right skills to obtain employment or to improve their careers. New housing developments almost anywhere in Surrey also enhance individual's life chances, especially near to Heathrow and Gatwick. Similarly development along the M4 corridor beyond Heathrow has proved successful in generating employment opportunities as well as housing.

However, investment in new and refurbished housing in regeneration schemes can still make a difference to people's lives, provided that there are good transport links to expanding labour markets or a strong job creation programme in the regeneration area itself. In some cases such regeneration can turn whole areas around, although it is always difficult to ensure that the original residents do benefit from this. Thus for example, London's docklands are today recognised as a regenerated area, yet Tower Hamlets where much of the regeneration was located remains one of the most deprived London boroughs with persistent high unemployment. The problem here was mainly one of non-transferable skills so that local people were unable to take advantage of the growth in employment in the financial services sector. However, one aspect of the successful regeneration was the Docklands Light Railway which attracted employment uses because it enabled people from all over London to take up the new financial services jobs.

In Scotland, the Glasgow Eastern Area Renewal scheme is generally seen as a success although like London Docklands it has not been without criticism. Again a crucial aspect is ensuring that the original residents improve their lives. Early regeneration schemes were criticised for lack of consultation and involvement of the residents and today housing renewal programmes involve much more consultation, sometimes leading to consultation saturation and making it difficult to encourage residents to get involved ( e.g. the Bristol case study for the Mixed Communities Demonstration Projects evaluation currently being undertaken by a team from LSE, Cambridge, Warwick and Shared Intelligence). Nevertheless, residents' involvement can lead to different outcomes from those originally proposed. For example, one estate in Newcastle was due for a regeneration package involving whole scale demolition and rebuilding, but about half the residents said they wanted to stay. The rest were moved on, and the failing school and local shops were refurbished along with around half the dwellings, with very successful results. The rest of the land was cleared and sold for private development (unpublished Geography student dissertation, Anglia Ruskin University, 1998).

2.2.6 How impacts vary by location

The model of the impacts of new house building on prices and affordability developed for ODPM as part of their response to the Barker Review (Barker, 2003) showed how the impacts of increased housing supply vary by location ( ODPM, 2005). The example used relates to Reading (a high growth, high demand area) and Knowsley (low growth, low demand) but the findings are relevant more widely. In the modelling, the two districts were each allocated a share of new housing pro rata to their share of actual new housing construction in 2001. By chance, the fall in the affordability ratio (which was much higher for Reading) in percentage points was exactly the same. But the reasons were very different.

Table 4 Local effects of the high growth scenario allocated across all regions (differences from baseline, 2016)

Reading

Knowsley

Affordability (points)

-0.26

-0.26

In-migration (numbers)

1151

59

Out-migration (numbers)

374

85

Net regional migration (numbers)

777

-28

Households (numbers)

3697

224

Completions (numbers, 2007-2016)

4050

791

Source: Based on ODPM (2005) Table 15.

In Reading, the cumulative increase in completions is 4,050 over ten years but the increase in households is only 3,697. Most of the new housing is taken up by migrants, so that affordability only improves by a small amount. In Knowsley the increase in completions has little impact on migration and the net flow is negative. Such a small increase in completions has a very limited impact on affordability. The main difference from Reading is that 70% of the homes would have to be filled by demand from existing residents.

The two examples can be seen as a 'before' and 'after' situation. A low demand area in Scotland would currently be similar to Knowsley, but once the infrastructure and employment has been added, it becomes much closer to Reading. The main driver is migration - the new housing will allow labour to move to where jobs (whether existing or new) can be accessed easily.

Work on what happens to new housing shows that it either goes to new households, or creates vacancies as existing households 'trade up' into the new dwellings ( ODPM, 2005). The location of the new dwellings is important - econometric modelling shows that new housing located in the most pressured areas allows new households to form but prices do not fall because people migrate in from lower demand areas. New housing in the lower demand areas causes vacancies to be created in the existing stock. However, if all the new housing is located in the high demand areas, vacancies will still be created in lower demand areas because of the migration impact. These are medium to long run impacts.

2.3 Demolition or renovation/retrofitting

In the past, when deciding whether is it better to retrofit a building as opposed to demolishing and rebuilding it, the focus was on the monetary costs and benefits. But the shift towards sustainable development in developed nations has changed the focus to the environmental impacts of retrofitting compared to rebuilding. Given that new construction can be much more energy efficient than most of the existing building stock, it is questionable whether it would be more beneficial for the environment to retrofit or renovate existing buildings rather than replace them. Through a study of a typical four bedroom detached house in Toronto, Dong, Kennedy and Pressnail (2005) reported that over a 40-year life cycle, the rebuild option has lower life cycle energy, global warming potential and air pollution, which are predominantly associated with the building operation. But the retrofit options have lower water pollution, solid waste generation and weighted resource use, associated with material flows. The retrofit options also have lower life cycle economic costs than rebuilding. Nevertheless, they suggested that there are ways to overcome the trade-off in negative environmental impacts between retrofitting and rebuilding, such as the use of renewable energy sources or the re-use and recycling of deconstruction and demolition materials in new construction.

A recent Masters thesis addressed the options between demolition and refurbishing UK residential tower blocks from an energy use perspective. Livingstone (2008) looked at some recent and ongoing examples of high rise refurbishment contracts in London and Norwich. He used thermal simulation to model energy use and heat losses in tower blocks under a variety of scenarios. Results indicated that the costs of improving energy efficiency can be high because of the access equipment required to carry out works to improve the thermal performance of high rise blocks, paying particular attention to the basics of insulation and double glazing. But the relatively simple form and layout of tower blocks are actually conducive to the fitting of external insulation and double glazing without much practical difficulty. Calculations of embodied energy in demolition, refurbishment and replacement dwellings found that tower blocks can be very energy efficient dwellings when compared with an energy efficient new building. Overall, decisions about refurbishment or demolition will continue to local ones in which local conditions prevail. Town by town, block by block, and house by house, architectural and structural, climatic, economic and social circumstances contribute to these decisions. But it is important today to include an energy performance assessment as part of the decision making process.

2.4 Impacts of investment in different tenures

The impacts examined here have mainly concentrated on the private, owner occupied sector. Information on investment in the private rented sector is limited. The number of Buy to Let mortgages has been increasing at least until 2008 and mortgage lenders remain optimistic that the market will remain buoyant because it is currently low geared - only 19% of the 2.7 million properties are mortgaged (Grandin, 2009). However, the CML statistics suggest that many Buy to Let mortgages were for existing properties rather than solely on newly built units so that it is not an accurate guide to the size of the sector. Private renting has always provided a more flexible tenure than either owning or renting in the social sector. It thus contributes importantly to labour mobility (Muellbauer and Murphy, 2008).

Other than mortgage loans, it is difficult to establish how much investment in the private rented sector has taken place, whether new build, refurbishment or simple repairs and maintenance. Any property owner can decide to let out their dwelling at any time and the security of tenure for tenants has now become limited to a six month lease. Survey data consistently shows that the private rented sector performs badly in terms of state of repair and unfitness, so investment to address this would create better homes especially at the cheaper end of the market where it would directly help poorer households.

The social rented sector has received considerable investment from government, both directly through grants and indirectly through the use of public sector land. In addition, investment in social housing via a housing association allows private finance to be levered into the sector. The benefits of such investment are mainly social, covered in the next section. The employment creation impacts are similar to those arising from owner occupation - direct employment during construction of new dwellings and refurbishment of existing dwellings, consumption and employment impacts arising from the households that live in the dwellings - but the latter impacts are dampened compared with owner occupation because household incomes are lower, often significantly so.

2.5 The likely/potential economic consequences of the fall in new housing supply

Current housing market instability and macroeconomic uncertainty reflect the links between housing markets and wider economic trends identified in the previous section. This will have important implications for housing delivery and sub-national economic performance, but the precise impact will depend on the strength of the economy in question.

In terms of direct implications, increased market uncertainty and the collapse of liquidity in the credit markets has significantly reduced effective levels of housing demand. Annual housing completions were on an overall upward trend in Scotland, which peaked in 2004-05 at 26,500 completions. However, completions for 2008-09 were 21,400, a decrease of 17% on the previous year. The latest quarter (April-June 2009) shows a 22% decrease on the same quarter in 2008. The number of starts decreased in the latest year, by 26% from 26,900 in 2007-08 to 20,000 in 2008-09. In the latest quarter starts were 55% lower than in the same quarter the previous year (Scottish Government, 2009c). This has resulted in business activity associated with the housing market losing work, most notably in the construction sector, with subsequent employment and share price losses.

The loss of house-building capacity will have long-term implications for the Government's housing growth plans. Declining land prices will also mean that joint ventures (such as local asset backed vehicles) and planning mechanisms (such as Section 106 agreements - otherwise known as section 75 in Scotland - and the proposed Community Infrastructure Levy) will have significantly less utility. Further uncertainty will be placed over infrastructure delivery, which in turn will restrict housing and economic growth - placing particular constraints on high demand areas.

There are reports of builders struggling to sell on existing schemes and delaying work on future development phases, leaving projects incomplete and unsightly gap sites which can further knock economic confidence. Regeneration projects in the initial stages of development and on more marginal, complex development sites - where the risk to the private sector is highest - will be most vulnerable. As a result the Scottish Government has followed the Homes and Communities Agency ( HCA) in making additional funds available to stimulate the housing market and to assist 'stalled' schemes ( HCA, 2009). ATLAS, the planning advisory service team dealing with large planning applications, has issued guidance on what local authorities should be doing in the downturn ( ATLAS, 2009).

Despite these problems, there are significant opportunities to deliver new housing through the private rented sector - particularly in high-demand areas. Falling property prices will slow the 'buy-to-let' trend, and could encourage developers to adopt a longer-term investment model, raise standards, and diversify supply. Current market conditions present an opportunity for policy-makers to support a stronger private rented sector (Glossop, 2008).