North/south divide – is the Treasury’s 80/20 rule really that unfair?

20 November 2020 | Investment

“The river bears no empty bottles, sandwich papers.

Silk handkerchiefs, cardboard boxes, cigarette ends

Or other testimony of summer nights.”

(T.S. Eliot, The Waste Land).

Eliot was writing about London in the aftermath of the First World War and the effect the war had on the city of London: ‘Sweet Thames’ had no detritus in it mirroring the deserted streets of London. Like all other cities, London bore its fair share of the brunt of the war.

What has this to do with the government’s housebuilding levelling-up agenda? Simply put, it is this: London may be bustling with the ‘loitering heirs of City directors’ but within its administrative area remain many areas of extreme deprivation; many of its residents don’t have enough to throw into the Thames let alone enough money to buy a house.

On October 2 2020, the Financial Times reported on what is called the ’80:20 rule’. This is the Treasury’s rule which aims for the lion’s share of monies intended to boost housebuilding goes to those areas with the ‘greatest affordability challenge’. 

In other words, 80% of the available pot goes to boosting development in those areas of the country where property is the most unaffordable. In a nutshell, these areas as those where the ratio of median house price to median income is highest.

It is to these areas that 80% of the pot should go in order to boost housebuilding and these areas are situated, overwhelmingly, in London and the South.

Whilst this can, on the face of it, seem to be unfair to our northern neighbours, from a personal affordability of purchasing a home is it so unfair? Using readily available figures and utilising the proverbial back of a cigarette packet, the following figures show that the Treasury’s 80:20 rule is not, in actual fact, all that stark.

The North

Average house price = 6.7 x average salary. Let us say that a bank will loan four times a person’s average salary. That means the shortfall between what a bank will lend and the price of the house is just over 50% of what the bank will lend.

The South (including London)

Average house price = 12.4 x average salary. Using the same lending figures as above, the shortfall between what a bank will lend and the price of the house is just over 200% of what the bank will lend.

The rough figures above suggest that a 75:25 ratio is more akin to the reality of potential buyers’ situation which is not vastly different to the Treasury’s 80:20 rule; therefore, it is hard to see what major changes can be made to the levelling up agenda from this crude financial angle.

Granted, the rough split of people in the South as against the North is 30 million to 26.5 million, which indicates that almost as many homes need to be built in the North as in the South. Whilst northern MPs, in particular, may look to change this to try to achieve a levelling up, the monies available from the pot need to be spent where there is the greatest affordability challenge and this is, clearly, London and the South.

The charge of levelling up actually meaning levelling down is not correct in this, albeit limited (although exceedingly important), area of the economy.

The government’s stated aim is for people to own their own homes. In order to do this, it has to put monies where such affordability is the least achievable.

As set out above, it is clearly more financially burdensome to be able to own a home in London/the South than it is in the Midlands and the North. Should more investment go into the economy north of Watford? Absolutely. Should incentives for large corporations to move to the Midlands and the North be put into place? Absolutely. Should the government give 50% of the pot that is the subject of this article to the North where home ownership is ‘easier’? No, it should not; it would not be equitable to do so when there is such an affordability challenge in London and the South.

The government needs to make a concerted effort to ensure that the North is not left behind, something even more pressing given the likely impact of Brexit. With the introduction of mayoral combined authorities and other similar instances of localised power, there is a chance for some of the wealth gap to be bridged with something akin to the Barnett formula used for the devolved nations of the United Kingdom.

This would, de facto, lead to a levelling up with the extra funding being able to be spent in whatever way the mayor/leader of that authority thinks best, be it more hospitals, schools or greater investment in housebuilding for its area.

By allocating funds where there is the ‘greatest affordability challenge’, the government is hamstrung because it is a fact that, on this measure, a far greater amount of money needs to be allocated to London and the South.

*Ben Arrowsmith is an associate at law firm BDB Pitmans

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–> This post has originally been featured in Property Investor Today.