Nicholas Boys Smith is the Director of Create Streets, a social enterprise encouraging urban homes in terraced streets not multi-storey buildings.

Those of you who don’t live in London may have missed how vicious, how polarised some of the political debate has become here in recent months. On the one hand some celebrate the flows of capital, resurging prices, markets, banks, bonuses and house prices. Others bemoan the same phenomena with equal vigour and condemn benefit reform and house prices in terms that are far (far) more Bennite than Blairite.

Underlying it all are homes, or rather the lack of them. The problem is not just that there is limited space but that despite the desperate need for new housing, specific new housing projects often encounter local opposition – with long consequent delays. Just look at the controversy surrounding redevelopment at Mount Pleasant, Earl’s Court or the Heygate Estate.

The London Plan estimates an annual need of 49,000 new homes. However in the year ending in September 2013 only 17,950 homes were started and 16,240 completed. In the previous twelve months only 15,380 were started and 17,530 finished. In other words, London is normally managing to build about forty per cent of the homes needed just to stay in line with population increases – let alone try to reduce sky high rents and purchase prices.

In consequence, Boris Johnson’s position on tall buildings has evolved. In 2008 he ran fairly unambiguously on an anti-high-rise platform, condemning Ken Livingstone’s encouragement of towers as a “phallocracy” and promising to maintain the city’s viewing corridors: “London’s skyline is precious,” he said. “It is hugely embarrassing that . . . Unesco considers two of London’s greatest architectural triumphs, the Tower of London and the Palace of Westminster, potential candidates for the endangered list of World Heritage sites.”

Today however, Ken’s liking for tower blocks seems rather timid, more of an amuse-gueule than the tower block terror we are getting under Mayor Boris. London’s skyline is changing faster and more profoundly even than in the 1960s – with remarkably little public debate. New figures last week revealed that 236 towers are currently being built or have recently been given permission in London. More were approved on Friday. Our new pre-budget research note, published today, shows how the regeneration of London estates is creating a second generation of large multi-storey blocks. Our research of 18 schemes shows the density of housing increasing by 171 per cent from 72 units per hectare to 195 units per hectare. The average increase in height of the buildings was 227 per cent. Only one development studied had no new buildings above 10 storeys. Are we repeating the errors of 40 years ago ? Some multi-storey blocks in East London, less than 15 years old, are already becoming dense repositories for the unintentionally homeless (see p. 120 of this book).

Maybe this is what people want ? in fact, not Normal streets with normal houses and low or medium rise flats are infinitely more popular. In the latest 2013 poll, only 3 per cent want to live in flats with over 10 units in the buildings. Why is this? Why do 89 percent of Britons want to live in a house on a street, 0 percent in a tower block and only 2 percent in an apartment? Is this a naïve British desire for cottages and country roses? Far from it. People are being deeply rational. Living in big tall buildings is not good for you. The vast majority of controlled studies show that the residents of large multi-storey blocks suffer from more stress, mental health difficulties and crime, that children do less well and that communities are less strong. This data takes account of socio-economic status. You can access some of the academic evidence and read summaries of the data here, here, here, here and here.

So why are we sleep-walking to a second generation of high-rise and multi-storey living in London? Specifically, why are estate regenerations building large multi-storey units all over again? It is mainly because we have got into a vicious circle. Building new housing is typically unpopular. Therefore obtaining planning consents remains (in historic and comparative terms) difficult. Therefore land supply is constrained. Therefore land values are high – making it more economically rational to build high. A series of factors then exacerbate.

There is an increasing expectation that uber-densities will be permissible which in itself drives up values further. A cumbersome and lengthy planning process pushes up costs even more. So does a strong demand both from domestic and international investors, eager to buy in to what they see (certainly wrongly) as a one-way bet on capital values.

The best way for commercial partners (who are mostly cash-flow businesses, quite reasonably looking to maximise short-term profit from sales) to cope with the high land values and meet their investors’ requirements is to build big and build high. Even when land is not being bought, Council and Housing Association land owners typically require private sector support to fund and manage redevelopment. Replacement homes must be funded from private sector sales and the cost of development finance (typically 7-8 per cent) and the profit targets of investors (typically 20 per cent in a fairly short time frame) then require the same high returns.

It is hard for public bodies to dodge this dilemma. The Best Value test requires maximised immediate value. Public bodies are (quite rightly) required to secure ‘best value’ when disposing of assets and land under the 1999 Local Government Act. Unfortunately public bodies have typically found it safest to achieve this by focusing on higher initial land value (and thus much quicker cash returns) over long-term (but ultimately higher) investment returns accruing over time via a co-investment. This biases decisions in favour of regenerations that can sell lots of units quickly.

Finally, density targets and design rules in the London Plan and the London Housing Design Guide (which gold plate national standards) then make it harder than it should to build conventional high density normal streets cost-efficiently. You can read more about these here.

The good news is that there is an answer. Streets are not just popular but practical. Terraced streets can be very high density. They are higher density than most post-war estates. If we built enough, they could solve the South East’s housing crisis. By making redevelopment more popular, by giving local people more control over what happens, when and how, we believe that redevelopment of more land would be popular. Streets also have excellent very long term returns due to higher long term value appreciation. For example, data from the Halifax, Savills research, Space Syntax (a spin off company from University College, London) and the Brookings Institute all indicates that, quite apart from the social benefit, the long term returns of developing low density post-war estates as attractive, high-density ‘normal’ and well-connected terraced streets of houses and medium rise flats could be fantastic.

The problem is that their short term returns for immediate re-sale can be less good than maximum density high-rise due to lower square footage. However, these higher returns appear typically to take longer to feed through. The additional premium that streets can generate over time seems to be a simple function of the fact that people like them more and are prepared to pay more to buy or rent places to live in them.

To make it easier to focus on long not short term value appreciation, our pre-Budget report (published today) calls for four steps to move from providing insufficient and less popular homes to providing more and more popular homes.

1. Ending the regulatory bias for high-rise and against conventional streets

2. Empowering local people to take a more active and important role in the regeneration process

3. Improving the focus on the long term via a revolving fund for estate regeneration. This could build more homes for London at no ultimate cost to the taxpayer.

4. Piloting a Social Impact Bond helping regeneration to be more sharply focused on good social outcomes

Launching a revolving fund for estate regeneration would not even necessarily involve any short term increase in public spending. The Government is already spending or putting at risk at least £500m to subsidise building affordable housing. Why not move some portion of these large sums of money explicitly to fund estate regeneration?

Here’s how it might work:

  • Local councils or Housing Associations could draw on the fund if commissioning large scale street-based redevelopment.
  • It is a loan not a grant – with a cost of capital rate of interest, perhaps linked to ‘Prudential Borrowing’ rates.
  • The nominal term would be long term – say 30 years.
  • They could use this loan to commission development.
  • The fund should be specifically available only for redevelopment of estates where running costs, the cost of refurbishment and the state of buildings have made the current financial situation unsustainable, making redevelopment the most rational long term approach.
  • The fund should also only be available when there is genuine and very real local support for regeneration. This is absolutely critical. The fund should only be permitted to support regeneration that has been clearly passed in a local neighbourhood plan. Otherwise there is a risk of the fund merely being used to accelerate the type of second generation multi-storey which currently predominates. The new neighbourhood planning mechanism shows how this could be done.
  • The proposal backed by local people would have to be sufficiently densely developed and attractive to private as well as affordable tenants to pay back the loan over a medium to long time frame.
  • The loan would be paid off using a mixture of surpluses of rent over running costs of replacement and new affordable homes, private sales, retained equity stakes in shared ownership homes being ‘staircased out’ over time and (if necessary) by hypothecating future Right to Buy receipts from the redeveloped estate.

Our modelling on a real site shows that in many developments if density could be sufficiently increased (without going to the uber-densities now being seen on some schemes), the income from rents and sales could pay back the loan from central government within the timeframe of the loan. Meanwhile all existing social housing could be maintained.

Nothing in life is too good to be true. We do not pretend that improving the process and outcome of regeneration is easy. Changing rules in the London Plan is complex. And there is a risk to the Exchequer if development is badly managed or executed. In a way that is the point. The Government is taking some of the risk of long term regeneration. But done well, we estimate this could provide an additional 250,000 homes in London, at no accountable cost to the Treasury whilst also helping build new, more socially mixed, neighbourhoods in London along the lines of the most popular and valuable.

London property risks becoming too expensive to its own good or for the good of the British economy. Surely a massive increase of supply of good normal housing that real people want to live is an idea worth pursuing?