Solving Britain’s housing crisis

Published in Public Sector Review (London), March 2008

If there is one topic that over the past decade has steadily climbed up the ladder of political priorities, it is housing. In the first years of the latest housing boom, which started in the mid-1990s, rising house prices were almost universally regarded as a good thing. As prices went up, people felt wealthier. And wasn’t a steady rise in house prices also a sign of economic strength?

But as the housing market apparently only knew one direction, the downsides of rising house prices became ever harder to ignore. First-time buyers found it increasingly difficult to make their first steps onto the property ladder. Their parents, it turned out, now had to support them with gifts of more than £17,000 on average; without such help many of them would not have been able to make a deposit. No wonder then that we now regularly hear stories of children well into their twenties or even early thirties who are still living with their parents. They simply cannot afford to move out.

Public sector workers, too, have experienced severe difficulties. In the majority of English cities they have been effectively priced out of the market. And for many young families with children finding a once typical family home with a garden in a leafy, suburban environment has become an unachievable dream. It is hardly surprising that in the past few years Britain has seen record levels of emigration, driven by people who no longer think they can fulfil their housing aspirations here.

These problems have caused a gradual rethink about housing. Steeply rising house prices are no longer regarded as an all-round beneficial development, but as a social problem. But if they are a problem, what is the solution to it?

A few years ago the Government commissioned Bank of England economist Kate Barker to look into the economics of housing supply and, later, the workings of the planning system. Ms Barker’s analysis filled hundreds of pages, but her central argument was actually quite simple: restriction of the supply of land for development (something which has happened here), means land prices (and consequentially house prices) go up. Her analysis was as correct as it was unsurprising to economists. In any market, with all other things being equal, supply restrictions must lead to higher prices.

That land prices and land supply – or to put it slightly differently, house prices and house building – have something to do with each other, is no longer a secret that is only known to the learned. As a matter of fact, it is not disputed any more as the evidence is well documented.

But although the fundamental analysis is now beyond dispute, the practical consequences to be drawn from it are not. To be sure, housing is now one of the key issues in British politics. The Housing Minister has effectively been promoted to the Cabinet, and one of Gordon Brown’s first announcements after becoming Prime Minister was a pledge to build three million new homes by 2020. On the other side of the political spectrum, David Cameron’s Conservatives have made it clear that they want to bring decent, affordable accommodation back into the reach of the average first-time buyer and young families.

Yet, while there is much agreement that something needs to be done, current Government policy is heading in the wrong direction. Promising to build three million homes by 2020 may sound like an ambitious programme, but in fact it may not even be sufficient to cope with the extra demand that will result from an even faster increase in the number of households due to changed demographics and immigration. But more importantly, simply pledging to build more does not actually lay a single brick.

On closer inspection, the Government’s plans in fact just promise more of the same: more centrally determined building targets, and extra requirements for the density of developments and how much brownfield land should be used. This kind of central planning is precisely the kind of approach that has been practiced for the past six decades. There is no reason to think that it will now deliver what it has so far failed to.

In fact, if there is one lesson that should be learnt from Britain’s rich history of planning, it is this: a centrally administered policy of predict and provide for housing does not work. Solving the national housing crisis can only be achieved if we shift the balance towards more localised decision making.

To be clear: more local decision making under the current fiscal arrangements would be a recipe for disaster. As councils have to provide costly infrastructure for new development and deal with NIMBY protesters without receiving an automatic and substantial upgrade in their government grants, there would be no incentive for them to engage in a more pro-active planning and development policy. But once provisions are made to ensure that councils will benefit from local development, planning for housing will become something that local councils will not do because they are instructed by the national government, but because it is in their own interest. This way we will be able to solve the housing crisis.

In any case, the stagnant housing market that we have experienced in the last few months does not diminish the urgency of reform. British house prices are so unaffordable that even a 30% correction would not bring them in line with prices in the rest of the world.

Housing has climbed up the political ladder. As long as first-timers, public sector workers and young families are still struggling in the housing market, it must remain any current and future government’s priority.

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