Published in Roof Magazin (London), September 2008, p. 24

New houses in Germany are cheaper than their British counterparts and on average 50 per cent larger. Given that the two countries have a similar population density, what’s going wrong in the UK?

Helmut Kohl, the former German chancellor, was puzzled on arrival at Heathrow airport. British newspapers were full of doom and gloom at the prospect of house price falls. ‘Why is this bad thing?’ Herr Kohl asked his aides.

Coming from a country with an unspectacular housing market and a big private rental sector, falling house prices were good news. He could not understand why a slowing property market could put the Brits into a state of panic. Shouldn’t they have been celebrating the prospect of being able to afford better homes?

Other Germans arriving in Britain are often astonished at how substandard British houses are. The Frankfurter Allgemeine Zeitung described Britain as a land where hot and cold water still run from two separate taps, where windows cannot be cleaned since they only open by sliding against each other, and where property prices are so inflated that the British cannot afford anything better.

And yet, the Brits seem to take a perverse pleasure in the ups and downs of the housing market. How else could one explain the plethora of ‘property porn’ TV programmes dealing with building, buying and selling property.

This country follows the property market with the interest it used to reserve for the weather and the football results. This stands in marked contrast to other European countries, especially Germany and Switzerland. There, house prices are a non-issue.

They hardly ever feature in the newspapers, let alone on the front pages.
House prices have been stable for decades and, unlike in Britain, there is no reason to treat houses as a capital investment with the expectation of fantastic year-on-year rises.

The German and Swiss property market may look boring to a British observer. No boom-and-bust cycles, sub-prime crises, waves of repossessions. But behind this apparent lack of excitement, the quality of life that ordinary Germans can enjoy in their reasonably priced homes is astonishing to most Britons.

So how come German houses are so cheap? And why are Germany’s newly built houses on average more than 50 per cent larger than new properties in Britain?

We often hear that Britain is a densely populated island where land is expensive. But constant repetition does not turn myth into fact. The population density is similar to Germany’s. In Germany there are 231 people per square kilometre, compared to 247 in the UK – not dramatically different. Some parts of Britain are only sparsely populated but that is also the case in Germany, particularly in the North-East.

What other factors could explain the differences in house prices? The average annual population growth over more than three decades has been 0.16 per cent in Germany and 0.24 per cent in the UK. But in Switzerland the corresponding figure is 0.45 per cent. The Swiss have also kept house prices stable. In other words, it would be silly to blame the UK’s rising house prices entirely on immigration.

Maybe household formation has changed in the UK? As people live alone for longer periods more dwellings are needed. But similar changes have occurred elsewhere. During the past quarter of a century household sizes have fallen by about 0.3 people per household in the UK, Germany and Switzerland. Just like population density and population growth such changes cannot explain why the housing market has developed differently from Germany’s and Switzerland’s.

And they have developed differently: adjusted for inflation, UK house prices have risen by 4.14 per cent a year since 1970, according to the Bank for International Settlements. In Switzerland, however, the annual increase has been 0.34 per cent, whereas in Germany house prices have fallen by 0.38 per cent per year. If the demand side is similar in all three countries, the source of differences must be on the supply side. The fact is that in Britain housing supply has not been as responsive to increased demand as it has been in Germany or Switzerland. Two factors are mainly responsible for this lack of housing supply: the planning system and the system of local government finance.

It is impossible to overstate the rote that the planning system has played. Since the Town and Country Planning Act was introduced in 1947, British cities have been constrained by a policy of limited land supply. But where demand is growing and supply is restricted, prices have to go up, and this is what has happened.

A hectare of land without planning permission will sell for an average of around £10,000 in England, but residential land fetches a price, on average, of more than £2.6 million per hectare – the result of planning-imposed artificial scarcity. This is an unnecessary condition, especially considering that, far from being an urbanised country, only 10 per cent of the UK’s land mass is developed – much less than in countries of similar population density.

Planning was introduced to coordinate development while ensuring that people could live in decent accommodation and a pleasant environment. However, it has become a policy that, perversely, limits the spatial extent of cities, cramming more people into existing space. Land was to be saved from development, but this policy has benefited the rural few at the expense of the urban many. The winners of this policy of containment were property owners, the rich and the rural population. At the same time, people in the city with no property – first-time buyers and the younger generation – lost out.

Yet planning alone does not explain the difference between the UK, and Germany and Switzerland. The latter also have strict planning laws, but they still manage to build more than the UK.

In Germany and Switzerland, planners are keen to support their councils by making cities good places to live, thus attracting new inhabitants who will increase council revenue. People get the houses they want and the politicians are the masters of their own (fiscal) fate.

Existing residents also benefit. They are told how much it costs to build more homes and how much new infrastructure would have to be provided. Communities are comfortable deciding on development proposals, weighing costs such as more traffic or less green space against benefits such as a new public swimming pool or a local tax cut. In that way the German and Swiss planning systems support the preferences of local governments and communities.

In stark contrast, British housing policy has a very centrist and almost Soviet approach which, like other examples of central planning, does not work. Whitehall simply cannot know best what kind of housing is needed across the country. Local government, on the other hand, would know better.

In fact, most locals would have a clear idea how much more housing would be desirable. For example, they know how difficult it is for buyers in their areas to make the first step on to the property ladder. But they do not have the financial incentives to deliver the number of homes to supply this demand.

The only way our government can increase housing stock is by issuing central targets. But with proper incentives, councils would not need regional agencies or the national government to tell them what to do. Their own self-interest would ensure that they took the action required.

We should not be misled by current news about falling house prices. Even a 20 per cent correction would bring house prices only back to a level where they were three or four years ago. But the problem is bigger than that as we are facing decades of undersupply. We need to shift the balance towards more devolved and incentivised planning.

If we do not achieve this, housing comparisons with the continent will remain unflattering. But if we do manage to change our planning culture, future generations will enjoy a better lifestyle.