The Great British Property Racket!

 

In international discussions of economic policy, the British government likes to boast of the flexibility of its economy. In some areas, notably the labour market, the UK does have a relatively unregulated economy. But every country has its sacred cows, and Britain’s is housing. In planning, the UK persists with an approach that might be described as Stalinist. The difference is that, whereas Stalin wanted to make things happen, the UK’s land-use system is designed to do the opposite. It is spectacularly successful. If it had been in effect in the 19th century, none of the great British cities would now exist.

Here are two simple indicators. First, the number of houses constructed in the UK in the financial year 2012-13 was the lowest since the second world war, at just 136,000. Even in 2013-14, just 141,000 houses were built. In 1969-70, the corresponding figure was 378,000. This is a stunning collapse.

Second, this decline in output has not been due to any diminution of demand. This is demonstrated by prices. According to Nationwide Building Society, the ratio of house prices to average full-time earnings rose from a trough of 2.1 in 1995 to an all-time peak of 5.4 in 2007. It fell to 4.1 in the first quarter of 2009, still high by historical standards, before rising to 5.0 in 2014.

Collapsing supply and soaring prices: nothing could better indicate severe constraints on supply. Those who do not know better will say that supply is constrained because building land is limited in a small and densely populated island. This is true, but not for physical reasons. Only 11 per cent of England’s surface area is urbanised. The urban-dwelling majority do not recognise this because they travel so much more slowly inside towns than between them. The restrictions on land availability are man-made. They are due to a control system of baroque complexity that has not only constrained supply, but, far worse, has created a set of powerful vested interests in its continuation. Among those interests are local residents, homeowners in general and the banks that finance them. In a genteel British way, this is a corrupt arrangement whose result is to benefit the haves at the expense of have-nots. It is supported by pressure groups, such as the Campaign to Protect Rural England, which I think of rather as the Campaign to Contain Urban England.

One of the ironies is that the inability to build houses probably prevented a far worse economic crisis in the UK, since it prevented an expansion of supply and subsequent collapse in prices like those seen in Ireland, Spain or the US. But the long-run social and economic consequences are dire. These include massive transfers of resources across generations — and, within generations, to people whose parents own properties — which is arguably more important. They also undermine the ability of young people to afford housing and to form families. Defenders of the system tend to refer to housing wealth as the product of savings. It is not

Moreover, the wealth accumulated by property owners is fundamentally unproductive. Defenders of the system tend to refer to this wealth as the product of savings. It is not. I understand this myself, since I own a house whose nominal value is perhaps 25 times as great as it was when I bought it 30 years ago, almost nine times higher after adjusting for inflation. This vast increase in wealth is not due to my endeavours. It is overwhelmingly the product of a rise in the value of land, which is the fruit of other people’s efforts, not mine.

Change will come only once people recognise how unjust this situation has become. This is not just about obstacles to becoming an owner occupier. High house prices will also raise rents. They will ultimately force people to live in more cramped conditions than would occur without limits on supply.

What is to be done? If a solution were politically easy, it would already have happened. It is not. I cannot think of a better example of the way in which controls tend to create a vested interest in their perpetuation.

The obstacles to moving to a more supply-friendly set of policies are huge. But the long-run consequences of continued population growth alongside such low rates of new building are likely to prove explosive.

The long-term aim should be to reform the incentives facing local authorities, the role of prices in land-use planning, property taxation and housing finance. Here is a set of challenges worthy of a reforming government. In the short run, given extremely low long-term interest rates and the high value of houses, government could either build more or subsidise building. In 1969-70, local authorities built 185,000 dwellings. Without going that far, governments could do far more.

Present arrangements do not work. It is time for something more radical.

 

Source: Financial Times.