Cameron’s housing speech: terrible economics, but not even good politics
3 March 2015
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2 March 2015
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Most of the time, the role of think tanks is to engage in holistic, ‘big picture’ thinking. Think tank work is often about taking a few steps back, and looking beyond the specifics of the case on hand; it is about studying the woods, not the pattern of the tree bark. And yet sometimes, it is appropriate for think tanks to do the precise opposite: To question popular ‘big picture’ explanations, and come up with highly targeted ‘keyhole surgery’ solutions instead.
After the financial crash of 2008, a group of IEA authors argued that the lesson to be learned was not that we should abolish financial capitalism, and turn our back on international financial markets, as the popular narrative of the day had it. Rather, the appropriate response was to sort out some of the boring, technical stuff, such as capital adequacy ratios, risk rating procedures, liquidity provisions and bankruptcy laws.
Similarly, environmentalists insist that problems like pollution and climate change can only be solved through ‘big picture’ solutions: We have to overcome the ‘dogma of perpetual economic growth’, abandon our consumerist lifestyles and materialistic values, and adopt a completely different way of structuring our economic relationships. Free-marketeers, in turn, point out that narrow, focussed and targeted solutions (like Pigouvian taxes) are not just workable, but also far more cost-effective than the alternatives.
In recent years, Britain’s housing shortage has also – erroneously – come to be seen as a ‘big picture’ problem. The discontent with the high cost of housing feeds into the prevailing anti-market mood, it blends seamlessly into the familiar narrative of ‘austerity’, bankers’ bonuses, inequality, the 1%, NHS ‘privatisation’ and tax avoidance. Viewed in this light, the housing shortage becomes just another symptom of an economic model that only works for a few at the top. Unsurprisingly, those who peddle that narrative insist that there can be no targeted solutions, such as simply building more houses. Instead, we need to ‘think big’, and call everything that happened since 1979 into question.
None of this is true. The housing crisis tells us zilch about ‘our economic model’ (whatever that is) as a whole. The way to solve it is not to bring back Arthur Scargill, reopen the coalmines and renationalise British Airways. It is to roll back the greenbelt, deregulate planning, and ignore the whining of the Nimbys. But try to explain that to an angry student audience, copy of the Guardian in one hand, and Russell Brand’s or Owen Jones’ book in the other.
The housing shortage has become grist to the anti-capitalist mill, and this is not a new phenomenon. A leading post-war politician – I cannot remember who – once said that the annual number of houses built in a country was inversely related to the share of votes going to socialist parties. Housing shortages benefit the political left.
With this in mind, one could have been forgiven for expecting a bit more from David Cameron’s housing speech. But as always, Cameron has followed the well-known script for a politically harmless statement on the subject: Talk about housebuilding in the abstract, but at the same time, send reassuring signals to the anti-housing lobby, showing them that you don’t mean it. Rule out touching the greenbelt, and reheat the brownfield myth. Say nothing tangible unless you talk about demand side subsidies and other gimmicks.
Hence Cameron talked about low interest rates (demand side), the Help to Buy programme (demand side) and the Right to Buy programme (demand side). Unless it involves an increase in the number of planning permits, the talked-up ‘starter homes’ initiative will not lead to a net increase in housing supply either, but merely to a relabelling of development projects that would have taken place anyway. Exempting developers from the Community Infrastructure Levy and Section 106 payments may lower prices for buyers, but presumably, central government will have to compensate local governments for the ensuing shortfall in revenue, which would turn this measure into just another repackaging of costs. Reserving homes for first-time buyers, at the expense of Buy-To-Let landlords, will benefit the ‘marginal first-time buyer’, but since it does nothing to stimulate overall supply, this has to come at the expense of the rental sector. Cameron has offered precisely nothing that could reverse the long-term decline in housebuilding.
Number of dwellings completed per 10,000 inhabitants, 1969-2013
Cameron’s speech was terrible economics, but it was not even good politics. Of course, saying something meaningful about housing – questioning the failed greenbelt dogma, repudiating the brownfield myth – would come at a short-term political cost. The Campaign to Protect Rural England would hyperventilate, and Simon Jenkins would scream bloody murder (much like now, in other words). But the refusal to address the issue will only embolden an already existing anti-market mood, especially among ‘Generation Y’, which will ultimately be far more dangerous than the wrath of a few Nimby hysterics.
After the financial crash of 2008, a group of IEA authors argued that the lesson to be learned was not that we should abolish financial capitalism, and turn our back on international financial markets, as the popular narrative of the day had it. Rather, the appropriate response was to sort out some of the boring, technical stuff, such as capital adequacy ratios, risk rating procedures, liquidity provisions and bankruptcy laws.
Similarly, environmentalists insist that problems like pollution and climate change can only be solved through ‘big picture’ solutions: We have to overcome the ‘dogma of perpetual economic growth’, abandon our consumerist lifestyles and materialistic values, and adopt a completely different way of structuring our economic relationships. Free-marketeers, in turn, point out that narrow, focussed and targeted solutions (like Pigouvian taxes) are not just workable, but also far more cost-effective than the alternatives.
In recent years, Britain’s housing shortage has also – erroneously – come to be seen as a ‘big picture’ problem. The discontent with the high cost of housing feeds into the prevailing anti-market mood, it blends seamlessly into the familiar narrative of ‘austerity’, bankers’ bonuses, inequality, the 1%, NHS ‘privatisation’ and tax avoidance. Viewed in this light, the housing shortage becomes just another symptom of an economic model that only works for a few at the top. Unsurprisingly, those who peddle that narrative insist that there can be no targeted solutions, such as simply building more houses. Instead, we need to ‘think big’, and call everything that happened since 1979 into question.
None of this is true. The housing crisis tells us zilch about ‘our economic model’ (whatever that is) as a whole. The way to solve it is not to bring back Arthur Scargill, reopen the coalmines and renationalise British Airways. It is to roll back the greenbelt, deregulate planning, and ignore the whining of the Nimbys. But try to explain that to an angry student audience, copy of the Guardian in one hand, and Russell Brand’s or Owen Jones’ book in the other.
The housing shortage has become grist to the anti-capitalist mill, and this is not a new phenomenon. A leading post-war politician – I cannot remember who – once said that the annual number of houses built in a country was inversely related to the share of votes going to socialist parties. Housing shortages benefit the political left.
With this in mind, one could have been forgiven for expecting a bit more from David Cameron’s housing speech. But as always, Cameron has followed the well-known script for a politically harmless statement on the subject: Talk about housebuilding in the abstract, but at the same time, send reassuring signals to the anti-housing lobby, showing them that you don’t mean it. Rule out touching the greenbelt, and reheat the brownfield myth. Say nothing tangible unless you talk about demand side subsidies and other gimmicks.
Hence Cameron talked about low interest rates (demand side), the Help to Buy programme (demand side) and the Right to Buy programme (demand side). Unless it involves an increase in the number of planning permits, the talked-up ‘starter homes’ initiative will not lead to a net increase in housing supply either, but merely to a relabelling of development projects that would have taken place anyway. Exempting developers from the Community Infrastructure Levy and Section 106 payments may lower prices for buyers, but presumably, central government will have to compensate local governments for the ensuing shortfall in revenue, which would turn this measure into just another repackaging of costs. Reserving homes for first-time buyers, at the expense of Buy-To-Let landlords, will benefit the ‘marginal first-time buyer’, but since it does nothing to stimulate overall supply, this has to come at the expense of the rental sector. Cameron has offered precisely nothing that could reverse the long-term decline in housebuilding.
Number of dwellings completed per 10,000 inhabitants, 1969-2013
-author’s calculation based on ONS figures
Cameron’s speech was terrible economics, but it was not even good politics. Of course, saying something meaningful about housing – questioning the failed greenbelt dogma, repudiating the brownfield myth – would come at a short-term political cost. The Campaign to Protect Rural England would hyperventilate, and Simon Jenkins would scream bloody murder (much like now, in other words). But the refusal to address the issue will only embolden an already existing anti-market mood, especially among ‘Generation Y’, which will ultimately be far more dangerous than the wrath of a few Nimby hysterics.
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Kristian – It does not seem to me that your graph has any established relevance to the issue. It plots the number of new dwellings per 10,000 inhabitants, but if the population were stable and everyone was already well housed then it would not matter if zero new dwellings were completed. The number of new dwellings related to to the population rise (and perhaps trends in household size) would seem to be a far more relevant figure.
HJ, the ideal measure would be the NET change in the number of dwellings per 10,000, but I couldn’t find that anywhere.
It should be clear that once again we have attempts to grant favours to a narrow demographic, while encouraging the construction of slums of the future built to a price.
I’m getting very hoarse, but I’ll say it yet again:
Affordable homes are the homes we have at the affordable prices we used to pay for them.
Our housing problem isn’t (yet, although it will be in future) about high levels of immigration, because net immigration is dominated by students and others who live at high density:
https://a.disquscdn.com/uploads/mediaembed/images…
It is not really a shortage anyway – average occupancy remains stable – but is concerned instead with changes in ownership:
https://a.disquscdn.com/uploads/mediaupload/tmp/a…
The big change in ownership tenure has been the rapid rise of the BTL sector, fuelled by pyramid bubble finance and
HousingLandlord Benefit acting as a prop to rents. The finance actually comes from abroad via the banking system, so it sucks money out of the economy in interest and capital repayments to ultimate lenders.If you wish to reverse the trend, then
a) you must be prepared to see house prices fall in real terms (and in nominal ones if we aren’t to wait a generation) – even if some of those who were foolish to overextend themselves at bubble prices get repossessed;
b) there is a need to provide landlords with an exit route by offering a much lower rate of CGT on sales to owner-occupiers;
c) LTVs for BTL mortgages need to be restricted (I’d suggest to 50%, as they used to be in the 1990s), reducing the power of gearing to outbid normal buyers;
d) support for BTL rents via
HousingLandlord Benefit needs to be wound down;e) those on high LTVs should be required to pay off capital at at least (2.5% minus Bank rate) p.a. until their LTV is reduced below 50%.
The link between mortgage outstandings and house price ought to be clear:
https://a.disquscdn.com/uploads/mediaupload/tmp/9…
Politicans have been far too afraid to tackle the bubble. Major won an election in 1992:
https://a.disquscdn.com/uploads/mediaupload/tmp/7…
“The housing crisis tells us zilch about ‘our economic model’ (whatever that is) as a whole.”
But it does, because rising house prices do not produce wealth, they merely transfer it. From producers to privileged non-producers. Those on the Right often mistake privilege for free markets and Capitalism. And when this inevitably leads to dysfunction they blame State regulation, like the GreenBelt, or Socialism.
For arguments sake, lets assume Kristian is right, and that planning regulations raise the the cost of housing. It is present freeholders who benefit from these regulations, so why not give them the choice of keeping the benefit they get by paying for it? ie a Land Tax. If they do, everyone else pays less tax, and if they don’t we see an end to NIMBYISM. That’s how the property market should function to deliver affordable housing. But those on the Right don’t want functioning markets when it comes to housing. Even if it means building more terrible quality homes, that we don’t need, and where people don’t want to live. Saddling future generations with yet another burden caused by free market dogma.
Any opinions on this: “Capital Economics picked up the story in a note out earlier this week. It notes that from 2004 to 2014, the number of households in the UK rose by an average of 170,000 a year, but the number of dwellings in the UK increased by some 200,000 a year. That suggests a rise in the number of “apparently surplus homes” to around 1.3 million.”