Housing and Planning

‘Market failure’ in housing? What ‘market’, Polly Toynbee?

– ‘There’s a study on this by University X, which clearly confirms A.’

– ‘That has long been debunked. Another study, from University Y, rebuts A and conclusively proves B.’

– ‘But that Y study is flawed: it fails to control for M, N and O.’

– ‘No, it’s the X study that cannot be trusted. It has been co-sponsored by an organisation which benefits financially from A.’

Does this dialogue look familiar? Of course it does. Most political arguments follow this blueprint: start with a conclusion that ‘feels right’, then look selectively for evidence to retrospectively back it up. To some extent, we all do it, though some a lot more than others.

But there are a few policy areas in which you could not play this game, because the evidence is just too conclusive: no matter how hard you look, there simply is no University Y that refutes A and finds B. Empirical studies on the determinants of housing costs fall into this area. Virtually every study ever conducted on the subject reconfirms the role of building restrictions as a key cost driver (for a literature review, see pp. 74-80). It is for a reason that NIMBY organisations have to revert to the most ridiculous excuses, such as making up non-existent brownfield sites that supposedly render greenfield development ‘unnecessary’. What clearer evidence does one need when land granted planning permission is hundreds of times more valuable than agricultural land in the same place?

And yet most people on the left just cannot bring themselves to acknowledge that Britain’s housing crisis is a crisis of supply-side constraints, and therefore a crisis of government interventionism. Writing in the Guardian, Polly Toynbee describes the housing shortage and the house price explosion it has produced as a ‘gigantic market failure’. Market? What market? It’s a long time since we last tried market economics in housing.

The one good thing about Polly Toynbee is that you don’t even have to contradict her; just let her ramble on a bit, and she will do it herself at some point. This article is no exception. Among her policy recommendations is a scheme in which the government buys undeveloped land, grants itself planning permission, then sells off the land at the now much higher price, and keeps the difference. In this system, the government would effectively capitalise on its monopoly power to grant planning permission, by retaining the ‘planning premium’. A scheme like this is financially attractive for the government when the planning premium is large, which is only the case as long as land with planning permission is in short supply. So in endorsing this scheme, Toynbee implicitly acknowledges that land prices are kept high by the withholding of planning permission. How on earth is that a ‘market failure’?

In fact, much of the rest of Toynbee’s article itself lays out clear evidence that the state is in part responsible for high house prices in other ways. She alludes to the extraordinary monetary policy and low interest-rate policy of the Bank of England. She even goes as far as saying that ‘the government creates a phantasm of success by deliberately inflating house prices’, presumably referring to the reckless Help-to-Buy scheme. But with all this evidence staring her in the face, she still cannot bring herself to consider the possibility of ‘government failure’.

How could someone possibly come to that conclusion? Being generous, it may simply show a huge misunderstanding of what ‘market failure’ actually means. The less generous interpretation is that it shows an Orwellian attempt to manipulate language such that ‘market failure’ or ‘laissez faire’ refers to any outcome that Polly Toynbee and co. do not like. Perhaps Toynbee thinks that acknowledging the often perverse outcomes wrought by government intervention will weaken her advocacy of it in other areas. Who knows?

Whatever the true explanation, her decision to ignore ‘government failure’ and the true structural causes of Britain’s high house prices and rents leads her to advocate all the karaoke leftist housing market ideas: state building, second generation rent controls and higher property taxes. Governments have a terrible record on the first, whilst the second and third are treating symptoms rather than the underlying cause.

We should be thankful for small blessings, however.  At least Polly Toynbee recognises the need to build more homes – too many commentators still deny the need to build anything at all (‘Why should we build more? I already have a house!’). She is also right that the government is wrong to suggest rising house prices are good for the economy. Unfortunately though, her anti-market ideology refuses to acknowledge the implications of the evidence in front of her own eyes.

Follow @MrRBourne and @K_Niemietz on Twitter.

Head of Public Policy and Director, Paragon Initiative

Ryan Bourne is Head of Public Policy at the IEA and Director of The Paragon Initiative. Ryan was educated at Magdalene College, Cambridge where he achieved a double-first in Economics at undergraduate level and later an MPhil qualification. Prior to joining the IEA, Ryan worked for a year at the economic consultancy firm Frontier Economics on competition and public policy issues. After leaving Frontier in 2010, Ryan joined the Centre for Policy Studies think tank in Westminster, first as an Economics Researcher and subsequently as Head of Economic Research. There, he was responsible for writing, editing and commissioning economic reports across a broad range of areas, as well as organisation of economic-themed events and roundtables. Ryan appears regularly in the national media, including writing for The Times, the Daily Telegraph, ConservativeHome and Spectator Coffee House, and appearing on broadcast, including BBC News, Newsnight, Sky News, Jeff Randall Live, Reuters and LBC radio. He is currently a weekly columnist for CityAM.

Head of Political Economy

Dr Kristian Niemietz is the IEA's Head of Political Economy. Kristian studied Economics at the Humboldt Universität zu Berlin and the Universidad de Salamanca, graduating in 2007 as Diplom-Volkswirt (≈MSc in Economics). During his studies, he interned at the Central Bank of Bolivia (2004), the National Statistics Office of Paraguay (2005), and at the IEA (2006). He also studied Political Economy at King's College London, graduating in 2013 with a PhD. Kristian previously worked as a Research Fellow at the Berlin-based Institute for Free Enterprise (IUF), and taught Economics at King's College London. He is the author of the books "Socialism: The Failed Idea That Never Dies" (2019), "Universal Healthcare Without The NHS" (2016), "Redefining The Poverty Debate" (2012) and "A New Understanding of Poverty" (2011).

26 thoughts on “‘Market failure’ in housing? What ‘market’, Polly Toynbee?”

  1. Posted 04/04/2014 at 14:10 | Permalink

    Toynbee. She has been so wrong and so misguided for so long she must be in line to replace Tony Benn as a political national treasure.
    She has that same mindset as Benn had. The more someone disagreed with him and the more his social experiments failed, the more convinced he was that he must be right.

    She will end up in Westminster Abbey too, probably. With everyone saying ‘i didn’t agree with her but her camomile tea was lovely’

  2. Posted 04/04/2014 at 15:03 | Permalink

    The only issue I have with your piece is that there are thousands, if not millions, of British people who absolutely fundamentally don’t agree with the development of green fields and the urbanisation of the countryside, under any circumstances whatsoever.

    The requirement for more houses to be built is not as fundamental to human survival, and the survival of Britain as “a green and pleasant land” as the requirement for clean natural unpolluted “lungs” of rural countryside.

    I believe there are a very large number of people who will become mobilised to physically prevent any developers from permanently destroying the unspoilt countryside.

    Be prepared for a very bloody battle.

  3. Posted 04/04/2014 at 15:09 | Permalink

    Agree mostly guys but, as ever, you still ignore the principal effect on this ‘market’ of easy lending. Sure you refer to reckless HTB – and you are right to be pejorative – however it is not reckless. it is designed to create a mini boom to win elections, at the expense of anyone not in property and the next generation.

    #bringbackcapitalism #hikeratesnow #Taxon wealthnotwealthcreation and #banHTB and supply will open up, prices will fall and society will prosper.

    But it will never happen while the few own the property.and land. Eh guys?

  4. Posted 04/04/2014 at 15:43 | Permalink

    You seem to suggest that H2B is inflating house prices. This is nonsense. The demand was already there. H2B increases supply as no developer will build houses unless he is confident that there is someone able to buy them. It therefore acts to moderate the increases in price caused by high demand.

  5. Posted 04/04/2014 at 16:23 | Permalink

    Douggie @ 16.43. Dear oh dear. Planet. Zog. Living on.

  6. Posted 04/04/2014 at 17:50 | Permalink

    Nobody seems to recognise the state setting of minimum house prices via the housing benefit underpinning of rents.

    HB is supposed to reflect the current “market rates” but in many places id IS the market, “Benefits Street” being a case in point where the majority of the rents are paid by the goverment.

    If you own a BTL and you cant get a private tenant then you know you can fall back on a social tenant at 1/200 of the house price per month rent as a minimum.

  7. Posted 04/04/2014 at 18:41 | Permalink

    There isn’t a shortage of housing. There’s an excess of people.

  8. Posted 04/04/2014 at 18:43 | Permalink

    There isn’t a proper market in housing. And one problem is taxation. We should levy Capital Gains Tax on house sales just like we do on other forms of investment like shares. Either that or abolish CGT.

  9. Posted 04/04/2014 at 19:37 | Permalink

    Dougie – indeed! OMFG!

  10. Posted 04/04/2014 at 19:39 | Permalink

    I meant Dougie – you have to be kidding.

    MrVeryAngry – indeed. Amazing people believe and spout that tripe!!!

  11. Posted 04/04/2014 at 21:57 | Permalink

    I had a blog on the NHS scandals a few months ago in which I noted that two Anglican bishops said: “We
    have now seen what many of us suspected – that the marketisation of the health service has gone too far…This Christian basis has been weakened in recent years and covering the bottom line has become all important.” This was their response to the deaths of 1,200 people in a state-run health system which is less marketised than any system in the developed world except perhaps those in Iceland and Canada. It is sadly rather common to simply describe any bad outcome (even the deaths of 1,200 people) as a problem caused by the market. The thinking goes: “markets are bad; 1,200 deaths are bad, therefore 1,200 deaths must be caused by markets”. If they actually considered under what system the 1,200 deaths took place they might eventually change their priors – assuming their minds are just a tiny bit open

  12. Posted 05/04/2014 at 03:44 | Permalink

    Some interesting comments. Would be interested to know how you’d ensure quality if unrestrained building. Also what you would envisage happening to land prices. How would any strategic infrastructure be dealt with? Are you advocating removal of plan led system? How do you anticipate the market meeting the needs of those only able to pay moderate to low prices? If there’s that much pent up demand then MKT would satisfy that 1st and prices would remain high for some time. Would politicians ever have the balls to commit to a system for long enough to outlast long term landowners who might just decide to wait til the next govt or not bother for the next generation or two…

  13. Posted 05/04/2014 at 09:15 | Permalink

    I neither know nor care what Polly said but a few seconds rational thought would tell you that building more houses, while probably a good thing and good for the economy, will not get prices down overall. Prices would go down in very marginal areas but up in central areas.

    Or do you seriously think that the rental value of land goes down, in total, if you allow more construction rather than less? Land prices are primarily the capitalised rental value, so that would go up too.

    (Reducing taxes on earnings and output and profits and having LVT instead would sort all this out far better than more construction, although in an ideal world wed have both).

  14. Posted 05/04/2014 at 13:24 | Permalink

    MW: +1

    No, +2 – including my wife

  15. Posted 05/04/2014 at 22:51 | Permalink

    Polly saves time! All you have to do is take the very opposite view from hers and you will surely be on to it.

  16. Posted 06/04/2014 at 08:26 | Permalink

    Housing (rented or owned) is like any commodity, governed by the law of supply and demand. Supply in UK controlled by planning laws. Planning laws controlled by crested newts and other arcane green legislation.

  17. Posted 06/04/2014 at 13:02 | Permalink

    “Housing (rented or owned) is like any commodity, governed by the law of supply and demand.”

    Yes, but even in the absence of any planning laws, you’d still see expensive areas and cheap areas. There is little competition between the two, either a house is near a park on a leafy street or it is facing the gasworks.

    Just like there is no competition between Rolls Royce and Vauxhall when it comes to selling cars. But at least BMW or Ferrari can eat into RR’s share for luxury cars, it does not matter how many Vauxhalls they build or what price they sell them for, this has no impact on RR or BMW.

    The rental value of a plot is like a place in a queue – the value of the place in a queue is dictated partly by how many people are in front of you (closer to the centre) and partly by how many are behind you (further away from the centre).

    So if a town is allowed to expand, the new units are cheaper than the existing ones, but the older units nearer the centre now increase in value, in the same way as the value of your place in the queue increases if another ten line up behind you – even if the front of the queue has stalled and there are still five people ahead of you.

  18. Posted 06/04/2014 at 13:08 | Permalink

    there is no supply side problem. there is a geographically distinctive mismatch between housing supply and demand.

    in the home counties, housing demand massively outstrips supply while the opposite is true in other places.

    these mismatches are directly caused by successive governments’ social policies and [at best] a side effect of the same governments’ economic policies.

    the solutions are economic and social policies that even out population density and housing supply, depend less on financial services `scams` and more on manufacturing and export, and place less reliance on cheap immigrant labour and generous levels of non-contributory welfare to fill gaps.

  19. Posted 06/04/2014 at 14:49 | Permalink

    The media want everyone to believe demand outstrips supply. Take away easy lending or state lending (HTB) anmd you will see that is complete nonsense. hence in credit crunch mkt went nowhere 2010-2012. Where was your nonsense D>S then? Prces were lower but transactions numbers well still low. Why? Bcos NOONE COULD AFFORD TO BUY!!!!!!!!!!!!!!!!!!!!!!!!
    Only when the fascists in Govt got involved did mkt spring to life. Who’s paying for this? Who’s benefiting.


  20. Posted 06/04/2014 at 17:22 | Permalink

    Of course there will be expensive and cheap areas, as most land in central London is is built upon housing is physically restricted. Go to say Epping housing is not physically restricted, but planning controlled causing an artificial (man made) shortage thus bumping up the housing price.

  21. Posted 06/04/2014 at 17:57 | Permalink

    One area of Government intervention that you and, I suspect, Polly did not mention is the massive programme of rent rebate that supports the rent-to-buy market. Were all government interventions in the housing market to be withdrawn simultaneously, there would be a period in which tenants were thrown out on the street for their inability to pay rent before the increase in house building brought rents down. Are we ready to see children sleeping rough on the streets ? If not, this transition period requires intervention of some sort in suppressing rents.

  22. Posted 06/04/2014 at 23:40 | Permalink

    The undoubted shortage of housing stock is solely due to government policies. Massive random, rampant and unregulated immigration – owing to EU membership and the open door policy exacerbated by the New Labour Marxists for Asia, the Middle East and Africa – on a scale and in such a short space of time never before seen in the world has created the problem. This applies to all our institutions including Social Welfare, Education, Health, Police, Judiciary, waste, water and sewerage, etc. All have been stretched to deal with this enormous influx of people to the point that they cannot cope.

    Apparently, there are 74 million NI numbers in issue yet our census states the population is 61 million! Are we to believe that Britain has 13 million ex-pats? And when has anyone been prosecuted for not or incorrectly completing the census return? It suits government not to do so. Simply, the housing market has been substantially warped by government policies on immigration. Note that 25% of new births in the UK are to mothers that were not born in this country. The housing demand problem at this rate can only be satisfied when our country is completely concreted over.

  23. Posted 07/04/2014 at 07:37 | Permalink

    People with strong political beliefs are incapable of open minded thinking due to confirmation bias dominating their thinking. Data has to be be twisted to fit with their dogma using their emotion centres rather than logical thought. In effect this means any answer has to fit in with their belief system to be acceptable emotionally so they never be capable of thinking outside the box..See http://www.scientificamerican.com/article/the-political-brain/
    Two example of people ruled by confirmation bias are Polly Toynbee and Nick Clegg but there are many many more in parliament.
    There are five moral triggers that people use to judge right from wrong see http://www.nbcnews.com/id/36325869/ns/health-behavior/t/key-moral-triggers-polarize-politics/#.U0JSg1en-ul
    The liberal (or left in UK terms) only tend to care about harm and fairness whereas those more to the right have the full set of five triggers.
    Hence left wing solutions to problems tend to not work in the real world because of the limited basis of thinking or emoting and they do not consider financial probity to be of any real importance. Hence left wing governments have a history of being poor at finance and ending with higher unemployment than they started with.
    Best government would be for decisions to be based on the viewed and calculation by experts using logic but that will always have zero appeal to the political elite. Unfortunately in Asia many governments are basing future plans and projects on reports by experts rather than headless chicken mode politics. Hence over the decades they are catching up or have caught up and will leave us in the dust economically within a decade or two.

  24. Posted 07/04/2014 at 08:59 | Permalink

    Barry: “Go to say Epping housing is not physically restricted, but planning controlled causing an artificial (man made) shortage thus bumping up the housing price.”

    Yes, exactly, that was my point. I happen to live in Epping Forest and I know what you mean. So the new homes at the margins of Epping would be slightly cheaper than existing ones, but the value of land on Epping high street would go up; and similarly, this would gently push up values all the way down the Central Line into central London.

  25. Posted 07/04/2014 at 16:10 | Permalink

    Let’s not mention the 1 million Poles (according to Poland’s foreign minister, recently) and the 4 million other immigrants, some of whom at least are presumably not living rough and thereby using housing that would otherwise be available to the natural British.

    this comment box is rubbish for editing!

  26. Posted 20/05/2014 at 08:48 | Permalink

    Is the debate really greenfield v brown field development?
    Grannyluvdub asks “how you’d ensure quality if unrestrained building”
    Chrisb is worried about “Were all government interventions in the housing market to be withdrawn simultaneously, there would be a period in which tenants were thrown out on the street for their inability to pay rent before the increase in house building brought rents down. Are we ready to see children sleeping rough on the streets?”

    To deal with Chrisb first – I suspect that, just as when Hitler or Nazis are brought into an argument the commenter has lost, so is the case when the commenter writes”children sleeping rough on the streets.” Consider – a very large (one quarter?) proportion of the population receives rent rebates. There is no point in throwing them out onto the streets as there would be no one to take up the tenancy. The only option for the landlord is to markedly reduce the rent to something the tenant could pay. (Banks, being notoriously hard-hearted, might still chuck them out, thus leaving vacancies in the tenancy market.) Landlords – with the value of their houses reduced – would demand this be reflected in lower rates. Councils would be forced to agree – else dismissed at the next elections. This may put an end to wasteful local council spending. Meanwhile, with no Government interventions (which includes removal of ALL planning restrictions, developers would be free to build flats of varying sizes in places where people want them – mostly in central cities/towns, thus relieving the problem.

    The question for Grannyluvdub is “Why should anyone prescribe ‘quality’? I remember the concerns over the Parker-Morris standards – there is a good summary of the progress through the ages on Wikipaedia. If the standard is low, then only low rents can be charged. But the eventual standard will be that which suits the pockets of builders and purchasers/tenants. Let the market rule – there is a good case for government intervention here – prevent councils imposing minimum (or maximum) standards, to the detriment of those desiring housing

    There must surely be large areas of Victorian housing still in use in our cities. Areas in Croydon I remember from my youth (my uncle and aunt lived there) appear to have been done up – at least most houses have fresh coats of paint – but undoubtedly there must be areas where half a dozen houses could be replaced by flats for 300. A few such developments would markedly reduce the “housing problem” – and of course with the problem being ameliorated, the going level of rents would be reduced.

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