Liberating housing: a free-market approach

If it moves, tax it. If it keeps moving, regulate it. And if it stops moving, subsidise it.’

This famous quote by Ronald Reagan was meant to be a summary of governments’ approach to economic activity in general, but it is difficult to think of a more fitting contemporary example than the British housing market. Choked by an absurdly restrictive planning system, it stopped moving long ago. We have now reached the point where policymakers are thinking about how to ‘boost’ homebuilding, through incentive measures like the New Homes Bonus.

It is, of course, commendable that policymakers are at least recognising the problem. But by asking what the government can do to ‘encourage’ homebuilding, they are starting from the wrong premises. The government should not do anything to encourage homebuilding.

In a market economy, it is not the role of government to encourage production, be it of homes, apples, trainers, or shaving foam. The best thing the government could do for the housing market is to get out of the way. Don’t try to ‘boost’ or ‘promote’ it – just stop strangling it.

The housing market has long been characterised by excessive government interference on the supply side, and the results have been dismal. Over the past 40 years, house prices after inflation have increased three-and-a-half fold. Income growth has not remotely kept pace with house prices.

In the 1970s, the average homebuyer needed less than three gross annual salaries for a house, excluding interest payments. Today, it costs them more than five gross annual salaries, again excluding interest payments. By international standards, the UK is an extreme outlier on both counts.

In other markets rising prices entice new suppliers to enter the market and existing suppliers to expand their supply. In the housing market this simple mechanism has long been suppressed. As house prices exploded, fewer and fewer homes were being completed.

These figures are, again, extreme outliers in an international comparison. For at least three decades the UK has trailed far behind its neighbours in terms of housing construction.

Finding out why is not rocket science. The determinants of house prices are now well-researched and the literature is fairly conclusive. House prices are always driven by a variety of factors – but the impact of most of them is either modest or transitory. Substantial and lasting house-price increases are almost always the result of restrictive planning regulations.

The evidence is as clear as it gets, but housing is one of those areas where the political debate is remarkably impervious to facts. It circulates, instead, around red herrings.
A longer version of this article first appeared in the Housing Market Intelligence Report 2012 (pp. 49-51).

Read the full article in our ‘in the media’ section, here.

Dr Kristian Niemietz is the IEA's Editorial Director, and 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).