Britain’s housing crisis: still the single biggest driver of poverty
The IEA’s Kristian Niemietz took part in a panel discussion on poverty. The article below is a rough transcript of his opening remarks.
The reason why I have been invited today is that ten years ago, I wrote a book about poverty in the UK, or more precisely, on what can be done about it.
The book is now obviously a bit out of date. The numbers, and a lot of the policy details, have changed.
But the basic argument still stands – and that is not a good thing. Because I identified a lot of problems, and was therefore rather hoping that the book would lose relevance soon.
One of the main findings was that the single biggest driver of poverty in the UK is the housing crisis. It is not a lack of social spending. Social expenditure in the UK is actually far higher than commonly recognised. We spend more than 20% of GDP on various social programmes. That is not a million miles away from the levels we see in the Nordic countries, which are often held up as these great role models that everyone should follow.
But we get poor results despite these high levels of spending. The housing crisis is a major reason for that. Pumping more money into the welfare system without addressing the housing crisis is the equivalent of turning up the heating in a building where all the windows are wide open.
The housing crisis drives up poverty in a variety of ways. I’ll mention four of them.
The direct effect
The most obvious effect is simply the direct effect on people’s budgets. If you are a low-income renter in the Southeast of England, you will typically spend well over one third of your gross household income on rent. That’s excluding London: in London, it’s around half.
This is obviously money that these people no longer have available for other things.
But that’s not the full story. There is a lot more.
The effect on retail prices
If you increase the cost of housing, you really increase the cost of everything, right across the board. Because everyone faces these high property costs, including businesses. Every time you buy a cup of coffee, you are paying for a fraction of that coffee shop’s rent. The same is true of virtually everything you buy.
We all know that everything is more expensive at an airport, because of the high rents there. But with our housing policy, we have effectively turned large parts of the country into an airport terminal.
But that’s still not the full story.
The effect on labour mobility
The housing crisis also decreases labour mobility. In most countries, people tend to move from relatively poor to relatively rich regions. Americans tend to move from the Midwest to, for example, Florida. Italians tend to move from Sicily to Milan. Germans tend to move from the Eastern states to the Western states. And so on.
In principle, this happens here as well. There is net North-South migration. But it is made a lot harder by the housing market situation. If you move from the Northeast of England to the Southeast, you will, on average, increase your monthly household income by over £600. That sounds like a good deal, right?
The trouble is that your rent will also, on average, go up by nearly £400. So close to two thirds of the benefit of moving are immediately eaten up again, making such a move a lot less lucrative.
As a result, we have this absurd situation where, in the prospering parts of the country, there are businesses that are desperately looking for staff, while in the poorer parts, there are unemployed and underemployed people. But those people cannot move to where the jobs are. Because the housing market situation doesn’t let them. It stops them, quite literally, from moving out of poverty.
The work incentive effect
Fourthly, there is the impact on work incentives. The high rent levels are the reason why so many people in this country need financial assistance with their housing costs. Almost one in five households receive Housing Benefit, or nowadays, the housing cost element of Universal Credit. Both Housing Benefit and Universal Credit are means-tested. This means that you gradually lose them as your income goes up.
That is not a bad thing. It is a way to make sure that spending is targeted: that the money goes to the people who need it most. But it also has a side effect.
Imagine you have a part-time job. You work for two days or three days a week. Your income is a combination of your salary, and Universal Credit. Now your employer asks you whether you want to work for an extra day or two a week. Let’s say, you could earn another £100 per week. In the current system, this means that you will lose £55 in Universal Credit. So you will immediately lose more than half of your additional earnings again.
That problem cannot be entirely avoided. Financial support needs to be targeted somehow. But it would, of course, be much less of an issue if fewer people needed that support in the first place.
Causes and solutions
The short summary is that the housing crisis is a major driver of poverty, both directly and in various indirect ways. So what can be done about that?
We need to realise two things here. Firstly: it hasn’t always been this way. Secondly: it isn’t like that everywhere. If you look at housing costs over time, and internationally, you will see that the housing cost explosion only really started in the mid-1990s, and that it only really happened in a small number of countries.
Unfortunately, Britain is one of them. In Britain, house prices have trebled in real terms since 1995. In the Eurozone, they have only gone up by a little over 50%. This alone shows you that this is not the result of some inevitable force of nature that nobody can do anything about.
Rather, it is a result of political choices. For a long time, Britain has been building fewer new houses (relative to population size) than comparable countries. As a result, we now have a much smaller housing stock. If we wanted to match the EU average, we would have to build another 3.4 million homes, and that’s just to catch up with the average, never mind being a bit better than average.
There is a lot of resistance to new housing development. It comes from people who are already well-housed, who benefit from the current system, and who now want to pull up the ladder. The problem with the current system is that it effectively gives those people a veto over new housing. And they usually use it.
That problem has long been well-known. Politicians know this. For twenty years now, there has been a series of government-commissioned expert reviews and government white papers, which all diagnose the problem correctly, and then politicians make all the right noises, and start with all the right intentions. But as soon as they face a bit of resistance, they all cave in.
This has happened under Labour governments. It has happened under Tory governments. It has happened under the Tory-LibDem coalition government. Whoever is in government, it’s always the same story.
But we know what to do. It is really not that complex. It is a matter of finding the political will to do it. When it comes to solving poverty – this is the closest thing we have to a silver bullet.