Can tackling the housing crisis be left to the market?
26 November 2018
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On November 22, the Highgate Literary and Scientific Institution (HLSI) held a debate on the motion “This house believes that tackling the housing crisis cannot be left to the market”. The IEA’s Head of Political Economy, Dr Kristian Niemietz, spoke on the opposing side. The article below is a based on his opening remarks.
The first thing we need to note about the housing crisis is that in terms of housing costs, the UK is an extreme international outlier. We have some of the highest housing costs in the world. That is true in absolute terms, and it is true relative to average incomes. It’s true whether you look at the cost of buying, or whether you look at the cost of renting. It’s true whether you look at national aggregates, or whether you compare specific metropolitan regions. Doesn’t really matter which way you look at it – Britain is always the outlier.
This alone shows you that this cannot be a “market failure” of any sort. If it were, you would expect to see the same problem more or less everywhere, or at least, everywhere where housing is mainly provided by the market. Which it usually is. I’m not aware of any country, other than maybe North Korea or Cuba, where the state is the main provider of housing. But we don’t see it everywhere. That’s the point. Most comparable countries don’t have the problems that we have, or at least, on nothing like that scale.
The second point I’d like to emphasise is that this wasn’t always so. Britain wasn’t always such an outlier. If you look at figures from 40 years ago, British housing cost figures look completely normal by international standards. But at some point, Britain started to diverge from the rest.
In what is now the eurozone, houses prices have up by about 50% in real terms over the course of my lifetime, that is, since 1980. That is not out of line with income growth, so it’s not a problem. Figures for the US are slightly higher, but in the same ballpark: there, house prices have gone up by about 60% in real terms since 1980. Again, that is not out of line with income growth, so it’s not a problem.
In the UK, real house prices have gone up three and a half fold, over the same period. That is almost unparalleled. There are places which have seen similar rates of house price inflation during a housing bubble, but not on a permanent basis. Of course, real incomes have also gone up since 1980, but by nothing like that. Real incomes have “only” doubled, on average.
Why has this happened?
On one level, the answer is very simple: because over the same period, we have been building a lot less than all these other countries. Over the past 40 years, Britain has been building fewer new homes than any other country in Europe, relative to population size. This was at a time of growing demand, due to income growth and a trend towards smaller household sizes.
Just to give you an idea of the scale of this. A couple of years ago, I read an article about a crisis in the French construction sector. During that so-called crisis, they were still building about twice as many homes per year as we were. In Britain, housebuilding numbers like that would be considered a phenomenal success. In France, that was considered a crisis.
After more than four decades of exceptionally low housebuilding numbers, we now have the lowest level of housing supply in Western Europe. If you measure housing supply as the total residential floor space, divided by the number of households, then you will find the UK right at the bottom of the league table. That is the reason why housing is more expensive here than in other places. We have less of it.
But that doesn’t really answer the “Why here?” question. It just paraphrases it. We have higher housing costs than other countries, because we build a lot less than they do – but why do we build less? We have bricks, we have mortar, we have land, we have bricklayers, we have architects, we have housing finance – what stops those ingredients from coming together?
Here, we need to look at the wider economic literature on housing markets. Housing markets are a very well researched area in economics. There are several dozen papers which have looked at variation in housing costs between countries, cities and regions, and which have tried to disentangle the various factors at play.
One common finding that comes up again and again in that literature is the importance of the land use planning system. Of course, there are other factors which matter as well, but in the long run, that is the most important one. Places which make it hard to build new homes get high houses price inflation. Places which make it easy to build new homes don’t. It really is as simple as that. I know that in recent years, it has become fashionable to overcomplicate this matter, to claim that housing is an extremely complex issue, where standard economic models of supply and demand don’t apply. But it isn’t. It’s not true. If you look at the empirical literature, you’ll find that, no, it actually isn’t particularly complex. The basics are fairly simple.
But I should spell out in a bit more detail what I mean by “land use planning” or “planning constraints”. That can mean two different things. It can refer to formal rules and regulations, which explicitly constrain development. The green belt is an obvious example of that. That’s a land designation which explicitly prevents development, and which is meant to do exactly that. Height restrictions would be another example. Those are statutory planning constraints.
But it can also mean something else. It can also refer to a system which, even if there aren’t many formal constraints, makes it easy for opponents of housing development to block a project they don’t like. You can have a system where, on paper, there are no obstacles; you can build anything you want, anywhere you want – but as soon as you try to actually do it, some NIMBY group will try to stop you. And if local politics is very receptive to the demands of such groups, if they are the ones who dominate local politics, then that is every bit as bad as restrictive formal regulations. It can be worse, in fact, because it’s less predictable. With formal planning constraints, at least you know where you’re at. You have legal clarity. But in a politicised system, you depend on the whims of NIMBY groups.
In Britain, we seem to have the worst of both. We have highly restrictive formal planning constraints. I mentioned green belts and height restrictions. But at the same time, local politics seems to be very much dominated by NIMBY groups.
How did we get here?
It wasn’t always this way. In the 1930s, Britain had the biggest building boom in its history. Large parts of outer London were built in that period. And it was not poor quality. Quite the opposite. A lot of those areas are now among the most desirable neighbourhoods in the country. Most of that was private sector development.
That period was, in many ways, the golden age of housing. It can’t be exactly repeated, but it shows that the private sector very much can deliver high-quality housing on a large scale. It did then. It could now.
There’s probably a parallel universe somewhere where, after the Second World War, Britain simply went back to the housing policy of the 1930s, and where that building boom resumed.
Unfortunately, in this universe, the Town and Country Planning Act of 1947 was brought in, which nationalised development rights. Before then, if you owned land, your ownership rights would normally include the right to build on it, subject to constraints. After 1947, you would have to apply for permission.
Then in the 1950s, green belts were brought in, making it almost impossible to build around some of the major cities.
Initially, that was not a problem. There was enough undeveloped or semi-developed land inside the big urban areas. At the same time, New Towns like Milton Keynes were created, which absorbed some of the spillover demand. It didn’t really matter that the major cities could not expand. They didn’t have to.
But eventually, those initially harmless constraints began to bite. They also became more severe. Green belts expanded massively in size. In 1980, about 6% of England was designated as green belt. That figure is now 13%. Almost all of that is prime real estate.
At the same time, the British state, including the tax system, became more centralised. Why does that matter? Because in more decentralised places, such as Switzerland, local authorities compete for taxpayers. They want to attract more residents, because residents pay taxes. One straightforward way to attract residents is to allow housebuilding. They cannot afford to be NIMBYs.
In Britain, local authorities get most of their revenue in the form of grants from the national level, not from their own residents. That completely changes incentives. In such a system, you can afford to treat potential new residents as hostile invaders to be fought off and kept out. You couldn’t do that if you were a local politician in Switzerland. In Britain, you very much can – you even have to.
In short – the state has created this problem in the first place. Could government action be the solution nonetheless? Can you fight fire with fire?
The answer is no.
Government actors are held back by the same planning constraints, and by the same NIMBY pressures, as private developers. I’m a free-marketeer. To me, the idea of a state housebuilder is as absurd as the idea of a state-run brewery or a state-run bakery. But you don’t have to agree with me on this to see that government action cannot be the solution. Even if you think that council house building is superior to private sector development: councils and other government actors are bound by the same planning constraints, and subject to the same NIMBY pressures, as private developers. So it doesn’t really matter who does the housebuilding. The obstacles are the same in any case. You would still need to get rid of those obstacles.
Tackling the housing crisis can be left to the market, if – and that’s the big if – the market is allowed to operate. If you don’t allow it the operate, it can’t. But in such a situation, the government can’t solve it either.
The first thing we need to note about the housing crisis is that in terms of housing costs, the UK is an extreme international outlier. We have some of the highest housing costs in the world. That is true in absolute terms, and it is true relative to average incomes. It’s true whether you look at the cost of buying, or whether you look at the cost of renting. It’s true whether you look at national aggregates, or whether you compare specific metropolitan regions. Doesn’t really matter which way you look at it – Britain is always the outlier.
This alone shows you that this cannot be a “market failure” of any sort. If it were, you would expect to see the same problem more or less everywhere, or at least, everywhere where housing is mainly provided by the market. Which it usually is. I’m not aware of any country, other than maybe North Korea or Cuba, where the state is the main provider of housing. But we don’t see it everywhere. That’s the point. Most comparable countries don’t have the problems that we have, or at least, on nothing like that scale.
The second point I’d like to emphasise is that this wasn’t always so. Britain wasn’t always such an outlier. If you look at figures from 40 years ago, British housing cost figures look completely normal by international standards. But at some point, Britain started to diverge from the rest.
In what is now the eurozone, houses prices have up by about 50% in real terms over the course of my lifetime, that is, since 1980. That is not out of line with income growth, so it’s not a problem. Figures for the US are slightly higher, but in the same ballpark: there, house prices have gone up by about 60% in real terms since 1980. Again, that is not out of line with income growth, so it’s not a problem.
In the UK, real house prices have gone up three and a half fold, over the same period. That is almost unparalleled. There are places which have seen similar rates of house price inflation during a housing bubble, but not on a permanent basis. Of course, real incomes have also gone up since 1980, but by nothing like that. Real incomes have “only” doubled, on average.
Why has this happened?
On one level, the answer is very simple: because over the same period, we have been building a lot less than all these other countries. Over the past 40 years, Britain has been building fewer new homes than any other country in Europe, relative to population size. This was at a time of growing demand, due to income growth and a trend towards smaller household sizes.
Just to give you an idea of the scale of this. A couple of years ago, I read an article about a crisis in the French construction sector. During that so-called crisis, they were still building about twice as many homes per year as we were. In Britain, housebuilding numbers like that would be considered a phenomenal success. In France, that was considered a crisis.
After more than four decades of exceptionally low housebuilding numbers, we now have the lowest level of housing supply in Western Europe. If you measure housing supply as the total residential floor space, divided by the number of households, then you will find the UK right at the bottom of the league table. That is the reason why housing is more expensive here than in other places. We have less of it.
But that doesn’t really answer the “Why here?” question. It just paraphrases it. We have higher housing costs than other countries, because we build a lot less than they do – but why do we build less? We have bricks, we have mortar, we have land, we have bricklayers, we have architects, we have housing finance – what stops those ingredients from coming together?
Here, we need to look at the wider economic literature on housing markets. Housing markets are a very well researched area in economics. There are several dozen papers which have looked at variation in housing costs between countries, cities and regions, and which have tried to disentangle the various factors at play.
One common finding that comes up again and again in that literature is the importance of the land use planning system. Of course, there are other factors which matter as well, but in the long run, that is the most important one. Places which make it hard to build new homes get high houses price inflation. Places which make it easy to build new homes don’t. It really is as simple as that. I know that in recent years, it has become fashionable to overcomplicate this matter, to claim that housing is an extremely complex issue, where standard economic models of supply and demand don’t apply. But it isn’t. It’s not true. If you look at the empirical literature, you’ll find that, no, it actually isn’t particularly complex. The basics are fairly simple.
But I should spell out in a bit more detail what I mean by “land use planning” or “planning constraints”. That can mean two different things. It can refer to formal rules and regulations, which explicitly constrain development. The green belt is an obvious example of that. That’s a land designation which explicitly prevents development, and which is meant to do exactly that. Height restrictions would be another example. Those are statutory planning constraints.
But it can also mean something else. It can also refer to a system which, even if there aren’t many formal constraints, makes it easy for opponents of housing development to block a project they don’t like. You can have a system where, on paper, there are no obstacles; you can build anything you want, anywhere you want – but as soon as you try to actually do it, some NIMBY group will try to stop you. And if local politics is very receptive to the demands of such groups, if they are the ones who dominate local politics, then that is every bit as bad as restrictive formal regulations. It can be worse, in fact, because it’s less predictable. With formal planning constraints, at least you know where you’re at. You have legal clarity. But in a politicised system, you depend on the whims of NIMBY groups.
In Britain, we seem to have the worst of both. We have highly restrictive formal planning constraints. I mentioned green belts and height restrictions. But at the same time, local politics seems to be very much dominated by NIMBY groups.
How did we get here?
It wasn’t always this way. In the 1930s, Britain had the biggest building boom in its history. Large parts of outer London were built in that period. And it was not poor quality. Quite the opposite. A lot of those areas are now among the most desirable neighbourhoods in the country. Most of that was private sector development.
That period was, in many ways, the golden age of housing. It can’t be exactly repeated, but it shows that the private sector very much can deliver high-quality housing on a large scale. It did then. It could now.
There’s probably a parallel universe somewhere where, after the Second World War, Britain simply went back to the housing policy of the 1930s, and where that building boom resumed.
Unfortunately, in this universe, the Town and Country Planning Act of 1947 was brought in, which nationalised development rights. Before then, if you owned land, your ownership rights would normally include the right to build on it, subject to constraints. After 1947, you would have to apply for permission.
Then in the 1950s, green belts were brought in, making it almost impossible to build around some of the major cities.
Initially, that was not a problem. There was enough undeveloped or semi-developed land inside the big urban areas. At the same time, New Towns like Milton Keynes were created, which absorbed some of the spillover demand. It didn’t really matter that the major cities could not expand. They didn’t have to.
But eventually, those initially harmless constraints began to bite. They also became more severe. Green belts expanded massively in size. In 1980, about 6% of England was designated as green belt. That figure is now 13%. Almost all of that is prime real estate.
At the same time, the British state, including the tax system, became more centralised. Why does that matter? Because in more decentralised places, such as Switzerland, local authorities compete for taxpayers. They want to attract more residents, because residents pay taxes. One straightforward way to attract residents is to allow housebuilding. They cannot afford to be NIMBYs.
In Britain, local authorities get most of their revenue in the form of grants from the national level, not from their own residents. That completely changes incentives. In such a system, you can afford to treat potential new residents as hostile invaders to be fought off and kept out. You couldn’t do that if you were a local politician in Switzerland. In Britain, you very much can – you even have to.
In short – the state has created this problem in the first place. Could government action be the solution nonetheless? Can you fight fire with fire?
The answer is no.
Government actors are held back by the same planning constraints, and by the same NIMBY pressures, as private developers. I’m a free-marketeer. To me, the idea of a state housebuilder is as absurd as the idea of a state-run brewery or a state-run bakery. But you don’t have to agree with me on this to see that government action cannot be the solution. Even if you think that council house building is superior to private sector development: councils and other government actors are bound by the same planning constraints, and subject to the same NIMBY pressures, as private developers. So it doesn’t really matter who does the housebuilding. The obstacles are the same in any case. You would still need to get rid of those obstacles.
Tackling the housing crisis can be left to the market, if – and that’s the big if – the market is allowed to operate. If you don’t allow it the operate, it can’t. But in such a situation, the government can’t solve it either.
3 thoughts on “Can tackling the housing crisis be left to the market?”
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Sure, housing could and should be left to the market, so long as that market is fair it will also be efficient.
Unfortunately it is neither because the owners of valuable land aren’t required to compensate those they exclude for their loss of opportunity. This bakes in excessive inequalities and resource misallocation, resulting in symptoms like unaffordable housing for some groups in society.
There are three symptoms of the housing crisis which a 100% tax on the rental value of land solves. Other solutions like building more houses, rent controls, social housing may mitigate some symptoms, but they solve nothing while making other existing problems worse.
Firstly such a tax reduces the selling price of land to zero precisely because it transfers incomes back to those that find housing unaffordable now. As a result and all else being equal, housing could not get anymore affordable for that group in society.
Secondly, by levelling the playing field between all market participants, the tax allows optimal allocation of existing housing stock, thereby rationalising the excessively vacant and under occupied housing a distorted market has produced. This reduces the numbers of new homes that need to be built, but more importantly makes sure those that do get built are of the right type.
Thirdly, as high aggregated land values result from the optimal allocation of resources, such a tax aligns the incentives of the state with those of its citizens, ensuring the right kind of development gets allocated to the right places. So we can end up with the sort of efficient, attractive urban environments we can all be proud of.
Yes UK house prices have gone up since the 1980s. But so have some other countries by similar amounts. We started of from a low base, partly due to a weak economy and also due to a set of policies that were designed to keep prices low. Since then, not only has the economy done much better, but previous price regulating housing policies were undone.
London is now one of the top global cities, attracting millions more people to live there and buy property. This success has distorted the housing picture of the UK as a whole. But even so, the data is unequivocal. The supply of housing has more than kept up with household formation for decades in every region of the UK. So while a simplistic narrative of supply and demand might be appropriate to some goods/services, it doesn’t apply to land, which housing issues are really all about.
Hi Kristin,
I agree with everything you say about private housing, but social /Council housing is required for people who can’t afford to buy or rent private, ie the disabled, minium wage earners, single parents, low income pensioners,these people at the bottom of the ladder need a helping hand, so their family members become the next private home buyers
There is one very simple and quick change the government could make – relax height restrictions in planning rules. They should stipulate that buildings up to (say) 5 or 6 storeys should be allowed wherever there is planning permission, by default. Much of the country’s most attractive housing is this height – it should really be uncontroversial.
In the longer term, it would make sense to gradually introduce a land value element to the Council Tax. We have a strange situation currently where we have a lot of not-particularly-nice low-rise housing in areas with high land value in towns and cities. Taxing the value of the land would encourage replacement (something that rarely happens currently) with better and more space-efficient housing.
Both of these measures would allow greatly increased housing expansion without any changes to the green belt.