Dr Kristian Niemietz is Head of Health and Welfare at the Institute of Economic Affairs. He is the author of the IEA’s new briefing on the housing crisis, published today.
Housing costs in the UK – both house prices and rents – are among the highest in the world. Since 1970, average house prices in the UK have gone up four and a half fold after inflation. In this, the UK is an extreme international outlier. No other OECD country has experienced a price explosion of such a magnitude.
A similar picture is obtained for median multiples (MMs), the ratio of median house prices to median annual incomes. ‘Normal’ MM values in developed countries are between 2 and 3, and until the 1990s, this was true for the UK as well. Most English regions now record MMs around 5, and in much of the south of England, MMs are above 6.
For over three decades, the UK has had lower rates of housebuilding (relative to population size) than any similar country for which comparable data is available. This is why the UK’s housing stock (when measured as the total residential floor space divided by the number of households) is now the smallest among comparable countries.
The government’s thinking on the issue remains unduly compartmentalised, especially along tenure lines. But what we see in the different subsectors of the housing market are all just different manifestations of the same problem. The ratio of market rents to house prices shows no systematic trend over time, and social rents are ultimately just ‘market rents lite’.
The causes of the cost escalation are well-established. Hilber and Vermeulen estimate that 35 per cent of the average house price is directly attributable to planning constraints, which is best thought of as a lower bound, because the study errs heavily on the side of caution.
The study’s counterfactual is not a free-for-all system in which anyone can build anywhere. It is a system in which governments do shape development, but do not limit the overall supply of land. As Cheshire (2009, p. 11) explains in his international comparison of planning systems:
“the distinctive difference between the English planning system and those of Germany, the Netherlands and the US is that the English system explicitly constrains the supply of land, and has done so over a long period. The German and Dutch systems, although they impose a strong regulatory framework, have imposed only a modest constraint on land supply (although as noted above the Dutch seem to have become more restrictive since about 1990).”
The government has preferred to focus on measures that are politically easy and unchallenging, but economically useless or even counterproductive. The most obvious example is the flagship ‘Help to Buy’ programme, a demand-side subsidy which, according to an estimate from Shelter, has pushed up house prices by over £8,000.
Changes to inheritance tax, which treat housing wealth preferentially relative to non-housing wealth, will further inflate demand without adding anything to supply. The abolition of ‘cliff edges’ in stamp duty is commendable, but taxing housing transactions remains the wrong approach, because it impedes labour mobility and downsizing.
Sensible tax changes would strengthen incentives to permit development by giving local authorities ‘skin in the game’. This could be achieved by, for example, replacing council tax, stamp duty, business rates and (property-related) capital gains taxes with a local Land Value Tax (LVT). Local authorities would retain 100 per cent of LVT revenue. This would encourage tax competition for residents, and it would allow local authorities to capture a part of the ‘planning gain’ (the increase in land value when planning permission is granted).
The concept of the green belt, meanwhile, should be abolished in its entirety. Protecting land from development should be done in a selective manner, on the basis of the environmental and amenity value of a particular plot of land, not in the form of a blanket ban.
The reason for the government’s failure in tackling the housing crisis is its unwillingness to confront organised ‘Nimbyism’. It has become almost a cliché to point out that everybody agrees in principle that the UK needs more housing, but that nobody wants those houses near them. But public attitudes to housing are not immutable. Resistance to development can be overcome, but it must be publicly challenged, not pandered to.