The Tony Blair Institute seems to have launched a strange new campaign against solutions to the housing shortage.
A recent piece by the Institute’s Executive Director claims – repeatedly, and at length – that supply did not cause the rise in house prices in recent decades. Well, of course, it didn’t. For which product can you raise prices by making more of it?
Lack of supply, on the other hand, was very much a cause of rising house prices, and the report carefully never denies that. Many places around the world have had similarly loose credit and low interest rates without experiencing the vertiginous rise in house prices seen in London and the South East. The reason is simple: they built plenty of homes. That is a standard result in economics.
The same goes for boats, cars, and indeed high-quality furniture – or, for example, London in the 1930s. No explanation, still less serious evidence or research, is given for the view that London could not decide to build at the same rate as London did back then, or indeed Tokyo and many other cities do today. Almost every other manufacturing industry outperforms the 1930s, often by ten times or more.
The report does helpfully estimate how much a one percent increase in the housing stock would reduce prices. That is all we need to establish that the shortage of housing is caused by politics, a topic which strangely the report entirely neglects to address.
The report also has a curious obsession with counting households and homes. A ‘household’ in British housing circles is not what you might think. Six unrelated adults sharing a flat through force of high rents are considered a ‘household’.
Once you realize that, it is instantly clear that comparing the number of households with the number of homes to argue there is no shortage is a total waste of time.
Even if ‘household’ were better defined, the number of families is partly driven by house prices; economists say it is ‘endogenous’. People marry – later and later, as prices rise – and have children when they can finally afford a family home. They move around the country to better opportunities partly based on whether the home they could afford would be worse, or better.
Are ever-rising house prices an unmitigated good thing? I suggest not. House prices that are several times the cost of building a new home, when land (with no chance of permission to build) is very cheap, are a warning sign to every competent economist.
In healthier markets, as in this country in centuries past, houses are priced more like furniture. If you pay for high quality, it should stand the test of time, and, with care, may even be worth more a century hence. If you buy cheaply, it will generally not hold its value.
The evidence is clear that for fifty years we have failed to build remotely near enough homes in the South-East to keep up with demand, to the extent that the total value of UK homes exceeds the cost to build them today by about £4 trillion, or some two-fifths of the entire net worth of the United Kingdom.
That eye-watering shortage, if caused by a private cartel, would be illegal.
Economists and competition lawyers explain that cartels are bad not because they are ‘unfair’ but because they make society overall worse off.
If bridge owners form a cartel to raise tolls for crossing a river, fewer people will cross. Plumbers and tutors will decline work on the other side and twiddle their thumbs instead. Even if you taxed the monopoly profits away from the bridge owners and redistributed them, you would not raise enough to put people where they would have been, because less has been produced and consumed. Economists call it a ‘deadweight’ loss.
The shortage of homes caused by a failure of regulation and planning has caused an enormous deadweight loss. England’s lack of homes within reach of high productivity firms keen to employ people means that fewer workers earn those high wages. Instead they do lower-productivity jobs, which makes them and the whole country poorer. The ‘spatial economists’ who study the evidence are unanimous on that.
UK average earnings and GDP per head could easily be ten to twenty percent higher – ahead of Germany and France, and catching up with the United States – without the shortage of homes within reach of good jobs. Apart from the unfairness, the unnecessary closing off of opportunity, the resentment and the suffering, that is the high cost of our shortage of homes.
The good news is that there are plenty of ways to fix that problem. If you do not wish to touch green belt, there are endless acres of unremarkable twentieth-century homes with a fifth or a tenth the amount of housing of some of our most-loved places, like Bath, Edinburgh’s New Town or London’s Pimlico. There are easy, vote-winning ways to make those homeowners better off while creating better places and much more room for people to move to better jobs. We can have plentiful homes, higher average wages and more beautiful cities too.
The late Baroness Thatcher once described Blair as her proudest achievement. Some Conservatives might look at today’s Labour Party and wish that he were still in charge.
But perhaps Blair is subconsciously uncomfortable that the threefold rise in house prices during his term in office, although it certainly helped his re-election, may not have been an entirely good thing. It must be comforting to have reports claiming it was inevitable.
Sadly it needn’t have been. But it is not too late to fix the problem. It is time for Blair to start helping.