0.3 per cent GDP growth in the first quarter of this year was better than many people expected. But it would have been better still if the construction sector hadn’t done so badly, contracting by 2.5 per cent.
As Nicholas Crafts reminds us in the Guardian, there was a time when construction led Britain out of recession:
- “In the early 1930s Britain recovered impressively from a double-dip recession which ended in 1932. In every year from 1933 to 1936, before rearmament could have made any difference, growth exceeded 4% per year.”
Nor was this growth “driven by fiscal stimulus; indeed it blossomed at a time of fiscal consolidation.”
In another parallel with the present, the central plank of the government’s economic strategy was “cheap-money policy”:
- “From the middle of 1932, short-term interest rates were reduced close to zero and monetary policy was expansionary enough to stop prices falling and sustain mild inflation in pursuit of a target, set by the chancellor, Neville Chamberlain, to return prices to the 1929 level.”
But if cheap-money produced growth under Mr Chamberlain, then why aren’t we getting similar results from quantitative easing under Mr Osborne?
In order to work, 'monetary activism' has to have a way of getting through to the real economy:
- “A very important channel [in the 1930s] was through development of new housing. The number of houses built by the private sector rose from 133,000 in 1931-32 to 293,000 in 1934-35 and 279,000 in 1935-36. Many of these dwellings are the famous 1930s semi-detacheds which proliferated around London and more generally across southern England.
- “These figures are way ahead of any other year since the second world war.”
Including “multiplier effects’ it is thought that this building boom accounted for “a third of the increase in GDP between 1932 and 1934.”
This was also a period of rising home ownership, facilitated by the fact that the homes being built were remarkably affordable:
- “85% of new houses sold for less than £750 (£45,000 in today's money). Terraced houses in the London area could be bought for £395 in the mid-1930s when average earnings were about £165 per year.”
Of course, one enormous difference between then and now was the “almost complete absence of land-use planning restrictions which applied to only about 75,000 acres in 1932”:
- “Houses were cheap because the supply of land for housing was very elastic, which in turn meant that there was no incentive for developers to sit on large land banks.”
In the absence of such elasticity, current efforts to stimulate the market through lending subsidies seem doomed to increase prices rather than construction. As for the wholesale abolition of planning restrictions, that would be an excellent plan… for getting a UKIP MP elected in every rural and suburban constituency in southern England.
But there is an alternative: Massively increase taxes on land banks and other forms of property speculation; then use the proceeds to reduce the tax burden on investment in high quality housing design and to provide investment for urban regeneration. That way we at least have a chance of getting the right houses built in right places at the right prices.