Back to the 80s to fix the housing crisis
Experts have been warning about the housing crisis for decades – and the solutions have been staring us in the face for just as long, says Kristian Niemietz
“[T]he planning system […] has significantly increased land and housing prices […] and distorted the economic structure, all of which have led to the British standard of living being lower than it otherwise would be. […] The aggregate reduction is […] probably of the order of 10 per cent or more of national income”.
This is a finding from No Room! No Room! The Costs of the British Town and Country Planning System, a study on the causes and consequences of Britain’s housing crisis, published by the Institute of Economic Affairs this week.
I know what you’re thinking: “Oh, please, not another report telling us that we need to relax planning restrictions and start building things again. Haven’t we all figured this out by now?”
But here’s a twist: this “new” report is not new at all. It is a republication of a report from 1988.
I have added a new foreword and new footnotes, to make sure the report contains the most recent housing market data and reflects the current state of the academic literature on the subject. But I have made no changes whatsoever to the main text itself.
Nor did I need to. Because it still feels as if it had been written last week, were it not for the occasional giveaway (such as when multiplex cinemas are presented as an exciting novelty, or when economic comparisons are made with a country called “West Germany”).
And this is precisely the point we are trying to make by republishing this old book, rather than writing a new one. The fact that it was possible to see these problems so clearly 37 ago is a much more brutal indictment of the failures of British housing policy than a report written today could be. It is precisely the fact that this report is, by definition, completely free from hindsight bias which makes the argument so much more powerful.
The fact that it was possible to see these problems so clearly 37 ago is a much more brutal indictment of the failures of British housing policy than a report written today could be
The author, the late Professor Alan Evans, started with a few relatively simple observations. The increase in house prices that had taken place in (from his perspective) recent years was almost entirely attributable to increases in land prices. But it was not the price of “land” per se that was increasing. It was, specifically, the price of land with planning permission. Land without such permission was – and still is – cheap as chips. Britain has an abundance of land. It just denies itself the ability to use it.
Prof Evans was also ahead of his time in recognising that this problem had much wider ramifications than commonly appreciated. It is wrong to think of the housing crisis as a problem which only affects young renters struggling to get on the housing ladder. It has a range of economy-wide effects and makes Britain poorer in multiple ways.
Land is a key factor in production
For a start, land is a key factor of production. Making land scarce and expensive raises the cost of doing business in the UK. This leads to a combination of higher consumer prices and lower wages.
Prof Evans already recognised that the housing market acted as a barrier to internal migration, discouraging people from moving from the relatively less productive to the relatively more productive parts of the country. In this way, it makes the British economy as a whole less productive than it otherwise would be.
The housing crisis also discourages saving and investment. Homeowners get used to automatic annual increases in their housing wealth, expect this trend to continue indefinitely, and no longer feel the need to, say, put money into a pension fund or other long-term savings vehicles. Why bother saving, if your house is already doing it for you?
On solutions, Prof Evan’s book already pointed in the right direction. Incentives had to be realigned, so that places which permit a lot of development can share some of the economic gains this creates. There is nothing wrong with protecting some landscapes from development, but this needs to be done in a selective and targeted way, not through blanket bans, which is what green belts are.
The correct diagnosis, and the correct solutions, have been staring us in the face for 37 years. Policymakers could – and should – have known all this decades ago, and acted accordingly. But they chose not to. It is hard to see how this could be described as anything other than a decade-long policy failure of all major parties.
For 37 years, Prof Evan’s book has barely aged a day. Let’s hope the ageing process finally kicks in now.
Kristian Niemietz is head of political economy at the Institute of Economic Affairs