Tuesday, 2 June 2015

Deep-rooted vested interests are to blame for our housing crisis

Posted by Christian Hilber, LSE and SERC 

The UK housing affordability crisis is a serious concern. A recent poll by Ipsos Mori found that 15% now mention housing as among the most important issues facing Britain, up from 5% in 2010.

The crisis is particularly acute in London and the South East, where housing is most unaffordable. In 2014, a year after the introduction of the governments Help-to-Buy in scheme, the price of the average dwelling in London increased by almost 26% to £400,404. Thats £82,190 or to really get a sense of what this means £9.38 every hour of the day and the night.

While many London homeowners and private landlords may be delighted to make more money from their houses than they do from their jobs, housing has become ever more unaffordable for young would-be-buyers, which is probably why, according to the same survey, 26% of Londoners think housing is an important issue, much higher than the national average.

Still, government figures show that the rate of home ownership peaked at above 69% nationally in 2002 but has fallen steadily to almost 63% in 2013, largely because fewer young people are buying homes. Other statistics show that in 1991, 67% of 25-34 year olds were homeowners but, by 2011, this had declined to 43%.

In a recent report, I showed that there is strong evidence that the planning system, as well as strong demand in some areas, is the main cause of this affordability crisis. Our planning system restricts urban areas with the use of green belts, with development control by local authorities and strict controls on height. There is also a lack of tax incentives at local level and a preponderance of not in my backyard behaviour, facilitated by the planning regime. This is largely why house building has been in decline or, some might say, in free fall since the late 1960s. We build about a third  of the homes each year today than we did in the late 1960s.

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In short, the planning system does not allow the supply of homes to rise no matter how high prices rise, which essentially suggests that demand-focused policies proposed by the various parties are attacking symptoms but not causes of the problem.

For instance, the Help-to-Buy scheme already mentioned effectively stimulates demand and, since supply is so severely constrained, simply pushes up prices without stimulating construction, exactly as predicted when the policy was first announced. So rather than help, it has effectively priced out young would-be-buyers from the market so that Hinder-to-Buy would have been a more appropriate name for the policy. And its not alone in doing more harm than good.

There is today pretty much universal agreement among politicians that we have a serious housing crisis where the main losers are the young generation and there is also some consensus that the problem is one of supply. Regrettably, recognition isn't leading to action.

Fixing the planning system does not mean not having one. We absolutely need a system of land use planning to correct market failures. The planning system has an important role to play for example to ensure land-based public goods such as urban public parks or areas of outstanding natural beauty are adequately maintained or landmark buildings are protected.

In the absence of serious planning reform, political parties have resorted to announcing house building targets, as they seek to show voters that they will do something about the problem. But, again, these are of little use as prices already give developers, architects and builders the right signals of where and how much to build. Its the planning system that ignores price signals and tries to prevent residential development nearly anywhere. Were these price signals not ignored, we would build many more homes in more attractive areas. Wed have more high-rise buildings in town centres and more single-family homes further out.

More homes make housing more affordable. Thats a much better way to solve the crisis than with any government-set target.

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So if the solution is so simple and obvious, why arent things changing? The reason is a powerful array of deeply embedded vested interests that make meaningful change difficult.

Homeowner-NIMBYs can protect the value of their homes by opposing almost any project that spoils their view or generates noise. Homeowners near green belts are even worse and best described as BANANAs: Build-Absolutely-Nothing-Anywhere-Near-Anything. They have particularly nice views to protect and particularly expensive houses that rely, to a certain extent, on keeping the green belt land off-limits from development.

What is more, a majority of voters still own their own homes, making the impetus for change even more sluggish.

So, is the only solution to wait for a socially explosive and economically traumatic situation that eventually triggers reform or even revolution? Possibly not, because there is an ever-growing group of young and not so young would-be buyers who have a strong interest in genuine reform and who may become more politically powerful over time.

Among the other groups that may begin to push for change are the aspiring and expanding families that have just about managed to get on the housing ladder. This group is crucial because young home-owning families are clear losers of the broken planning system, even though they often dont realise it.

They should be in favour of genuine reform for two reasons: because they live in artificially cramped housing and because they are increasingly priced out from moving to a larger home that would be more adequate for the growing family. Trading up becomes expensive and the problem is only made worse by the stamp duty.

Elderly homeowners should also have an interest in change. Many may well be sitting on large capital gains accumulated since the 1960s and 1970s when homes were still affordable. But realising those gains will be difficult if they want to remain in the same communities where they may have built strong ties over the years.

The only real winners of the broken system are elderly homeowners who are prepared to sell their houses, pocket the proceeds and move to a country with cheaper housing. For those who stay put, its mostly the children that inherit property who will eventually benefit, leaving children of people who rent at a relative disadvantage. The broken planning system cements wealth inequality and the proposed inheritance tax reform makes things even worse.


Why does no party not one propose genuine reform? Politicians of all stripes back away from meaningful change out of fear of being demonised by the vested interests.

Still there is hope. Many commentators and secretly many politicians now understand the real cause of the crisis, which suggests public opinion may soon turn away from the vested interests. The polls certainly suggest a softening and even this Financial Times poll shows that almost 72% of its readers would back building on the green belt. Once public opinion warms up to the idea, a well-thought through reform could even become a vote-winner. Now theres an idea for the next election.

This article was originally written for Disclaimer Magazine. View it here

1 comment:

Ben Jamin' said...

1. Our high levels of vacancy and under occupation would suggest that under supply is not issue.

http://www.capx.co/there-is-no-uk-housing-crisis-and-there-never-was-one/

2. Our economic system of taxing wealth creation and privatising land rent, not only distorts incentives, but leads to a mal-distribution of the factors of production.

3. If £250bn of land rent were used to replace other taxes, the average UK household would be £11,500 better off every year in their pocket. When allied to a reduction in house selling prices due to the de-capitalisation of land values(equivalent of saving £6,500 pa in mortgage interest), housing becomes four times more affordable as a ratio of discretionary income.

4. Land and immovable property would be put to it's optimal use. So we'd see a significant reduction in vacancy, under occupation and land banking.

We'd also see a much higher re-cycling rate of immovable capital.

5. A Land Tax internalises all the externalities due to the regulatory and economic environment.

If landowners are happy with the existing regime, those who own little or no land will be compensated.

And landowners are automatically compensated if development lowers rental values.

In order to maximise aggregate rental values, the State will have to balance protecting amenity and new development.

Incentives of landowners, non-landowners and the State are thus aligned.

6. It would encourage development away from London and the SE as those regions would be liable for around £100bn per year less in taxes.

7. The reduction in deadweight losses from taxes on income/capital and the mis-allocation of land would greatly expand our economy.

8. Efficient use of property assets is better for the environment. Urban sprawl is not the product of an efficient market, but one distorted by capitalised land rent.