We must urgently fix Britain’s horribly broken housing market
IT’S called the law of supply and demand, a basic concept that Labour and coalition politicians sometimes find difficult to grasp. If you try to mess with it, it ends up biting you, and hard.
Take residential property. In a free market, if the price for something goes up, people tend to produce more of it. Ditto with homes: in most economies, higher house prices tends to trigger a greater amount of construction, as developers or self-builders respond to price signals that indicate a lack of available properties. The market’s tendency to react quickly to changes in demand is a basic reason why capitalist economies work much better than centrally planned ones.
Not in Britain, where the construction market is uniquely unresponsive to price changes, thanks to an idiotic set of land use and planning restrictions, inherited from the socialist Town and Country Planning Act of 1947, combined with deeply entrenched extreme nimbyism.
In The Price Responsiveness of Housing Supply in OECD Countries, published two years ago, Aida Caldera Sanchez and Asa Johansson reveal that new housing supply is relatively more flexible in North America and some Nordic countries, but extremely poor in some continental European countries (such as Germany) and in the UK, which is ranked 14th most responsive out of 21. It’s just not good enough. In the US, a one per cent increase in prices will trigger a two per cent increase in supply; Sweden, Denmark, Canada, Japan and Finland all tend to see output increasing proportionally more than prices, a trend which means that long-term affordability is likely to remain good.
Unfortunately, a one per cent rise in prices in the UK tends to bolster supply by just 0.4 per cent or so. It’s not as bad as Switzerland, where supply is even less responsive – but one can only get away with that sort of policy if one is a restricted, relatively closed country, where development and population growth isn’t exactly the number one priority. If, like the UK, one aspires to dynamism, change, growth and expansion, one needs a housing policy that reflects demand, not one that tries to ignore it, inflicting ever-higher prices and untold misery on millions of people.
The situation in London and its economic region is especially dire. Not only is supply stagnant as a result of restrictive rules (there is space: depending on preference, one could build up with dozens of residential skyscrapers, on government land, in the green belt, on brownfield land of which there is lots still in the east, or even create new commuter towns). On top of that, George Osborne’s funding for lending and help to buy schemes are artificially bolstering demand. The former of the two is failing to help business lending, its original purpose; both are pumping cash into mortgages, which are on the rise again.
The situation is not all bad. The government has been trying to loosen up planning rules, and there could be some early signs that some of the reforms are having some impact. We will know for sure in a couple of years’ time, but by then the problem may well have got even worse. The fact that Savills and Rightmove have massively hiked their forecasts for house price growth is certainly bad news. London is a global city, and we should take pride in the fact that so many international individuals want to have a home here, thus ensuring they spend in the UK and often invest in businesses – but for the system to work, we need to build more, to avoid fuelling tensions and protectionist demands.
Homes in London are already over-priced, and owner occupiers have now fallen below half the capital’s population. Unless we want home-ownership to become a luxury, inaccessible to most of the public, and to cripple even high earners with extreme levels of debt, we need to build, build and build more again.
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