HOUSING BLOG WEEK. Kristian Niemietz: Unaffordable housing: Causes, Consequences and Solutions

Dr Kristian Niemietz, Senior Research Fellow at the Institute of Economic Affairs (IEA), shows how and why the UK’s exceptionally high housing costs are a catalyst for poverty, and all that this entailsIF_Blog_Week_IEA_logo

Economists are a notoriously quarrelsome bunch, who disagree on almost everything. Ask three economists, and you’ll get four opinions. The reason is that in economics, empirical literature is seldom fully conclusive. Even for seemingly straightforward questions, such as the employment effects of minimum wage laws, empirical findings remain somewhat ambivalent. Some studies find a very strong effect, some find none, while others find some effect but caution that it may have been caused by something else, and so on.

So when we come across a topic on which the econometric literature is conclusive for once, we should heed those conclusions. Such instances are rare, but they exist, and a stark example is the literature on the determinants of housing costs (see here, pp. 74-80, for a review).

The salience of land use planning policy

What studies in this field try to do is disentangle the effects of the myriads of factors which affect housing markets, such as credit market conditions, population density, characteristics of the local economy, socio-economic factors, demographics, physical constraints, market power of developers etc. Those studies also include indices which try to measure the restrictiveness of land use planning policies in different housing markets. This latter variable always turns out to be a decisive one and, in most studies, it dwarfs everything else in significance. In the long run, housing costs are almost wholly determined by political decisions. Make it easy to build new homes, and housing costs will fall; make it difficult to build new homes, and housing costs will rise. The evidence on this is so overwhelming that those who still deny it must be seen as the British equivalents of Sheikh Bandar al-Khaibari, the Saudi-Arabian cleric who disputes that the earth rotates around the sun.

The UK’s land use policies are among the most restrictive in the world, and those restrictions have become more and more binding over time. The result is that the UK has been building fewer new homes than any other European country for more than three decades. In places like France, Germany, Austria and the Netherlands, the number of new homes completed each year has long oscillated between 50 and 70 units per 10,000 inhabitants. In the UK, it has been well below 40 since the 1990s. So, unsurprisingly, the British housing stock is now the smallest in Western Europe (when measured as total residential floor space divided by the number of households.)

British housing costs, meanwhile, have risen to among the highest levels in the world (for both buyers and renters). According to the most recent estimate, 35% of the average house price – and far more than that in London and the Southeast – is directly attributable to planning restrictions, and since that study defines “planning restrictions” in an exceptionally narrow way, this figure is almost definitely an underestimate.

Why is unaffordable housing a problem?

One of the effects of this politically-induced housing shortage is a massive transfer of income and wealth from the younger generation to the “Baby Boomers”. But it is not a zero-sum transfer: there is a net social cost, and it is gigantic. The housing shortage depresses living standards, especially among the least well-off. Non-homeowners in the bottom quintile of the income distribution have to reserve over 40% of their household budget for housing costs. One in five households now relies on Housing Benefit – the highest share in the developed world – at a cost of £25 billion a year to the taxpayer. About 1.7m households are stuck on social housing waiting lists, despite the fact that social housing still accounts for a fifth of the UK’s total housing stock.

And those are just the visible effects. Those who receive Housing Benefit are also subject to a steep withdrawal rate of 65p for every £1 of extra net income, which erodes work incentives, leading to lower levels of labour market attachment and higher public spending on tax credits. The housing shortage also deters people from moving to places with better jobs and earnings prospects, because these are also the places where the problem is most severe. And by raising the cost of business premises, it raises consumer prices in sectors like retail and catering.

The Nimby problem

So if the housing shortage causes so many severe economic and social problems, and if its causes are so well established, why is nothing being done about it? Don’t politicians of all stripes now agree on the need to expand the housing supply?

Yes – in the abstract. The problem is that as soon as somebody actually puts a shovel to the ground, there will be resistance from some local “Nimby” group, and as soon as the issue becomes tangible, politicians always side with the Nimbys. This is politically rational: the opponents of housebuilding are far more politically active, and infinitely better organised, than those who stand to gain from new housing. In theory, the planning process should mediate between divergent interests but, in reality, participation in the process is extremely asymmetrical. The typical participant in a planning consultation is a well-to-do homeowner, strongly averse to changes in their surroundings, time-rich, opinionated, and articulate. You will not hear the voices of low-income renters, nor young adults who cannot afford to move out of their parents’ home, let alone people lingering on a social housing waiting list. Planning is a tug-of-war of sorts, but one in which one team is not even grabbing their end of the rope.

Consequently, our housing policy revolves around the sensitivities of those who dislike the sight of houses other than their own. When you hear politicians expressing support for more housing, don’t take it at face value. Chances are that the next time they meet with representatives of their local anti-development lobby, they will equally assure them of their full support.

The way out of the housing trap

What should be done to sort out the housing market? To a large extent, it is about getting economic incentives right. Communities that permit development must see real benefits, and communities which choose to be obstructionist must bear at least some of the social cost of their obstructionism. One way to achieve this is to devolve all housing-related taxes to the local level, especially capital gains tax, stamp duty, inheritance tax, business rates, but also the better part of income tax. Permitting development would then become an easy way to broaden the local tax base, and increase local tax revenue.

As the flipside of the same coin, paying for housing-related public expenditure should also become the responsibility of the local level. If a community insists on driving up local rents through anti-development obstructionism, they should also pay for some of the resulting increase in Housing Benefit costs.

Further, arbitrary designations like “green belt” should be abolished altogether. It is simply not true that towns sprawl outwards endlessly unless they are locked into a straightjacket. No other European country has green belts, but many of them still prioritise brownfield site redevelopment, and/or the densification of existing settlements, where appropriate. Landscapes with a genuinely high environmental and/or amenity value can always be protected, but this should be done selectively, not in the form of a blanket ban. Especially in inner-city areas, height restrictions also need to be relaxed.

First of all, however, we need a more honest housing debate. We need to stop wasting our time with all those sideshows and red herrings that explain at best a tiny fraction of the housing cost explosion, and focus on the real causes instead. On topics like housing, don’t trust your gut feelings. They are probably wrong.

Dr Kristian Niemietz is a Senior Research Fellow at the Institute of Economic Affairs (IEA), London. He is the author of the books Redefining the Poverty Debate and A New Understanding of Poverty.