How The Housing Shortage Wrecks The UK Economy

Nobody denies there is a shortage, but what is its extent? Research, conducted in 2018 by Heriot-Watt University, showed a shortfall of 4 million homes. Government targets suggest that 300,000 homes need to be created annually in order to fix the problem (The pro rata Heriot-Watt figure is 340,000). Drilling down into various estimates reveals different levels of overall shortage, different geographical distributions of shortage (and local instances of over-supply), together with a plethora of causes, solutions and obstacles to solutions. These are all important issues, often with profound social implications, but for the present I propose to focus on a single, high level question: how is this shortage damaging the UK economy?

The core problem is a straightforward process: the shortage drives up prices; increasing prices create an attractive financial asset; an attractive financial asset sucks up savings and diverts money away from other, more productive, forms of investment; lower investment results in lower productivity; real incomes fall behind those in other, more productive economies. This vicious circle will, if it goes unchecked, result in an economy that becomes increasingly less competitive, and which is characterised by a growing economic underclass excluded from home ownership. As this underclass expands, living in rented accommodation where the shortage drives rents up, an increasing proportion of the population pays more and more to keep a roof over its head. At the same time the shortage drives up prices so that even those who manage to achieve home ownership face higher mortgage debt and consequently reduced disposable income. The net effect is a less dynamic economy where consumer expenditure is either suppressed or financed through expanding consumer debt. A decade of historically low interest rates has enabled this process to gather pace, while the growth of housing’s asset value has done nothing to discourage mortgage-seekers to take on greater debt.

Situations like this invariably give rise to a plethora of proposed ‘solutions’, often based on, and driven by, the various social problems that the housing shortage creates:

– Rent controls.

– Ending ‘right to buy’ for social housing.

– ‘Affordability’ criteria, whereby newly built housing is required to have a certain percentage of units at ‘affordable’ prices.

– Occupancy controls: forcing people out of social housing where they are deemed to have more living space than they ‘need.’

– Ownership controls: financial disincentives for owners of second (or more) homes, or of buy-to- rent properties.

And so on…

The common feature of these so-called solutions is that they do nothing at all to increase the housing stock and thereby help to solve the real underlying problem, the shortage. They are an attack on the symptoms rather than on the cause. In practice they amount to a series of micro- economic solutions to a macro-economic problem, rarely an effective remedy.

It may seem harsh to dismiss these and similar proposals, in most instances they arise, after all, from the best of motives. In the case of occupancy controls this may not be the case – there are genuine concerns about ‘social cleansing’ in high value areas, not to mention a series of human rights issues. But with other proposals there is an argument for considering their merit for as long as a housing shortage emergency (and it is an emergency) exists. For example:

– ‘Right to buy’ has a role if and only if certain criteria are met: purchasers should obtain a mortgage, and the funds raised should only be used to build more homes. If there is no building land available in the local authority where the sale is made, then the funds should be transferred to neighbouring authorities until used as prescribed. Consider this: If an authority spends £100k building a house and then sells it for £200k under right to buy, that’s £200k it can spend building two houses. If it sells them both for £200k under right to buy, then it can build four houses. And so on. Right to buy could, properly managed, be a key aspect of ending the housing crisis.

– Areas where prices are highest are also those where housing becomes a favoured financial asset. Central London is the prime example, but there are others. In such areas there is a case for a variety of controls, ranging from restrictions on foreign ownership to financial disincentives for non-occupancy.

However, the focus should never shift from the main issue here. The housing shortage is the cause of serious damage to the UK economy. In the longer term that damage will amount to wreckage. Removing the shortage is the only way to avoid the chain of events that lead to that damage. We need to build many more homes, principally in the places where demand is greatest, and we need to do it on an emergency basis to reverse the trend.

1 thought on “How The Housing Shortage Wrecks The UK Economy

Interesting development: ‘The Bank of England could be set a target for house price inflation under plans being explored by the Labour party, with tougher powers to restrict mortgage lending to close the gap between property prices and average incomes.’ https://www.theguardian.com/business/2019/apr/10/labour-considers-house-price-inflation-target-for-bank-of-england

Of course, indirect pressure on price will only be of any use if run in parallel with an aggressive house building programme to increase supply.

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