What’s the problem?
The undersupply of housing, whose root cause is a dysfunctional land use planning system, is the UK’s biggest problem. It slows productivity growth by preventing people from moving to get better jobs, forces them to spend more on housing costs than they need to, and to have fewer children than they would like, at a later age than they would like. It creates a brain drain from deprived parts of the country, because only the most talented people can afford to move to prosperous cities, exacerbating regional inequality, and means that many of the income gains from the slower productivity growth we do get accrue to existing landowners in the form of higher rents and housing costs, instead of higher living standards for everyone.
All of this is poisonous to the centre-right. Weaker growth and people not feeling the benefits of the economic growth we do experience strengthens the hard left. People being forced to delay family formation until later in life means fewer Conservative voters overall and means people living in the most expensive areas — who are often the most productive — have fewer children than they would like.
The researcher Andrew Sabisky has calculated that the effect of people delaying family formation and having fewer children than they would like has led to 157,000 fewer births between 1996 and 2014. Rising housing costs slash fertility rates among renters, and mean that younger renters who expect to own in the future put off having children, and may not be able to afford large homes to accommodate as many as they would like.
Expensive housing is the result of insufficient supply. Nearly every other ‘cause’ people point to is also a symptom of insufficient supply. Land banking exists because developable land is scarce and developers want to guarantee a steady annual supply of land to build on, to make full use of their capital and employees. House prices do fluctuate as a result of interest rates, but much more where the supply is tightly constrained — airplanes and cars do not rise in value when borrowing costs fall, but fine art and housing in places people want to live do (albeit much less in places like Houston and Atlanta where the supply of housing is less constrained by planning laws). The fact that the prices of homes in areas near job opportunities often exceed the economic cost of building more homes by a factor of three is further evidence that the main problem is with supply.
The Tony Blair Institute’s Ian Mulheirn argues, mistakenly in our view, that building more houses will not significantly cut housing costs. He is correct to point out that, because housing is effectively an investment good, house prices can be a misleading guide to the supply and demand for housing. Given tightly constrained supply, a fall in interest rates can lead to a spike in house prices. Instead, the cost of “housing services” — the cost of living somewhere for a given period of time — or what we usually call “rents” are what we should be interested in. And according to Mulheirn’s data, rents have risen dramatically in the past two decades — by 66% in nominal terms since 1996 in England.
Any intervention that does not focus on liberalising supply is extremely likely to be harmful even if it does reduce prices. Rent controls would make rents cheaper, but in the case of first-generation controls also make the quality of housing worse — potentially far worse, judging by the experience of the twentieth century — and end up rationing access to housing on the basis of waiting lists instead of price, as in European cities that use “second generation” rent controls like Stockholm. Second- and third-generation rent controls that only apply to existing stock and are alienable are effectively a one-off lump sum transfer from landlords to existing tenants.
There is no economic reason that rising incomes should capitalise into rents and house prices. If people hold housing costs fixed as a percentage of their incomes, then over time they should be getting better and better housing for their money. The fact that this does not happen, and that in fact people are paying more for worse housing today, is because the supply of housing is so tightly constrained.
Note that it is not expensive housing per se that is the problem. People want to live in nice, large houses in nice areas, and supplying those homes is good even if it did not lower housing costs (although it does). The problem is that any given home is more expensive than it needs to be compared to the counterfactual of a world of liberalised supply.
Our goal
The supply of housing is constrained in two ways by the country’s planning system: constraints on where you can build, and constraints on what you can build. You cannot, for example, build housing on most farmland without permission from local government, and if that land is in a green belt it will be even more difficult.
But often even more important are the rules that constrain what you can build on land. These mean that extremely valuable sites in cities are often underused: we have streets of semi-detached houses within a few minutes’ walk of railway and Underground stations.
Housing is often misallocated as well. Stamp duty land tax means that every housing transaction above the tax threshold incurs a large tax penalty every time it changes hands, so people move less often than they would otherwise like to. The nature of the council housing system means that many people are in properties that would be worth a small fortune to someone else, but they cannot access.
NIMBYism — the “not in my back yard” reaction — arises when residents stand to lose out from new developments near them, because increased supply lowers the value of their properties or because they worry that new homes will make their neighbourhood worse off.
To get local residents to buy in to new developments, they need to benefit from them as well. The land value uplift that comes from planning permission is often enormous: agricultural land that gets planning permission can rise in value by two hundred times or more (for example, in the areas surrounding Cambridge). Similarly, allowing land that has been built on already to be made denser raises its value, so the existing landowner benefits.
Dense areas have more vibrant high streets, more amenities, more access to public services, better public transport options, and are much more environmentally friendly both in terms of air quality and carbon emissions. One reason for the decline of the high street is that people live further away from them than they used to.
In our view, the politically feasible way to liberalise housing supply is to densify our existing cities in such a way that local residents actively want new developments near them, so that new infrastructure can be self-funding while also allowing new homes nearby, and to use the stock of highly-valuable council housing more efficiently, while guaranteeing that council residents are also better off. All of this can be done in a single Parliament, without having to threaten the green belt and generating substantial new revenue for local councils and the Exchequer.
Specific policies
Allow streets to vote on their own planning rules. A Conservative agenda on housing, in our view, would introduce policies that would devolve decision-making over densification to a practical local unit — the street. This would adopt the proposals of the London YIMBY (“Yes In My Back Yard”) group, allowing individual streets to vote on whether to change their planning rules to, for example, allow multi-unit housing or raise height restrictions to allow medium-rise developments, with the ability to set a design code if they wish. (There is now a detailed proposal for doing this from Policy Exchange, available here.)
New low- and mid-rise developments primarily affect people on the street that those have been built. It makes sense, then, to let these people decide on new developments near them. According to surveys carried out by London Yimby, a majority of residents tended to support allowing an extra story or two to houses on their street, especially if they could choose the design rules. This was with no prompting to explain the benefits to each homeowner — and, of course, the land value uplift they would enjoy would make this rule change very attractive for some homeowners.
Doing this on a street-by-street basis solves two problems. One, it allows people who feel strongly about living in low density areas to preserve that aspect of their street. Two, it aligns the incentives of homeowners more effectively so that those streets that do vote for more density are the ones that experience the land value uplift.
London YIMBY has proposed a number of protections that could be considered to avoid outcomes that are unpopular. A vote could only be triggered if a certain number of locals proposed and supported one. A supermajority of two-thirds of local homeowners could be required, and/or a supermajority of people who have owned property in an area for more than five years. The purpose of this is to find areas where residents genuinely want the increased amenities and land values that come from higher density, not to force density onto those that do not.
The effects of a policy like this would likely be less dramatic than many would like. Most streets, even in areas of high demand, would probably vote for the status quo. But a few might not. The rewards to those that voted for extra density could in many cases be enormous, and (naturally) direct new construction to places where residents thought it would be of most benefit.
We expect this to lead to houses that end up filling up their lots more, making their houses bigger and more valuable, and hence sucking demand out of the top end of the market and seeing it trickle down. Some streets will opt to go denser and sell off their houses (again, at a considerable premium — making everyone on the street millionaires several times over) to allow the construction of mansion blocks in the style of Bloomsbury, Victoria and Belgravia. These styles are dense without towering over their areas, and are extremely popular with local residents. Much of London within Zones 3 to 6 is filled with semi-detached housing that could easily be replaced with housing that is much denser, without affecting views beyond that street but bringing many of the benefits of density to surrounding areas.
Introduce a Flexible Right to Buy. 700,000 local authority-owned homes are in areas where median house prices exceed £250,000; 200,000 of these are in areas where median house prices exceed £500,000. More than half of council tenants would like to own their own homes but cannot afford the properties they are in, even with the Right to Buy discount.
A Flexible Right to Buy would allow them to use the value of the Right to Buy discount to buy a different property, selling their existing council house to fund that discount and raising additional revenues for the local council. If this scheme was successful, an ambitious estimate of the impact would see 197,000 tenants benefit, with £83 billion of stock and £21 billion of discounts and net receipts of £62 billion for local councils.
The advantage of this would be to allocate valuable housing stock more efficiently, so that whoever is willing to pay the most for a property, because it allows them to live near a productive job, can live in it. It guarantees that council tenants are also better off, and creates a significant revenue stream for local councils to invest in new infrastructure to support new private sector development.
This would be particularly attractive for the Conservatives because unlike other housing policy reforms, its effects — to create a generation of new Right to Buy homeowners, and free up housing stock in some of the most high-value areas in the country — would be felt immediately.
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