Restrictive planning laws have caused the UK’s housing cost explosion
No comparable country has built so few houses over the last 30 years.
Runaway housing costs have become one of the most pressing issues for low-income households in the UK. House prices are now two-and-a-half-times higher in real terms than they were in the mid-1970s, and rent levels have followed closely. What is more worrying than the level of prices or rents per se are measures of affordability, which look even bleaker. Historically, the ratio of average house prices to average incomes, both collected at the local level, has rarely exceeded a value of three. This meant that an average family could afford an average-priced house with three gross annual salaries. In a growing economy, we would expect this ratio to gradually fall over time, but the opposite occurred: It has risen to over five in most UK regions.
No other developed country except Australia has experienced such an extreme and sustained increase in housing costs. Spain, Ireland and the US have had their housing market bubbles, but they were transitory: Since 2008, real-term house prices there have almost returned to pre-bubble levels. Not so in the UK, where they have only fallen back to the levels recorded just before the peak.
High housing costs are not just decreasing living standards directly, but create numerous adverse knock-on effects. Most obviously, they raise the price of nearly every good or service that requires retail and/or office space, since the commercial rent is partially passed on to consumers. The cost of a standard food basket in the UK, for example, is 20 per cent higher than in France and 30 per cent higher than in Ireland. Another knock-on effect is the explosion in Housing Benefit (HB) payments. One in five households is now reliant on HB, which is not just a fiscal problem – the HB bill has doubled in real terms over the past two decades – but also erodes work incentives, due to the high withdrawal rate.
But the worst aspect is that the explosion in housing costs, and everything that flowed from it, was completely unnecessary. It could have been entirely avoided. The empirical evidence from around the world shows that temporary fluctuations aside, housing costs are largely determined by the severity of planning restrictions. This remains true even when controlling for a wide range of other factors, like population density, natural (as opposed to regulatory) obstacles, or the extent to which an area is built-up already.
The empirical literature merely confirms what common sense tells us. There are a variety of other alleged cost drivers that are frequently cited, but the problem with each of them is that the same factors are present in dozens of other countries, which have not experienced a housing cost explosion. Yes, the South East and the West Midlands are fairly densely populated, but no more so than a number of Swiss cantons, German Länder and Dutch provinces. Yes, the social housing stock has declined, but it still remains one of the largest in the developed world. Yes, there are empty and underused properties, but comparatively few by international standards. There is only one figure on which the UK really does stand out from its neighbours, and that is the number of newly completed dwellings (relative to population size) over the past thirty years. No comparable country has quelled housing development with such rigour for so long.
Housing development is not a threat to the attractive parts of the countryside, unless you assign that label to every muddy field and every stubbly patch of grass, as the anti-development Nimby lobby does. Only one tenth of the English surface area is developed at all, and within that tenth, the single biggest category is domestic gardens. There is plenty of room for development without sacrificing areas of natural beauty. It is a matter of confronting vested interests, which, unfortunately, the present coalition is not particularly good at.
Kristian is the author of Abundance of land, shortage of housing, a new report from the IEA.