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.

A house being built near Bristol. Photograph: Getty Images

Kristian Niemietz joined the IEA in 2008 as Poverty Research Fellow.

Kristian is currently a PhD student in Public Policy at King's College London, where he also teaches economics. He is the author of the recent IEA Discussion Paper on planning reform, Abundance of Land, Shortage of Housing.

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Sooner or later, John McDonnell must defend the bankers he hates

The shadow chancellor's message is too complicated to be clear. 

“Like me, you will have friends who voted Conservative,” John McDonnell told an audience of mechanical engineers, Labour faithful and journalists. “They don’t want a bankers’ breakfast – Brexit – any more than I do.”

If the shadow chancellor would subconsciously prefer to talk about fry ups, it might be because the government’s strategy on Brexit has put him in a bind. The man known as a true follower of Marx is increasingly finding himself on the same side as the capitalists. 

In the run up to the EU referendum vote, the Tory Brexiteers leading the Leave campaign talked up a business-friendly, free trading Britain, a Singapore on the North Atlantic, as McDonnell put it in his speech. Labour’s Remain campaigners warned of attacks on workers’ rights.

But then came Brexit, and the economic liberals’ fall from grace. Britain’s new Prime Minister, Theresa May, has steered away from the cosy reassurances once offered to UK Plc and towards the world of the “just managings”. Her Brexit minister, David Davis, hasn’t revealed much about the negotiations, but he has said this: “This Conservative government will not roll back those rights in the workplace.” 

The Tory PM’s focus on controlling immigration and economic fairness will delight many traditional Labour voters. But her apparent complacency about the single market is unnerving economic liberals, and businesses. The most obvious critique of the Prime Minister is that she is willing to risk all-important access to the single market, in order to win on a populist point. 

McDonnell has clearly spotted his. And yet, forced to mount an attack from a free trade position, he sounds conflicted. In his speech on Thursday, he attacked Tory backbenchers who tried to intervene in the Bank of England’s independent monetary policy, and declared: “The economic benefits of free trade are well-known throughout this country.” 

Financial services access is a “red line” in Labour’s negotiation stance. He is prepared to make “a robust economic case” for the benefits of free trade “over the perceived costs of migration”.

Nevertheless, McDonnell’s suspicion of the financial services industry is never far away. His speech was peppered with references to “special deals for bankers”, the “elite” and a “few jobs in the Square Mile”. 

“We have reached the end of the line for the old economic model, with financial services at its centre,” he declared. Instead of a trickle down of wealth, he said, the public had seen “a grotesque trickle up”. 

McDonnell may be bang on in his analysis that economic inequality drove Brexit. He may be right that the economy needs to rebalance towards manufacturing. But that is not what the Brexit negotiations are about. The next two-and-a-half years are about trying to preserve and haggle - and shout the loudest about what the government's priorities should be. And the financial services are central to this. 

Like it or not, we live in a country where services account for nearly 80 per cent of the UK economy, according to the Office for National Statistics, and generate 11.6 per cent of tax receipts. In Scotland, financial services employ nearly 100,000 people. 

The financial services industry is also one of those most jeopardised by Brexit, because it is not a straightforward case of negotiating tariffs. Without passporting rights, UK firms serving the EU are expected to have to establish a subsidiary in the EU. The Institute for Fiscal Studies concluded: “It is clear that the financial services sector is disproportionately affected.”

In other words, the uncertain fate of the financial services industry represents the cold, hard reality of Brexit. The public need to know exactly what the stakes are. McDonnell could be the one to spell this out, and he shouldn't be ashamed by the fact - any more than his Labour predecessors should be for bailing out the banks. But doing so requires mustering up at least a little enthusiasm for financial services. Perhaps he’d better ask his Conservative friends for advice. 

Julia Rampen is the editor of The Staggers, The New Statesman's online rolling politics blog. She was previously deputy editor at Mirror Money Online and has worked as a financial journalist for several trade magazines.