Regular readers will recognise that I am highly sceptical of the UK housing system, which I believe operates world’s worst practice when it comes to social and economic outcomes.
A key tenet of the UK’s housing malaise is its dysfunctional supply system, which has become increasingly constipated following sixty years of urban consolidation policies and strict planning. When combined with decades of easy credit and policies aimed at stoking demand, UK housing has displayed high levels of price volatility, as well as extreme unaffordability (see next chart).
The forced urban consolidation caused by the UK planning system – whereby only 8% of the UK is urbanised, compared with roughly 28% in Germany, 20% in Italy, 28% in the Netherlands, 18% in Switzerland, and 9% in Spain – has also caused Britons to live in some of the worst and most cramped housing conditions in Europe. As shown by the below table, which comes from the London School of Economics, new homes in the UK are, without exception, the smallest in Western Europe:
And yet despite the size of UK homes shrinking, they remain amongst the most expensive in Europe, caused primarily by decades of strangulating urban land supply and escalating land costs.
Instead of treating the supply problem at its core, UK authorities are instead opting for short-sighted policies aimed at “improving affordability” by increasing would-be buyers’ access to credit and lowering borrowing costs.
In March, the UK central government launched the “Help-to-Buy“, a scheme that will provide £130 billion of government mortgage guarantees to marginal borrowers that would not otherwise qualify for a loan. Help-to-Buy has been denounced by the Office of Budget Responsibility and the Treasury alike, who claim that the scheme will do nothing but force-up the cost of housing, whilst opening taxpayers up to potentially large losses in the event that loans turn sour.
For its part, the Bank of England has also stepped-up efforts to reflate the UK housing market. In August 2012, it launched the “Funding-for-Lending” (FFL), an £80 billion scheme aimed at forcing down the price of business loans and mortgages.
Yesterday, the London Evening Standard’s Amol Rajan wrote possibly the best critique of the UK housing system that I have read. In just over 300 words, Rajan touches on all of the important issues: intergenerational equity and inequality, supply constraints, demand-side “affordability measures”, and political economy. Below are the key extracts.
…in Britain [housing] is the great scandal of our times. Property prices were one of the four domestic booms — along with immigration, public spending and private debt — that fuelled the years of growth preceding the crash. Property also played a major part in the crash.
It is a primary source of inequality, because those who own assets have such an advantage over those who don’t. It transfers money from the young and poor to the old and rich. And housing benefit costs £24 billion each year.
So the problem is vast. Luckily, the solution is obvious: build, build, build. Forcibly deport all nimbys and build for England and St George. A massive programme of residential construction, particularly in and around London, would increase supply, reduce prices over the medium-term and create jobs for the young and low-skilled. Nor would it destroy English land, 90 per cent of which is unspoiled.
Yet confronted with the twin nuisances of nimbyism and planning regulation, Osborne has chosen otherwise. Rather than devise and apply the remedy, he is exacerbating the problem.
The Funding for Lending Scheme, which subsidises the cost of mortgages, has been augmented by a Help to Buy scheme that forces taxpayers — me and you — to underwrite billions in mortgages to people who can’t afford a house.
These are among the stupidest policies ever devised in Whitehall, and a barely disguised admission of failure. It will benefit current rather than future owners, create distorting subsidies that are hard to remove, raise rather than reduce property prices, sustain our addiction to debt, and further inflate an asset bubble.
Politicians inflate asset bubbles for the simple reason that owners of assets are more likely to vote. But there has never been an economic bubble in history that didn’t eventually meet a pin. The trick of modern democracy is to make sure the pin arrives after you have left high office. This is the Chancellor’s gamble: that he can enjoy the bubble and delay the pin. It is myopic, selfish and inexcusable.
London’s poor suffer the consequences most of all. Britain’s housing policy is a moral, social, economic and geographic catastrophe. Yet by deluding the middle class into thinking they are getting richer, it might also be political gold. Sometimes, democracy stinks.
I couldn’t have summarised the UK housing situation better myself. While the Help-to-Buy and FFL schemes are seemingly unconscionable, they are at least predictable from a short-term political and economic perspective. In March, it was revealed that between 630,000 and 800,000 home owners in the UK are facing negative equity. Meanwhile, the UK economy has become increasingly dependent on debt to drive growth, whereas incomes have been falling in real terms. And with Government finances already over extended, the authorities are endeavouring to ‘kick the can down the road’ by encouraging home buyers to leverage-up into housing once more, even though it is what helped get it into this mess in the first place.
While both schemes should work to stimulate UK growth in the short-term, and might even help to re-elect the central government, doubling down on housing now risks a much bigger debt hangover (and bust) in the future. Treasury, the OBR, and Amol Rajan are, therefore, right to be concerned.