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Britain’s housing crisis just isn’t that complicated Homes cost more than they need to. Why not do something about it?

Residential Investor

How can we end the housing crisis? Would a better planning system ensure more well-designed homes with local support where they are most wanted, over time making homes more affordable than they would otherwise be?

Of course it would. When it comes to whether or not something should be done about Britain’s planning system, that is all you need to know. And yet some seem determined to complicate matters and all but ignore the obvious truth that housing in Britain is more expensive than it needs to be. One such commentator is Ian Mulheirn, who in a recent post for the Resolution Foundation gets awfully worried about whether the supply of housing has been “adequate” or not. It is the latest in a crop of articles by Mulheirn that are widely cited by those who are opposed to more homes being built in the parts of Britain that need them.

Let’s start with a few simple points. Mulheirn’s own firm, for Labour’s Redfern Review, concluded that housing prices and rents would be reduced if we built more homes, all other things being equal. They even estimated by how much.

To repeat: no one is disputing that rents and house prices would be more affordable if more homes were built, than otherwise.

Mulheirn’s contention is that supply did not cause house prices to go up. Well, of course it didn’t. More supply generally causes prices to go down, not up, other things being equal. And Ian would agree that house prices and rents would have been lower than they are now if there had been more supply. His own firm’s study says so.

Academic economists like Professors Paul Cheshire or Christian Hilber of the LSE would have defined the term “shortage” before using it. Cuba has a shortage of cars because of a ban on imports and second-hand car prices in Cuba go up, not down. Permits to drive a New York taxi used to cost a million dollars and it was harder to get a ride, before more supply emerged.

A researcher might break that into two questions.

First, in high-demand places, could we build more homes for less than the current prices (counting all costs, including a return on a builder’s capital)?

Second, could we do that without any significant negative effects on other people?

The answer to both in the South-East is undeniably yes.

A generation of spatial econometricians has gathered extensive evidence for the first. We know of literally no peer-reviewed paper arguing the opposite. Certainly we have seen none cited by Mulheirn.

In much of the South-East, a house costs many times more than the cost of building it. Ask a homeowner for the estimated rebuild cost on their insurance certificate. Yet, with no hope of planning permission, the underlying land would be worth vastly less. The bulk of the value of the house is in the planning permission.

You don’t need the research to be convinced. There are industries based on this exact point. The business of land promoters and consultants is getting planning permissions – often in the teeth of fierce opposition – because of the value it will add. If you don’t believe that planning permissions are scarce, expensive, and hard to get, just ask them what they do all day.

Or the Office for National Statistics can tell you that total house prices exceeded replacement costs by £3.7 trillion or roughly 40 per cent of the net worth of the UK, in the last available year. An eye-watering 2/5ths of the nation’s net so-called “wealth” is derived from an exploitative and needless shortage of housing. In the 1930s, land was just five per cent of the cost of a new house.

Missing from Mulheirn’s pieces are any local data on the cost of building homes, or comparing that with local house prices. That would demonstrate the real problem.

Second, we also have plenty of room to build more homes with local support, and make existing places better. The gorgeous terraces of Bloomsbury and Pimlico have five times as much housing per acre as most of sprawling London. Half of all homes in London are in buildings of just one or two floors. The places that people find the most beautiful often have the most housing.

That’s the end of the debate, so far as any academic economist is concerned. There is a shortage: houses cost more than they need to. It is as simple as that. The major component of that cost, in the places with the most job opportunities, is planning permission. A better planning system would ensure many more well-designed, pretty homes, with the support of local people. If it did, housing would be far more affordable. The result would be an incredible reduction in inequality and boost to economic growth. Along the way, we would build a fairer and more beautiful country.

From the beginning of UK data in 1290 until only a few decades ago, the housing supply generally ensured homes were priced at little more than the cost of building them, except in the centre of cities where technology, height limits, and (for a long time) lack of good public transport put homes at a premium.

The current planning system was designed, with the best of intentions, to make housing abundant and to push growth away from London. In recent decades, it has failed in both – not for want of good intentions by planners but due to nearly insurmountable political obstacles.

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