Housing, an essential human need, forms a key sector of the economy. It forms a crucial component of investment and in many countries, makes up a large component of overall wealth. Taking the case of the United States, Zhu (2014) noted that real estate accounts for a third of the total assets held by the non-financial private sector. Besides being a key form of investment, the housing sector also plays a crucial role in the transmission of monetary policy through mortgage markets. Due to the inextricable linkage of the housing sector in the overall economic framework, its booms and busts have significant feedback loops on the wider economy.
Developments in the interwar housing market in the UK serve as a good case study of a housing sector boom supporting economic growth. Some key facts give evidence to this housing expansion. The total number of houses almost doubled from 6.7 million in 1901 to 11.5 million by 1939. Moreover, fixed capital formation in dwellings rose more than 4.5 times from £37 million in 1920 (1.2% of GDP) to £169 million by 1938 (3.4% of GDP)*. What were some of the factors behind this phenomenon? This article analyses the UK housing market during the interwar years and explores the political and economic policies which led to this boom. It also delves into its economy-wide impacts to draw lessons for today where a slow recovery in global housing markets continues.
The UK housing market in the 1930s
Figure 1: a timeline to show major events in the housing sector
From the end of the First World War, the role of housing in both the social and financial stability of the nation assumed growing political significance. Interestingly, the housing sector used to come under the Ministry of Health from 1919 to 1950. Post the 1918 election, the Prime Minister Lloyd George said that he wanted to create ‘a land for heroes to live in’. This resulted in the ‘homes for heroes’ campaign to provide for better homes for the returning soldiers. A year later, the House and Town Planning Act of 1919 (Addison Housing Act) was the first large scale government project to build housing for social use. The central government provided generous subsidies for housing which resulted in costs being spread out between tenants, the treasury and local councils. The move also encouraged local authorities to engage in large scale housebuilding.
Although the first Labour government of 1924 lasted a mere nine months, they passed a number of key pieces of social legislation including the Wheatley Housing Act. This increased government subsidies for local authorities to build housing for rent for low paid workers. Around 508,000 houses were built under this act. Not only was the purview of providing subsidies focused on local authorities but it was extended to the private sector through the Housing (Additional Powers) Act of 1919 and the Chamberlain Housing Act of 1923. With the above background of UK interwar housing market, it is important to delve into the specific policies which brought about this boom. These are mainly due to the subsidies provided for housebuilding and tax rebates.
Subsidies for housebuilding to private home owners and local authorities
Government incentives to boost the housing sector resulted in an unprecedented building expansion in England and Wales and led to the construction of 1.5 million houses from the end of the World War until 1930 (Becker, 1951). It is estimated that two thirds of these houses received state assistance in their construction which according to Derek H. Aldocroft and Peter Fearon, authors of British Economic Fluctuations 1790-1939, represents 65% of all houses built during that time period. State assistance towards housebuilding was given to local authorities and the private sector.
Public expenditure on housing comprised of capital expenditure on housing by local authorities, subsidy from central government (known as exchequer subsidies) and subsidy from local government (rate fund subsidies). Capital expenditure up to 1928-9 was made ‘out of loans’ but post Great Depression its scope was broadened and could be funded from revenue as well. With the broadening scope of funding for capital expenditure, public expenditure on housing increased from 0.8% of GDP in 1920 (£1.1 billion at 2000 money value) to a peak of 1.5% of GDP by 1938 (£2.2 billion at 2000 money value).