Why can’t you afford a home?
UCL researcher Josh Ryan-Collins says it is due to inevitable landowner profits from land, to a majority of homeowners blocking fair taxation of those profits, and to excessive mortgage credit. His new book is not yet widely available, but he has written a long summary.
Causation is complex. Lawyers speak of ‘but-for’ causes; economists of ‘counterfactuals’. Things often have many causes, which can be necessary or sufficient in different combinations.
Ryan-Collins rightly asks questions about the banking system. For centuries, banks have received various implicit subsidies – too-big-to-fail status, deposit guarantees, lender of last resort facilities, exclusive access to reserve accounts, and maturity mismatches illegal in any other retail financial service – at a value and opportunity cost to the taxpayer of many trillions and without any serious check that we are getting value for money.
And it is certainly true that banks did far less mortgage lending in prior centuries. The peer-to-peer UK mortgage lending of the 1800s has been almost entirely forgotten.
He is right that easy bank financing and low nominal interest rates have driven up the price of housing, at least in some places. But, crucially, not in the places with a healthy supply.
A 2018 study by Edward Glaeser and Joseph Gyourko showed a striking difference between two groups of cities. In cities like Atlanta, more demand and low interest rates were met with a jump in building new homes, while prices barely moved. In cities like San Francisco, the flow of new homes barely budged while prices vaulted.
In Cuba, cars are ‘unique’ and fixed in quantity because imports are prohibited. Second hand cars there rise in price, just like UK housing.
He is also right that private home ownership makes the politics of fixing housing far harder. Homeowners are happier when their house price goes up. Hence the tyranny of the majority, and the current explicit UK government target for house prices to continue to rise.
The 1950s upturn in his graph of global house prices coincides quite well with homeowners becoming majorities. Of course, it also correlates rather well with the introduction in 1947 of a ‘modern’ UK planning system without serious testing or any intention to facilitate large-scale densification of existing cities.
But his argument does not explain the experience of the UK in the 1930s, for example, when interest rates were low, de facto 100% mortgages became available and yet the working class were suddenly able to afford to buy homes in London because the Tube system enabled housing on land that used to be too far out. Meanwhile, landowners desperate to find something to do with their central London properties turned them into highly affordable mansion blocks with vastly more homes per acre, to tempt the middle classes.
There are crucial aspects of the microeconomics of housing that he glosses over.
If you are lucky enough to own a home in the south-east of the UK, the most expensive element is probably not the cost of building it. It is certainly not the land. It is probably the planning permission for that home to exist.
Land in the UK, even in the south-east, is surprisingly cheap if you eliminate the possibility of building on it – somewhere around £10,000 per acre.