19/Sep
Matthew Evans
Published in post

How to Fix Britain’s Broken Housing Market (Part 1)

The UK’s housing market is arguably the biggest government failure in our entire economy. We have one of the most restrictive planning systems in the world which has prevented an adequate number of new homes to be built in the past half-century, causing the runaway house price increases we have become accustomed to. Consecutive governments, both Conservative and Labour, have failed to solve, or even alleviate, this problem in any way.

Average house prices now stand at 7.6 times the average annual salary, more than double the figure for 20 years ago, according to the ONS; this problem is even more acute in London with the figure being a staggering 14.2. This unaffordability has left us with a generation of renters, with just 34% of households led by a 16-34 year old owning their home, down from 54% in 1996. This threatens to spell the end of Thatcher’s ‘property owning democracy’, posing a grave threat to Britain’s broadly free-market system, with property ownership being a traditional bedrock for support for Capitalism.

The lazy solution to this problem is to assume it is a market failure. Market failures do exist in many markets, but this is a blatant government failure, with Britain’s planning system the main culprit.

Research by Christian Hilber and Frederic Vermeulen of the London School of Economics indicates that the steep rises in house prices we have seen are mainly due to supply constraints, and these constraints account for more than a third of the average house price. This is basic Economics; as the supply of new homes is limited, too few are being built to meet demand, and this has led to the rapid house price growth we have experienced.

The root cause of Britain’s crazily restrictive planning system was the Town and Country Planning Act 1947 which established that planning permission was required for land development – ownership no longer conferred the automatic right to develop land. Whilst some level of control is necessary – to stop the building of a sewage plant next to a primary school, for example – the problem is that local authorities do not have the incentives to allow the building of enough homes, and thus give in to local NIMBY pressure.

One way to alleviate this problem would be to allow local councils to collect a proportion of the stamp duty receipts in their area, creating the incentive to allow and encourage housing developments. Also, NIMBYs may be more inclined to accept new housing in their area if it could knock a few hundred pounds off their council tax bills.

The Act of 1947 also conferred the right for local authorities to include Green Belts in their plans. These Belts have stopped cities growing in an organic way and have exacerbated the housing crisis by severely limiting supply where new houses are needed the most – around major cities. Thanks to these policies, more of Surrey’s land is taken up by golf courses than by housing; this is despite Surrey being an ideal location to commute into London.

The ideal plan would be to remove green belt status for all areas except for those that are deemed to be areas of natural beauty, or are home to a vast array of wildlife. This could be accompanied by provisions to ensure that any new towns built on the former green belt must have truly accessible public green space.

Regrettably, the UK has developed a very vocal NIMBY culture, and due to the longevity of the Green Belts, their supposed benefits are ingrained in the national psyche almost as much as those of the NHS. Scrapping them could prove politically toxic; therefore, alongside any reforms to the green belt there is an urgent need to educate the public about the role of the Green Belt in the housing crisis.

A more achievable option proposed by the Adam Smith Institute would be to remove restrictions on land within a 10 minute walk of a railway station, this would allow the development of 1 million more homes within the Green Belt surrounding London alone.

Whilst improving the UK’s planning system could go a long way towards solving the housing crisis, the UK’s stamp duty system also needs to be reformed to help resolve this crisis.

As with all IEA publications, the views expressed are those of the authors and not those of the Institute (which has no corporate view), its managing trustees, Academic Advisory Council or senior staff.

Matthew Evans

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