James Vitali is a Research Fellow at Policy Exchange.
Economic growth provides jobs, increases opportunity and living standards and – in the context of a growing and increasingly ageing population – delivers the tax receipts that support our vital public services. It also offers the prospect that each successive generation will enjoy greater prosperity than the last: a vital component in a political system’s legitimacy and support for popular capitalism.
There is an intuitive sense that the housing market is deeply implicated in the broader performance of the economy. The subprime mortgage crisis and subsequent financial crash of 2007-8 has cast a very long shadow over western political economy ever since. Households feel the effect of high house prices and rents on their personal finances and their ability to spend money on goods and services.
As new research by Policy Exchange (published today) argues, those intuitions are correct. The “dynamic impacts” of housing on the economy are not very well understood at all; indeed, housing is a far more significant part of the wider economic picture than many realise. Housing undersupply in a context of persistently high demand has meant soaring prices, leading to rising unaffordability and falling levels of ownership, particularly amongst younger cohorts.
At the macro level, this is having a number of deleterious effects. As a result of high prices, investment is being absorbed by mortgage credit and diverted away from areas of the economy that badly need capital. Low supply in cities of high demand is deterring social mobility and preventing our skilled workers from taking up productive jobs.
Productivity gains in those cities are being capitalised in higher housing costs. Rising wealth inequality driven primarily by a distribution of property ownership skewed towards older cohorts is unbalancing the economy and making it increasingly vulnerable to shocks in the housing market. It may also be dampening consumer demand for goods and services.
“Productivity isn’t everything”, as Paul Krugman puts it, “but in the long-run it is almost everything”. We know that the central dilemma confronting the UK economy, and the primary drag on growth, is low productivity. Increasing the supply of new homes is one of the most effective policy levers we have to address this issue.
New homes need to be well designed and to embrace vernacular styles. Developers need to be more committed to building beautifully. We should think about diversifying the housing market by supporting smaller, local developers, and we should think more creatively about what types of homes we deliver.
We need to build homes in places of high demand, and yes, we need to build more high quality social housingsocial homes for rent that communities can be proud of. The essential truth, though, is that we must get on and build them. Regardless of what sort of homes are built, that is an inescapable truth.
There are a variety of different strategies for how we might do that, which are set out in this report. We can rebuild trust and reciprocity in the planning system by increasing certainty for developers and local communities alike. We can reduce barriers to entry for smaller developers that are more sensitive to local design preferences and more incentivised to build quickly.
We can support releasing public land for social housing and shift government subsidies towards supply over time. We should trial improvements to planning on a limited scale to convince people that they work effectively and will enhance rather than harm their communities.
Increasing supply may not, as some have pointed out, have an immediate effect on house prices. But this is the necessary work that we must commence now to address market dysfunction in the long run. There is no route to solving the housing crisis which does not involve an expansion of housing supply.
Regardless, it is likely that a boost to housebuilding will still have an immediate and beneficial impact on the economy at a macro level. Boosting housebuilding by 100,000 homes could directly add £17.7 billion a year to the UK economy, and that’s before even considering the indirect benefits to employment, tax receipts and so on. Delivering more social housing could help the government reduce welfare spending on housing benefits by 6.5 per cent per annum and by around £10 billion over five years.
There is a case made, often by those on the left but from some quarters on the right too, that supply isn’t the problem, and that market dysfunction is primarily a demand-side issue. The expression “overconsumption” of housing is sometimes employed – there is, it is argued, too much demand for homes, and too much desire for particular types of home.
Occasionally, this argument is a case about homeownership: that we need to jettison this ideal and move to something more akin to the German model, with less owner occupiers and high levels of private renting, longer tenancies, and rent control.
It is absolutely true that more needs to be done to support renters, not just in the private sector but in social housing too. However, the question of what sort of housing market we want is not merely a pecuniary one; it has a moral dimension too.
Homeownership is one of the most widely held aspirational values in British society. Homeownership gives security and a sense of responsibility to homeowners, and consistency and stability to families. It gives people roots in local communities and inspires pride. People do not see homes as financial assets alone. They see them as extensions of themselves.
The responsibility of government is not to tell people what they should desire or to conjure up a different type of society from first principles. It is to deal with society as it is, and provide for the things that people themselves believe will enable them to flourish. When it comes to housing, that means making homeownership attainable for more people, rather than pulling up the drawbridge. To do this, and to revitalise the economy more broadly, we must build more homes.
James Vitali is a Research Fellow at Policy Exchange.
Economic growth provides jobs, increases opportunity and living standards and – in the context of a growing and increasingly ageing population – delivers the tax receipts that support our vital public services. It also offers the prospect that each successive generation will enjoy greater prosperity than the last: a vital component in a political system’s legitimacy and support for popular capitalism.
There is an intuitive sense that the housing market is deeply implicated in the broader performance of the economy. The subprime mortgage crisis and subsequent financial crash of 2007-8 has cast a very long shadow over western political economy ever since. Households feel the effect of high house prices and rents on their personal finances and their ability to spend money on goods and services.
As new research by Policy Exchange (published today) argues, those intuitions are correct. The “dynamic impacts” of housing on the economy are not very well understood at all; indeed, housing is a far more significant part of the wider economic picture than many realise. Housing undersupply in a context of persistently high demand has meant soaring prices, leading to rising unaffordability and falling levels of ownership, particularly amongst younger cohorts.
At the macro level, this is having a number of deleterious effects. As a result of high prices, investment is being absorbed by mortgage credit and diverted away from areas of the economy that badly need capital. Low supply in cities of high demand is deterring social mobility and preventing our skilled workers from taking up productive jobs.
Productivity gains in those cities are being capitalised in higher housing costs. Rising wealth inequality driven primarily by a distribution of property ownership skewed towards older cohorts is unbalancing the economy and making it increasingly vulnerable to shocks in the housing market. It may also be dampening consumer demand for goods and services.
“Productivity isn’t everything”, as Paul Krugman puts it, “but in the long-run it is almost everything”. We know that the central dilemma confronting the UK economy, and the primary drag on growth, is low productivity. Increasing the supply of new homes is one of the most effective policy levers we have to address this issue.
New homes need to be well designed and to embrace vernacular styles. Developers need to be more committed to building beautifully. We should think about diversifying the housing market by supporting smaller, local developers, and we should think more creatively about what types of homes we deliver.
We need to build homes in places of high demand, and yes, we need to build more high quality social housingsocial homes for rent that communities can be proud of. The essential truth, though, is that we must get on and build them. Regardless of what sort of homes are built, that is an inescapable truth.
There are a variety of different strategies for how we might do that, which are set out in this report. We can rebuild trust and reciprocity in the planning system by increasing certainty for developers and local communities alike. We can reduce barriers to entry for smaller developers that are more sensitive to local design preferences and more incentivised to build quickly.
We can support releasing public land for social housing and shift government subsidies towards supply over time. We should trial improvements to planning on a limited scale to convince people that they work effectively and will enhance rather than harm their communities.
Increasing supply may not, as some have pointed out, have an immediate effect on house prices. But this is the necessary work that we must commence now to address market dysfunction in the long run. There is no route to solving the housing crisis which does not involve an expansion of housing supply.
Regardless, it is likely that a boost to housebuilding will still have an immediate and beneficial impact on the economy at a macro level. Boosting housebuilding by 100,000 homes could directly add £17.7 billion a year to the UK economy, and that’s before even considering the indirect benefits to employment, tax receipts and so on. Delivering more social housing could help the government reduce welfare spending on housing benefits by 6.5 per cent per annum and by around £10 billion over five years.
There is a case made, often by those on the left but from some quarters on the right too, that supply isn’t the problem, and that market dysfunction is primarily a demand-side issue. The expression “overconsumption” of housing is sometimes employed – there is, it is argued, too much demand for homes, and too much desire for particular types of home.
Occasionally, this argument is a case about homeownership: that we need to jettison this ideal and move to something more akin to the German model, with less owner occupiers and high levels of private renting, longer tenancies, and rent control.
It is absolutely true that more needs to be done to support renters, not just in the private sector but in social housing too. However, the question of what sort of housing market we want is not merely a pecuniary one; it has a moral dimension too.
Homeownership is one of the most widely held aspirational values in British society. Homeownership gives security and a sense of responsibility to homeowners, and consistency and stability to families. It gives people roots in local communities and inspires pride. People do not see homes as financial assets alone. They see them as extensions of themselves.
The responsibility of government is not to tell people what they should desire or to conjure up a different type of society from first principles. It is to deal with society as it is, and provide for the things that people themselves believe will enable them to flourish. When it comes to housing, that means making homeownership attainable for more people, rather than pulling up the drawbridge. To do this, and to revitalise the economy more broadly, we must build more homes.