How to fix Britain’s housing shortage

That highlights a long-running issue for the British economy, the dominating effect that housing and especially house prices have on the national psyche and politics.

Property porn TV never seems to end, the media reports house price inflation in glowing terms and falling house prices are seen as some kind of disaster. Strangely everyone remembers the happy feeling of rising home prices, but the misery of negative equity and repossessed houses soon fades.

Yet, smoothing out the market is easy to do. In Canada the National Bank has been targeting house price inflation for years. When house prices rise so too do deposit levels and borrowing requirements. It is hardly surprising that this policy, pursued by a then unknown central banker called Mark Carney, meant that Canada emerged from the credit crunch relatively unscathed.

Canada and several other countries target house price inflation because they realise what a disaster ever more expensive housing is. But in the UK it is the consequence of government policies going back decades. The distorting effects on the British economy are a permanent handicap, let alone the fact that for many people finding a safe, secure and affordable home is proving increasingly difficult, if not impossible.

The principle reason for the seemingly ever-increasing price of property in the UK is a shortage of supply. Many people blame this on nimbyism which is a real problem. I have visited numerous towns over the years where earnest campaigners against the latest development have explained why it would be disastrous, while sitting in their lovely homes, obviously built on green field sites only a few years earlier.

This isn’t a problem unique to the UK. Berlin is desperately short of housing, but locals have blocked plans to build on now derelict airports in the city centre and house prices are rising across much of Europe. Housing policy is tricky and no one has all the answers, but the UK has one very specific problem: council housing or rather the lack of it.

The failure to build enough new homes since the 1980s is almost entirely down to the annihilation of council house building. In the post-war house building boom of the 1950s and 60s councils built hundreds of thousands of homes a year. In 2002 they built just 180.

The main reason was the introduction of right to buy, which not only forced councils to sell property at a discount but the money either went to the Treasury or was used to bring down council debt; it wasn’t used to build new council homes.

It was a disaster for house building, which is a great pity because councils have lots of land and can give themselves planning permission to build. Recent attempts to end the cap on borrowing for councils have not been a great success. Councils in the UK built just over 2,000 homes in 2019, France is building 40,000 pa. In the meantime, the private sector here has shown itself to be unable or unwilling to expand to meet demand, it builds about the same number of houses as in the 1980s.

But why is this so bad? Leaving aside the huge issue of homelessness and overcrowding the economic consequences are enormous. A few years ago, I met a senior manager at a building products firm who had been head-hunted to run a factory on the outskirts of London.

He had moved from a four bedroom, detached house, on a private estate in northern England and was renting because he couldn’t afford to buy a two bedroom flat above a row of shops on the local main road. He is the perfect illustration of why an unbalanced housing market is such a problem economically. The country needs the best people for the best jobs to be able to move to where they are most needed.

If, however, they can’t or won’t move the economy suffers. In Germany this is far less of an issue as the huge private rental market means moving around the country is easier and cheaper to do.

London house prices are in themselves also a huge distorting factor on the British economy, as they rise far faster than elsewhere. If you can make it onto the London housing ladder you would be mad to ever leave, your house will probably earn more than you do as prices soar.

Covid has dented this trend but not ended it, as the ‘race for space’ has seen people selling up in London to get bigger houses where they can work from home. But London left the rest of the country far behind decades ago.

The consequences are also very damaging for the Treasury, as more and more money is poured into an asset, property, that it is difficult if not impossible to tax. Profits on ever rising property values of millions of pounds don’t attract capital gains tax, inheritance tax bands are stretched and stretched to ensure that homeowners can pass on their wealth untaxed, council tax is such a political hot potato it hasn’t been reformed for decades.

Yet it can be done, in France you pay capital gains tax on property. It falls the longer you stay in your home, encouraging people to rent until they know where they are going to stay more permanently.

The UK’s property problems also mean the economic damage is inter-generational: If you inherit even a reasonably sized property you are made for life, inherit two and you have won life’s lottery.

That is very nice if you are one of those children, but it distorts the economy and prevents the creation of a level playing field. Property wealth means some people can afford to train for jobs where the pay is awful at the start, do unpaid internships, stay on at university longer, start work with no student debt and get onto the housing ladder themselves with help from the bank of mum and dad.

That was one reason the famously laissez faire Adam Smith, was in favour of inheritance tax. What chance do brilliant but poor children have against those whose parents can leave them a fortune or buy them success?

But so popular is home buying with the public that the government, in the middle of the largest and deepest recession in generations has found the money for a stamp duty holiday and to subsidise the mortgages of first-time buyers. As it just increases house prices, as buyers can now afford to pay more for a property, this gives more money to homeowners and their children, for free.

The government is now even planning to pay for free elderly care from general taxation and not from homeowners’ property wealth, which will be ring fenced. Again shifting the burden on to younger, often poorer taxpayers.

Still the government can console itself with the thought that at least it’s creating a home owning democracy, as more and more of us buy somewhere to live. Except that it hasn’t done that at all. House ownership peaked in 2002 and has fallen since and for the under-35’s the figures are far worse. Their home ownership levels have halved since 1989, as they have to save for years to get on the housing ladder. Lack of supply, higher and higher prices and the growth of buy to let has seen to that. In fact, the UK is pretty near the bottom of the European league table for home ownership.

So, what is the solution to all these problems? No country has the perfect system, but you would want a combination of Canadian measures to target house price inflation, more house building especially by councils like in France and a larger rental sector with much stronger safeguards and price controls as in Germany. Finally, property wealth should be taxed more.

Building sufficient homes, won’t be popular with Nimbys, nor with homeowners and buy to let owners who would see property values and rental income fall. But the construction industry will boom and productivity will increase as workers move more freely around the country.

Taxing property wealth is even less likely to happen, successive governments have sought homeowners votes by cutting their taxes. They know what happens if you try to increase them, yet they also know leaving a huge sector of the economy far more lightly taxed than others distorts the allocation of resources.

In short, the property market is a mess, this latest boom will probably end with a crash and house building will once again fail to meet demand, productivity and growth will suffer. But don’t worry we lucky ones with homes can always go on Rightmove or Zoopla and count our cash, our unearned, tax free cash.

Jonty Bloom is a freelance journalist and former BBC business correspondent. Follow him @jontybloombiz