The housing situation in
the UK
would be laughable if it were not so saddening. Put simply, the housing crisis
is almost entirely caused by the politicians that govern us - but what makes it
even worse is that these politicians are trying to fix the problems they've
caused with policies that add harm to the crisis that is already the result of
their interference.
That doesn't sound ideal.
No, it's rather like if a
bad driver knocks a cyclist off her bike and then tries to administer very
inexpert first aid, but in doing so gets in the way of the ambulance crew
trying to get to the scene of the accident.
I see, tell me more. What exactly is the housing
crisis in the UK?
The housing crisis is
largely made up of one twofold problem: there is a shortage of affordable
housing. That is to say, there are not enough houses to match demand, and
because of this the available housing is too expensive for many young people to
afford.
And why is this the fault of politicians?
The shortage occurs
because the government specifies rigid building standards, restricts the use of
land that can be built on, and subsidises mortgage borrowing (all these
policies push up the cost of housing and create a scarcity of suppliers). Due
to inflation and planning restrictions, politicians continue to cause the huge
rise in property prices, as they ensure that supply cannot meet demand.
So, then, what can be done to rectify the situation?
If demand is high and
supply scarce enough to cause a drastic shortage, the obvious solution is to
deregulate some of the brown/green land prohibitions and allow the natural
forces of the market to bring supplies closer to demand. One of the ineluctable
laws of economics is that if demand increases and supply decreases or remains
unchanged there will be a higher equilibrium price to account for the scarcity
of supply. So for example, younger prospective house buyers find it harder to
obtain an affordable purchase, and people renting property or even just a room
find that a larger proportion of their income is going on rent. Also, when
claimants of housing benefits constitute a greater part of the market, rents
are hiked up. As a corollary, higher rents engender a surge in buy-to-let
investments, which forces up house prices, which comes full circle in
justifying high rent.
So it's a kind of negative spiral?
Yes, but with an obvious
solution. If renting out property is hugely profitable, and housing
restrictions are relaxed or in some cases lifted, then investors will look to
build more property in order to generate more profits. If lots of investors do
this then housing supplies will increase, demand will lessen, and prices will
be brought down.
Yes, it makes sense - I can see why it is important
not to artificially restrict supply.
Indeed, but restricting
supply is only one part of the problem our politicians have caused - the other
is much more subtle, but arguably even more damaging to the housing market.
Oh, what's that? I'm intrigued.
I thought you would be. I
am talking about the government's injection of extra money into the economy and
how that negatively impacts people's purchasing power through money
devaluation. A look at the housing market and the difference between old and
young people will show this. For young people the cost of getting on the
housing ladder has risen to reflect all the additional money that has been put
in circulation.
You mean that older people got to buy their houses
prior to this, so they benefit from higher house prices that are now disproportionately
higher than they originally paid?
Yes, spot on. All the ways
the economy is devalued, through printing money, through excessive borrowing,
and through deficit spending, society is being turned into part Ponzi scheme
part credit-pumping pyramid scheme where those nearest the new currency gain
the most and those furthest away from it lose out, because by the time all this
extra money reaches them it comes in the form of higher prices, which are
reflected in higher house prices, where in places like London, where demand far
outweighs supply, housing is unaffordable for most people in the UK.
Thanks for the explanation.
You're welcome. A fact from
Dominic Frisby's article in The Guardian might interest you:
"Between 1997 and 2007 the housing stock grew by
10%, but the population only grew by 5%, and house prices rose by more than
300%."
Golly gosh!
Quite!! This shows quite
clearly that supply and demand are out of whack here, and much of it is to do
with the whopping increase in the supply of money that’s in circulation,
coupled with frivolous lending. House price inflation has gone out of control
as more and more mortgages are issued and more capital is created in the form
of 1s and 0s on a bank computer. Cheaply created money ensures that there are
bubbles, and societies built on easy debt are going to burst, as was the case
in 2008. Once you add in all the loose lending from abroad and include those
vast sums of money that flood into our housing market, you see that even though
there is lots of new housing being built in our major cities, house prices are
still unaffordable for the majority of young people. Couple all that cheap
money with the very restrictive planning laws we mentioned and it’s a recipe
for inflated prices, making a heavily regulated building sector the preserve of
a small group of wealthy suppliers.
You also mentioned that politicians are trying to fix
the problems they've caused with policies that add harm to the crisis. What did
you mean?
Oh yes, so I did. Having seen
how the state has caused the housing crisis by the toxic combination of
starving supply and devaluing currency, making houses both in short supply and
more expensive, let me mention two government policies that have been tried as
a method of easing the housing crisis, but for what ought to be fairly obvious
reasons, have worsened it.
Let me guess - something to do with affecting supply
and demand?
You're learning fast. Yes,
the first is their help to buy scheme, which comes in the shape of government equity
loan and mortgage guarantee schemes. The problem is, while regulations are not
relaxed, perpetuating the supply-side problem, the help to buy scheme simply
increases house prices and while raising affordability for the signatories,
makes house buying even harder for everyone else.
What else?
Another terrible idea is
rent controls, which although thankfully have not happened in the UK in recent
years are an issue in other countries, and are a favoured policy of some of the
opposition parties, not least the aspiring Prime Minister Jeremy Corbyn.
What's wrong with rent controls? They are looked upon
by some as an answer to the affordability problem for tenants.
Alas, as with help to buy schemes,
they have the opposite effect though. Rent controls artificially lower the
price of renting an apartment to below the market rate. That’s a terribly bad
idea. The consequence of this economic short-sightedness is a housing shortage.
When the government makes rent artificially cheaper it means landlords want to
rent out fewer units than they otherwise would.
So the long term vision of having more affordable
housing for people will also be compromised with artificial rent controls?
Yes, think about it this
way. Suppose you’re a property developer looking to spend millions of pounds
building a huge apartment complex in a major city – and let’s say you’re
thinking of either London or Auckland. Suppose London
has a rent control policy and Auckland doesn’t,
and all other factors are equal – you’d head straight off to Auckland to avoid developing apartments in a
place that makes you charge below the market rate to rent them out.
Yes, I can see that.
This also knocks-on to
affect economic growth too, as entrepreneurs will be reluctant to locate to a
country that artificially induces goods and services to be priced below the
market level.
Got it.
And here’s another way
rent controls create shortages – they disincentivise already available rooms
from being rented out. Suppose you live in Lambeth or Pimlico and you have a
room to rent. If the state-induced rent control places the room at 70% of the
value you place on it, you may well decide to leave the room unoccupied and use
it for storage or an office instead. Every time a decision like that is made
the government effectively eliminates hundreds of units from the rental market.
I guess rent controls would also lower living
standards too?
That's right. If landlords
have to artificially lower their profits they will be tempted to lower their
own standards in order to cut costs and make up for their losses. They will be
disincentivised to maintain properties in the way that they would if they were
being paid what their rooms are worth. The consequent effect is that re-wiring
isn’t done as frequently; general repairs are scarcer; utilities don’t get
replaced when they begin to show faults, and the neighbourhoods (from gardens
to graffiti) are cared for less. You may think that cutting corners to engender
shoddier living standards won’t be tolerated by clients, but that won’t be a
problem for landlords. With artificially low prices they will be able to fill
their shoddy rooms twenty times over.
So help to buy and rent controls are bad ideas, what then
can be done to help?
Relaxing regulations and loosening
the brown and green belt zoning are key things that would be a big help. To
understand why this is so important, let me give you an idea of how the land
lies (pun intended) at the moment. The UK is 60 million acres in size, and
the population is 65 million people, which equates to just under 1 acre per
person. However, the land is not divided up to equate to 1 acre per person.
Less than 1% of people own 70% of all the UK land (mostly comprising
Aristocrats, Baronets and the Landed Gentry). Yet the average Brit lives on 340
square yards which totals about 8% of the entire land, which would translate as
12.5 people per acre instead of 1 person per acre.
Yep, it's obvious to anyone who has ever flown over
the UK
in a plane that there is plenty of land available to be built on.
Yes.
And most of it non-green belt land too.
Yes again. To those who
assert that Britain
has reached its capacity on how many more people it can fit in - it's just not
true! Last I heard the UK National Ecosystem Assessment (NEA) worked out that
the proportion of England's landscape that is built on is a mere 6% (in fact,
once you include parks, allotments, and domestic gardens into that equation,
the actual figure is more like 2.27%). Or to put it in an even more compelling
way, excluding parks and gardens, if we were to quadruple the size of every
city, town and village in the UK,
it would still be the case that just over 90% of UK land is not urbanised.
Now obviously I'm not
saying that every bit of non-urban land can be built on - there are important areas
of natural beauty, there are mountains, rivers, canals, lakes and reservoirs;
and there is important land for farming, horticulture and silage, but the mere
suggestion that the UK is overcrowded, and that we are full, is frankly
ludicrous, and ought to be put to bed right away!.
Some cities are cleary overcrowded though, aren't
they?
Don't make such an
assumption - you have to understand why cities have so many people in them. Rural
areas are quieter because fewer people like to live in them - and house prices
are very expensive in bust cities because more people want to live there. It's
simple logic - the reason London has 8.6 million
people and rural towns have only a few thousand is because more people prefer
to live in London
than they do rural towns. The reason being, not only is there is a greater
abundance of the aforementioned benefits in more populous areas, there are also
better career prospects, higher salaries, better nightlife, greater choices of
restaurants, a richer choice of entertainment, more tourist attractions, better
public transport, greater diversity of people – the list goes on.
But yet in terms of probability, the highest number of
complainers of over-crowdedness will most likely come from a highly populated
area, which probably explains why to them the UK feels overcrowded.
Most people who
pontificate on overcrowding are likely to be pontificating from a vantage point
of high population density. The people with the highest probability of feeling
an intense population density are those who live in the densely populated
areas. For example, if city x has 7 million people and a village y has 1000
people, and only x and y exist, there is only a 1 in 7000 probability that you
don't live in city x.
What, so this means the UK is not overcrowded? I don't get
it.
The mistake people are
making is that they are trying to average population density of people instead
of averaging over square miles. You can't get a proper picture of the UK's
people to area ratio by counting how densely populated a populated area is -
the only way is to assess how densely populated the average square mile would
be when considering each square mile as a weighted average of total population
and total area. A tube station in the rush hour can be overcrowded; so can a
concert venue without proper door control - but as you suggested, take a trip
around the UK by plane and look down, and for the most part you won't see
crowds of people, you'll see fields and woodlands.
Ah right, so the measuring method is dodgy?
It's far from ideal
because it's quite misleading. The rate of urban areas in relation to square
miles is vanishingly small - there is potential for literally millions more
people living in the UK.
Of course, just like all sensible immigration policies, a nation must ensure it
has the schools, hospitals, roads, etc to support more people, but given the
myriad qualities and benefits one distils from living in places like London, that ought to be
something that's greatly encouraged.
Yeah, it certainly is the case that in some areas of
the UK
the infrastructure hasn't quite kept up with population demand.
True, but once you accept
the general maxim that more people means more cultural and social benefits,
it's easy to see that inadequate facilities does not mean the nation is
overcrowded, it simply means that the UK infrastructure has not
progressed conterminously to facilitate the social and cultural benefits that
come with an increased diversity of people."
While we are here, I'd like to talk about
something else please - London
house prices.
Oh yes.
Hardly a day goes by without hearing
someone complaining about London
house prices.
I think London is a fantastic city - far and away the best in the UK. A lot of
other people agree, and because of that they want to live there. Such demand
means London
house prices are high, but that's not bad for society.
It sounds like a bad thing if you want to
live in London.
Yes, but we
are talking about society as a whole, not just people who want to live in one
city. The negatives of high house prices for buyers are offset by the positives
of high house prices for sellers. There is no net loss for society.
But lower prices benefit society, right?
They benefit
buyers but those benefits are offset by costs to sellers. Low prices are a
benefit to consumers in one principal way - when they cause consumers to buy
more of what they want. Consider a large Domino's pizza costing £12. If you buy
a Domino's pizza for £12 you are signalling that you value it more than the
£12, otherwise you'd buy something else.
Yes, no disagreement so far.
Right, now suppose
you value a £12 large Domino's pizza at £15, the £3 difference is what is known
in economics as your consumer surplus. If Domino's makes £7 on the pizza (their
producer surplus) then society has a net value gain of £10. That applies to
anything – cinema tickets, washing machines, clothes, DVDs, and so on.
Now suppose
the price of a Domino's pizza falls to £11 and Domino's producer surplus drops
to £6. Nothing has changed in net terms because Domino's loss is the customer's
gain. But something else does change. What then happens is that more people are
willing to buy Domino's pizzas. All the people who were willing to pay £11.50
for a pizza didn't buy one when they were £12, but will now. All these extra
purchases create more consumer surplus, which creates more societal value.
Remember Domino's gains too because they sell more pizzas (the very reason
businesses cut prices).
Why doesn’t the same thing happen with
housing?
The key
difference between Domino's and housing is that Domino's don't have a fixed
supply of pizzas - they can make as many as the demand necessitates. Housing
supply increases are severely restricted by regulations, bureaucracy and
influential lobbying groups (as we've already discussed), which means even a
theoretical drop in property prices couldn't benefit consumers in the same way
lower pizza prices could.
The upshot is
that by and large the properties go to people who most value owning property in
London. People
with alternatives to living in highly priced London
will take those options, leaving in most cases the people in London who most value living there. Moreover,
as demand to live in London
drives up prices, much more prudent use is made of the limited space available.
Not only do prices that rise with demand ensure the best allocation of
residents to the fixed number of properties, it also ensures that the best use
is made of the land.
It's our old friends supply and demand
again.
It sure is. The
primary cause of London's
housing problem is overly-stringent regulations that starve supply in an
inelastic market (the inelasticity being the limited supply of land). London is
the main place where the demand to live there is hugely greater than the
supply-side availability, not least because the supply is limited to a 1500 km2
area, whereas the buyer-side demand comes from anywhere in the world, and not
always from people who want to buy those properties to live in.
Perhaps the government should try to
alleviate the problem by restricting London
house buying to UK
folk?
Definitely
not, because stated another way, it is tantamount to banning foreigners from
buying property in our country, which would be a wholly oppressive and foolish
thing to do.
But there are too many properties sitting
empty in London
because foreigners are simply buying them as assets, not as places to live.
Do you know
how many empty properties there are that are owned by foreign investors?
No, not off hand.
Then how can
you say there are too many if you don't know how many there are? Look, I know
all those buyers who purchase properties in London as an investment but have no intention
of living in them make many of you mad. But the reality is, there are not thousands
of London homes sitting empty while at the same
time there are thousands of people looking for housing in London - it's simply not true.
But there are quite a few - shouldn't the
government do something?
No. Even if we
ignore the fact that such an intervention would be xenophobic, wanting the state
to intervene to prohibit transactions just because they think the wrong kind of
people are buying these properties is problematical. You may argue that people
who want to live in London but couldn't afford the properties, and people
without homes at all, would value those more than foreign investors, but the
knowledge that those properties are far out of their price range shows
evidentially that those properties are not being bought at the expense of
either of those groups of people. It's a tragedy that there are so many people
who are homeless in the UK, but people buying expensive properties in London
are not the cause of their plight, and nor are any actions that prohibit those
purchases going to be the solution.
Secondly, and
following on from the first point, even just a basic understanding of economics
would inform people that Britain is actually better off when those properties
are sold, irrespective of whether the buyer is an English person or a
foreigner.
Really, how can that be so?
To see why foreign buyers make
Britain
better off, and why banning them would be counterproductive (not to mention
xenophobic), consider who benefits when an Englishmen (Jack) buys a house from
a second Englishman (Tom). Suppose Jack buys a house from Tom for £300,000.
Jack must value the house at more than £300,000 otherwise he would be unwilling
to buy it, and Tom must value the money more otherwise he would be unwilling to
sell it. Suppose the maximum Jack would pay is £310,000 - his consumer surplus
(the difference between the most he'd pay and what he actually pays) is
£10,000. Suppose that Tom would have sold his house for no less than £295,000,
then his surplus is £5,000, which means the transaction generates a net
societal surplus of £15,000
Now suppose that up steps
Johnny foreigner, out-bidding Jack by £7,000, offering him £307,000. Jack gets
no benefit from the sale of Tom's house to Johnny foreigner, but Tom's surplus
has risen to £12,000, meaning that if Johnny's consumer surplus is the same as
Jack's then society now has a net gain of £22,000, which is £7,000 more than
when the transaction was between Jack and Tom (there are complex reasons why,
in terms of a weighted average, we’d expect the consumer surplus to be roughly
the same – but we won’t deviate into that now). Of course if you ban Johnny
foreigner then Jack gains, but his gain is less than the loss incurred by Tom -
plus on top of that you also have to count Johnny's lost consumer surplus.
The desire to ban
foreigners from buying homes in the UK (by which we really mean London) is
perfectly coterminous with the definition of xenophobia you’d find in any
dictionary – it is a desire to impose an unfair discriminatory procedure on a
bunch of people solely on the grounds they do not share the same nationality as
you.
The test for you, dear
reader, not just on this, but in life in general, is to keep a check on how
often in the free market you find yourselves favouring people who just happen
to share your nationality – in terms of jobs, goods and services – over people
who happen to be of a different nationality. For I hope I don’t need to remind
you too often that the more globalised we become the more we should erode away
these old misconceived notions of jobs, goods and services being available only
to people who share your place of birth.
Finally, a more general
point about all this is that I think it's more the case that in the modern age
lots of people have become quite furtive about telling the truth. The truth
used to be valued so much more highly, but since socially we became more
emotionally linked (which, don't get me wrong, has been excellent in so many
ways) there is a widespread fear of telling the truth about things like wealth,
value, wages, inequality, discrimination and so forth for fear of sounding blunt
or uncaring.
When Jack tells us about
the problem of homelessness in London,
his default position is to frame it relatively in relation to rich property
owners (inequality) instead of as an intrinsic issue of how homeless people are
struggling on their own terms and need some help in life. The properties that
rich tycoons have the luxury of being able to buy are usually homes in the
region of £1-5 million pounds - they are unaffordable to the vast majority of
people in the UK, and have almost nothing to do with the reason the homeless
people are on the streets.
But there is another
politicised aspect to the housing crisis that no politician wants you to think
about. Politicians don’t want house prices to be lower, because lower house
prices are seen as a sign of a failing economy, and a big turn off for home
owners (home owners are fairly influential as they tend to vote in greater
numbers than renters). The housing debacle in the UK has created a vicious circle -
more people’s wealth has become dependent on the value of their home, so there
is more and more for politicians to lose if they loosen the restrictions on
housing. As most politicians are home owners (often multiple home owners) and
many also have rental income from second and third properties, you can be quite
sure that things aren’t going to get better anytime soon.
