14 September 2017

How to fix the housing crisis

By Ben Ramanauskas

The findings of yesterday’s National Audit Office (NAO) report on homelessness in the UK were alarming. The problem has worsened significantly in recent years. The number of rough sleepers stood at more than 4,000 in the autumn of 2016, having increased from fewer than 1,800 in 2010. The number of homeless households in temporary accommodation has also risen, rising from fewer than 49,000 in March 2011 to around 77,000 in March 2017.

The report is right to point out that homelessness is a complex issue with various cases. It is also correct to highlight the role that housing affordability plays.

The UK is in the midst of a housing crisis. House prices in the UK have increased by an average of 300 per cent since 1995 and in some areas of London by 1,000 per cent. This lack of affordable housing can have a devastating impact on people’s quality of life and career prospects. Moreover, it leads to people delaying starting a family of their own which is not only upsetting for people who would love to have children, but will also create problems for the economy in the future. Furthermore, as highlighted by the NAO report, it is a major cause of homelessness.

Housing affordability is not a problem in many other countries. The UK has the highest average monthly rent prices in the European Economic Area, with the price of housing per square metre in the Netherlands 45 per cent less than in the UK. Moreover, in Germany the real price of housing fell in both the 1980s and 1990s, and was completely stable from 1991 to 2001. As for the UK, there was an annual percentage increase of 3.6 – the highest for any OECD country – during that period.

Why is housing so expensive in the UK when compared to other countries? The answer is simple: there are not enough houses. For example, the London Strategic Housing Market assessment revealed that in London alone, 50,000 new homes a year need to be built in order to accommodate London’s population. However, London’s new housing supply is only at 27,000 a year.

It was the 14th-century Syrian scholar, Ibn Taymiyyah who stated that: “If desire for a good increases while its availability decreases, its price rises. On the other hand, if availability of the good increases and the desire for it decreases, the price comes down.” The housing affordability crisis in the UK is a problem of supply and demand. There are simply not enough homes to go around.

Given that housing is essential, and demand is so high, why is supply so low? Why are more homes not being built? The reason is the planning system.

By international standards, the UK has an incredibly complex planning system, with a plethora of rules and regulations relating to home building. There have been numerous academic studies into the impact of planning regulations on housing supply and affordability. For example, research conducted by Hilber and Vermeulen, found that the largest impact on house prices was caused by the regulatory constraints imposed by the planning system on development. Their study found that the planning system was responsible for 35 per cent of UK house prices. Moreover, a report published by the European Commission called the UK planning system “complex and costly” and that it exacerbates the housing crisis in the UK.

Furthermore, research by Chang-Tai Hsueh and Enrico Moretti of the University of Chicago found that housing supply constraints in the United States have a drastic impact on living standards. They found that if even modest steps were taken towards liberalising the planning system, then wages and living standards could improve by approximately one tenth.

The evidence is overwhelming and the conclusion is unavoidable. The restrictive planning system leads to a shortage of housing and results in incredible expensive homes.

It is not just regulations about the amount of light or the size of rooms which decreases housing supply in the UK, it is also rules about where homes can be built. For example, green belt policy is a major contributor to the UK’s housing crisis. This prevents building in areas surrounding major UK cities.

Such restrictions reduce the supply of developable land around cities which in turn reduces housing supply and leads to housing being more expensive. Research by the Adam Smith Institute revealed that 90 per cent of land in England remains undeveloped and that only 0.5 per cent would need to be developed to fulfil this decade’s housing need.

Simply removing restrictions on land 10 minutes’ walk of a railway station in London’s green belt would allow the development of 1 million more homes. Furthermore, research conducted by Cheshire and Sheppard found that regulations relating to green belts are a factor as to why housing affordability in the UK compares unfavourably with other developed countries.

The people who feel the housing crisis most acutely are younger people who are spending a significant proportion of their incomes on rent. It is hurting their career prospects and is preventing them from starting a family of their own.

Owning a home, which is something previous generations have been able to do quite comfortably, is now something which younger people can only dream of. And, in many instances, people are facing homelessness.

Obviously some regulations are essential, and the government should ensure that health and safety regulations are rigorously enforced in order to protect households. But the vast majority of regulations are unnecessary and are reducing the supply of housing which leads to housing becoming unaffordable.

From its role in the homelessness problem to the astronomical cost of housing for ordinary households, Britain is paying a high price for its housing crisis. Only by easing restrictions on supply can it be solved.

Ben Ramanauskas is a Policy Analyst at the Taxpayers' Alliance