In Britain, the construction of new housing tends to be relatively unresponsive to house price changes. If the construction market were working well, one would expect house construction numbers to rise more when prices rose faster and fall back more when prices fell.
Many people suggest that the UK’s planning laws are important constraints here. I’ll leave the debate about that for another time. Here, though, I want to emphasize that planning issues are by no means the only reason housing construction may not be as response to house price changes as would be ideal.
Another suggestion is that UK construction is not as competitive as it should be. Some parts of the construction sector have been found guilty of forming cartels in recent years. But even setting aside deliberately anti-competitive behaviour, construction is a rather concentrated sector, with firms that build over 2,000 units per year accounting for around 50 per cent of housing starts.
A couple of years back, the firm I work for (Europe Economics) did some work for Shelter on how housing construction could make more competitive and more price-responsive. The six key policies we proposed were as follows
1. Use guidelines or rules in procurement policies for government agencies commissioning house-building so these agencies have to use multiple construction firms (thereby encouraging more players)
2. Use local authority pension funds to invest in housing construction. (George Osborne in fact announced a variant of this idea at Party Conference this year.
3. Introduce a principle when government departments and agencies assess the impact of government policies, they should take account of the potential for them to create house price cycles and regard doing so as negative. Big house price cycles diminish the incentives for housebuilder to construct new houses quickly in response to house price movements (because by the time the house is finished the price might have fallen).
4. Creation of a special administration regime for “zombie housebuilders” whereby the Crown reasserts its fundamental ownership of the land if a housebuilder becomes financially distressed (e.g. insolvent). If housebuilders go bust, the land banks they hold could end up tied up for years without houses being built on them, even if planning permission has been granted. What might happen instead is that when housebuilders go insolvent the land in their landbanks with planning permission would revert to the Crown so as to be released more quickly for the building to happen.
5. Introduction of the relevant change of use taxation as soon as planning permission is granted. The idea here is that once planning permission to build a house is granted, taxes such as council tax might apply straight away, meaning it is costly to leave land idle after planning permission is granted.
6. Government ensures that capital requirements reflect systemic risks associated with housebuilding. The thought behind this policy is to encourage more bank lending for construction by adjusting the way the risks of loans for construction create bank capital requirements to reflect the idea that if there is more construction under appropriate conditions then macroeconomic stability will be greater.
In these ways, more price-responsive housing construction could be delivered without abandoning planning rules.
