10 August 2018

The affordability fallacy is only making the housing crisis worse


One of my colleagues used to have a theory about how Britain’s housing crisis would eventually become self-limiting.

It went more or less like this: the problem at the moment is that the cost of NIMBYism (i.e. organised resistance to house-building) is not borne by the NIMBYs themselves.

NIMBYism, to the extent that it is successful (and in Britain, it usually is), leads to higher house prices, higher rents, longer waiting lists for social housing, more people living in cramped conditions, higher spending on housing benefit (and thus higher taxes), and so on. But that cost either falls on people who do not own a home, or it is spread across all taxpayers. It is not borne specifically by the people who are causing the problem. The cost of NIMBYism is therefore an external cost, comparable to pollution or aircraft noise. You could even make a good economic case for a tax on NIMBYism.

According to my colleague’s theory, that external cost would internalise itself as soon as NIMBYs got fed up with having to share a house with their own adult children, who cannot afford to move out. Blocking nearby development and keeping house prices high may seem like a good idea when you have, say, an eight-year-old and an 11-year-old living with you. But things will look very different 20 years later, when they are 28 and 31, and still living with you.

Alas, it has not turned out that way. We should have reached that point by now. Over the past 20 years, the share of young adults (aged 20-35 years) still living with their parents has increased from 19 per cent to 26 per cent. We are involuntarily becoming more Italian, not because of any cultural changes, but because of our refusal to build houses.

And yet, British housing policy continues to revolve around the sensitivities of NIMBY campaigners. When Tory minister Liz Truss recently stated the obvious, namely, that the choice for her party was “building on more greenfield sites and making sure there are enough homes for next generation or losing the election and ending up with Jeremy Corbyn”, she faced a furious backlash from within her own party and the conservative media.

So what was wrong with my colleague’s theory?

In principle, nothing. But in the meantime, there has been a crucial change in the nature of our housing debate. Britain’s high house prices used to be an argument for more house-building. They have since become an argument against house-building. Anti-housing campaigners now frequently argue that even if the development project they are protesting against went ahead, most people would not be able to afford those new houses anyway. So what’s the point in building them in the first place?

A good example is the following statement from the spokesperson of an anti-development group in Croydon:

“I know that when my three boys move out, they won’t be living around here because it’s just too expensive. We aren’t opposed to development […] but at these prices how is anyone meant to get started?”

In other words: if my sons won’t be able to live here – why should anyone else?

This week, the Campaign to Protect Rural England (CPRE), one of the country’s most influential NIMBY organisations, has provided further ammunition to such anti-housing initiatives. Their latest report starts with the usual scaremongering about the green belt being “eroded at an alarming rate”, because 8,000 homes were built on green belt land last year, and more projects are in the pipeline. (For the record: since 1979, the size of the green belt more than doubled, from 721,500 hectares then to over 1.6 million hectares today. A little trimming at the edges is immaterial in the grand scheme of things.)

They then go on to claim that four out of fives homes built on the green belt are “unaffordable” (by which they mean “expensive”; offering something literally nobody can afford is not a great business strategy).

Well, who would have thought: after four decades of insufficient – and steadily falling – levels of house-building, leading to a massive shortfall and huge levels of pent-up demand, the few houses that do get built are very expensive. This is not, as CPRE seems to think, a “refutation” of the laws of supply and demand. It is the laws of supply and demand in action. But it will, no doubt, embolden anti-housing protesters even further. We have manoeuvred ourselves into an absurd Catch-22 situation: housing is too expensive because we have been blocking development for decades, and now we are blocking development because housing is too expensive.

What’s perverse is that, from the perspective of an individual, local anti-housing campaign, it actually makes sense. Internationally, there clearly is an inverse relationship between house-building levels and house price inflation. Temporary bubbles aside, housing is more affordable in countries that allow more house-building than others. But this relationship does not necessarily hold at the local level in the UK. Housing is not automatically more affordable in towns and cities that allow more house-building than others.

Why? Because of across-the-board pent-up demand. Suppose three neighbouring towns, which have severely restricted development for a long time, suffer from a housing shortage and high housing costs. Now one of these towns decides to take a more permissive approach, and allow a lot more house-building, while the other two continue their restrictive policies. Would house prices diverge markedly between these cities?

Probably not, because a lot of the extra houses built in the pro-development town would just be bought up by well-to-do people from the neighbouring NIMBY towns. And local campaigners would then argue: “Why should we build houses for posh toffs from neighbouring towns? They’re not even affordable for most local people!”

Imagine during the Irish potato famine, there had been a campaign group trying to prevent potato farming, on the grounds that since potatoes are so expensive, they would mostly be eaten by the rich. Imagine that group had argued that growing more potatoes was pointless unless they are “affordable potatoes”.

The famine would still be going on today. And that is more or less the state that British housing policy is in.

Kristian Niemietz is Head of Health and Welfare at the IEA.