The British economy has recovered relatively strongly from the financial crisis seven years ago. While other major industrialised nations, in particular in the Eurozone area, continue to suffer from weak (or non-existent) economic growth and high levels of unemployment, Britain has emerged in comparatively better shape.
The government have lauded this recovery as a vindication of their “long-term economic plan”, which they say is now bearing fruit: rock-bottom inflation, low interest rates and soaring real wages are combining to make ordinary people feel better off. The success of the narrative has also been politically convenient and was an important precursor to the Conservative victory in the General Election last May.
But headline figures belie a deeper truth. The economic growth currently being experienced in Britain exhibits many of the features which led up to the financial crash in the last decade: a surge in consumer spending, immigration of skilled and economically active workers and, importantly, rising asset (in particular house) inflation. Relying on these factors alone will not provide a sustainable basis upon which the economy can grow and flourish in the modern world.
It is the latter that is of greatest concern: the housing crisis is having profound political, economic and social repercussions for the UK.
That Britain’s housing market has become completely dysfunctional hasn’t escaped the attention of politicians on both the government and opposition benches. It is hardly as though the problem is a new one: there has been a chronic shortage of housing stock in the country for decades, and its effects are being felt most acutely in London and the South East. While in the 1960s, something in the region of 400,000 houses were being built annually in the UK; today the comparable figure is closer to 120,000.
Inevitably, this has had a profound effect on prices.
During the financial crisis, UK property prices crashed in real terms. Having peaked at an average of £185,000 in 2008, they bottomed out at around £158,000 by early 2009. Of course this phenomenon was hardly unique to Britain. Across the developed world, and most especially in Europe and the US, there was a painful readjustment after a decade-long bubble inflated by cheap credit.
More specific to Britain’s market for housing, however, is the speed with which property prices have recovered lost ground and re-commenced the inexorable pre-crash rise. At the beginning of 2015, the average property price had surged back to over £210,000 and Halifax bank recorded that property prices in London were increasing at an alarming rate of 17% per annum. Most commentators agree that this is not a sustainable trend.
Perhaps of greatest concern is the apparent reticence shown by the Chancellor in responding to calls to address the current problem of booming property prices. In his Autumn Statement last November, and in budgets that have come before it, there has been an implicit satisfaction about the current trend in asset prices.
This may partly be for economic reasons. As mentioned earlier, the surge in asset inflation has supported relatively strong economic growth in Britain post-crisis. Rising house prices tend to make people feel better off; this in turn improves consumer confidence and thus precipitates growing demand in the economy. Some economists argue that the rise in UK property after the crisis is singularly the most important factor in driving economic growth, which is in 2014/15 was faster than in any other major, industrialised economy.
But for Osborne, who is now seen by many as David Cameron’s likely successor, this is about politics too. The people who stand to gain most from rising property values are commonly wealthy, elderly people living in the South East of England. For the Tories, these are “our people”, the party’s core constituency whom they have traditionally been able to rely upon for votes. Last May, they turned out in hoards in the General Election to help return a majority Conservative government.
In her recently published report on Labour’s 2015 electoral defeat, Margaret Beckett highlighted the demographic differentials in voting behaviour last May. While 44% of over-65s voted Tory, as few as 24% chose Labour in the election. Among other things, a combination of the triple lock on pensions, a generous cut to inheritance tax rates, coupled with rising property prices, offered a healthy inducement for many elderly people to vote Conservative.
Political short-termism of this kind is likely to have profound generational implications. While our parents, and their parents to a lesser extent, have become wealthy on the back of asset inflation; at the same time young people have become trapped, with little hope of making the first step onto the property ladder. Properties worth £125,000 in the mid-1990s (when many people were facing negative equity) are now on average worth £650,000 – and there is no sign that the rate of increase is slowing.
Populist measures, such as Help to Buy, are hardly a palliative for these issues. Injecting further demand into a market facing severe supply constraints will merely place further upward pressure on the price of properties. Clearly, this is no way to help spread opportunity and allow young people to realise the aspiration of owning their own home.
But the task of addressing these problems is far from straightforward. It essentially represents an uneasy trade off between economic necessity and political will. Only a Chancellor as determined and proactive as Harold Macmillan in the 1950s can hope to achieve genuine reform in the housing market. So far that person is yet to emerge.
New housing developments may be necessary at a national level in order to stabilise prices; but locally they are often resisted by well-organised ‘NIMBY’-ism. It is not in the interest of residents to support housing programmes in their local area: they will likely lead to a fall in the real value of their homes and tend to bring short-term disruption to the community.
We also have a political system that serves only to exacerbate this problem. In the UK, MPs are elected with a mandate to represent the interests of their constituents. As such, major infrastructure projects – despite the obvious national benefits of boosting tax revenues and creating jobs – tend to get bogged down in consultation exercises and excessive bureaucracy. The constant prevarication over airport capacity in the South East of England is a case in point; clearly if these projects could somehow be depoliticised then we would probably have a Third Runway at Heathrow by now and housing development would be accelerating at a much more impressive rate.
Public choice theory also tells us that politicians and government agents are self-serving: they prioritise re-election and the prestige of being an MP over the genuine interests of the country more widely. This means that perverse incentives will undermine the chance of bold and radical policy emerging to address the housing crisis.
Particularly problematic in relation to the acute housing pressures in London is the Green Belt. While the idea of demarking a protected ‘belt’ around the City dates back over 60 years to the Town and Local Planning Act of 1957, the legislative restrictions on planning applications in protected Green Belt land have since changed very little. Fast-forward a generation, and the Capital has transformed unrecognisably: London in 2016 is a global city with a vibrant, diverse and growing economy that attracts more foreign investment than any other.
Recent estimates suggest that 50,000 homes will need to be built per year to accommodate this vast expansion and stabilise prices. But with acute land shortages in the City centre, it is becoming necessary to re-evaluate restrictive legislation protecting land in the suburbs.
The most efficient way to achieve this end is to look again at the Green Belt, which apart from tying down valuable land ripe for development, is also predicated on an out-dated and slightly naïve desire to encourage City dwellers to experience the benefits of the countryside. While this is a noble aim in itself, in practice, the reality has been quite different: the majority of Green Belt land – 59% – is agricultural land and used for farming and cultivation. As a result, only 22% of Green Belt land actually allows for public access and worse still, far from being an idyllic rural paradise, below two-thirds of the land within London’s boundary is actually defined as ‘green.’
A more balanced approach is required.
Protecting open spaces and recreational grounds is essential in large and sprawling cities, such as London. It is also necessary to prevent urban blights from ruining the landscape and harming the quality of life of local residents, who have often lived in their homes for many years. But there must be more flexibility built into the planning system to allow for the significant variation that exists between different bits of land, which are all lumped together and designated as Green Belt.
Clearly the challenges facing politicians are immense: the infusion of economic sanity and political pragmatism very rarely ends with sensible heads prevailing.
Addressing the UK’s beleaguered construction industry and restarting house building should be a central objective for the government. This would ensure the causes of the housing crisis – fundamentally a lack of supply – and not just the symptoms (people not being able to get on the property ladder) are addressed. Bolstering the supply of capital stock is surely a more effective way of alleviating the immense pressure on prices than throwing money at sticking plasters like help-to-buy, which will merely fuel demand and pent up prices further still.
There are now cross-party commissions dedicated to infrastructure projects and airport expansion. Encouragingly, these groups have gone some way to achieving a cross-party political consensus around certain issues, which are manifestly in the national interest. For housing, it might also be necessary to adopt a similar approach.