The problem of rising London house prices- and how to solve it

Industrial waste land in Strasbourg, France. [Source: Bertrand DUGARDIN]Industrial waste land in Strasbourg, France. [Source: Bertrand DUGARDIN]

The average house price in London is now over £500,000 and the Centre for Economics and Business Research predicts rises will continue in the medium and long term. Resulting high rents are unquestionably compounding the so-called ‘cost of living crisis’: a study by Shelter has recently revealed that a typical London family spends 59% of its income on rent. However, the solution proposed by Labour – rent control – is a populist quick fix that will have adverse unintended consequences and will not tackle the underlying problem that is causing London’s house prices to rocket.

Blaming ‘greedy’ landlords for rent increases is unhelpful: it is not their fault that house prices are rising. The truth is that for more than thirty years the United Kingdom has been building fewer new homes than any major country in Europe (Eurostat, 2010). Rising prices and high rents all boil down to one thing and it doesn’t take a rocket scientist to work out what it is: the inability of supply to meet rising demand.

The main problem lies in restrictive planning laws that prevent new building. These have become increasingly stringent in recent years. Greenbelt policy was introduced in Britain in the 1930s to retain areas of largely undeveloped, wild or agricultural land surrounding urban neighbourhoods. Green Belt status has been continually extended: in 1971, for example, the Green Belt around London was expanded to include most of Hertfordshire. Even between 1997 and 2004, a period which experienced explosive house price inflation and almost no increase in house building, the total Green Belt area grew by yet another 26,000 hectares. Now, the Green Belt suffocates London and heats the housing market like a pressure cooker. And it is not just London. Cities surrounded by Green Belt land such as Oxford, Cambridge, Bristol and Bath have experienced some of the highest price rises. House prices in Cambridge, for example, grew by 14% in the fiscal year 2013. (Nationwide 2014).

Planning laws must be liberalised for the housing supply to be increased and the affordability of renting restored. In the words of Dr Kristian Niemietz, senior research fellow at the Institute of Economic Affairs, “planning liberalisation is the closest thing there is to an economic silver bullet.” This is because if house prices are reduced and rents brought down then renters and mortgage-payers will have more disposable income to contribute to both their own wellbeing and the economy at large.

Contrary to popular belief, liberalisation will not lead to the destruction of our green and pleasant land. In fact, 18% of UK green belt land is categorised as “neglected”, i.e. full of pylons and rubble, and 37% is diverging – being transformed in some way. ( CPRE 2010). True, this still means that 45% of Green Belt land is rightly preserved beautiful pastures, but there is no compelling reason why neglected land at least should not be removed from such protection. It is just sitting there – redundant and ugly.  For example, the fact that 59% of land under the Avon Green Belt is neglected shows how unhelpful the Green Belt boundaries can be. Removing this 59% from Green Belt protection would provide 40,000 hectares of space for new development. But liberalisation would not have to be carried out on a large scale to make a real difference. If the government pushed back the Green Belt surrounding London by just 100 meters all round, homes for one million people could be built – not an insignificant number considering that Greater London’s total population stands at just over eight million. The only reason this has not been done already is because neither the government nor the opposition believes it is in their interest to risk offending voters in the south with whom this could be unpopular. The great irony is that solving the cost of living crisis is in all major parties’ best interests and allowing new homes to be built is a very effective way to do it.

Surely there is another way? Some have claimed that Labour’s proposed mansion tax will tax people with “excessive” housing out of their homes and therefore free up space for others. The scheme would require holders of property worth more than £2million to pay a fee to the government but unfortunately, such confiscation of wealth would not help the housing shortage: the idea that there is enough housing in the UK but that it is simply mal-distributed is misguided. The fact is that there is not enough supply to meet demand.

Another idea that has entered public debate is to encourage development on Brownfield land (land previously used for industrial or commercial purposes). Again though, the depiction of Brownfield land as a panacea is misleading. Firstly, there is as little as 90km2 of Brownfield land in England that is deemed to be suitable for redevelopment for housing purposes and in many cases clean-up costs are prohibitively high for developers. (Niemitz and Bourne 2014). Moreover, the location of Brownfield sites does not coincide particularly well with the demand for housing. Building houses where people do not want to live solves nothing. It follows, then, that Brownfield development should be used alongside Green Belt development but is no substitute for it.

Some people would rather see the rise in house prices continue than a liberalisation of planning laws. That position is tenable, if insensible. The idea that the problem can be solved without any liberalisation, though, is a fantasy.

  • Anon

    Really interesting ideas and well written article, think about running for government Charlie!