Mitchell Palmer: Britain itself might not be broken but its housing market is

Mitchell Palmer is an economist at the Adam Smith Institute.

The British housing market is broken, especially in the South East of England. In London, the average private renter spends more than 40 per cent of their income on rent, while more than 15 per cent of private rentals are not deemed ‘decent’ for human habitation. At the same time, first-home buyers struggle to accumulate a deposit. This creates misery, as well as unmeetable demand for social housing.

But the consequences are even more dire than they first appear. Since the Global Financial Crisis, Britain’s economic output per capita has remained basically static. As new research from the Adam Smith Institute shows, housing is to blame for much of this stagnation. Of the 10–20 per cent of additional growth we identified as available, fixing our planning system alone accounts for around 7 percentage points. It is the largest single pro-growth move we could make.

The reason is simple. When homes are scarce and expensive, everything else suffers. Workers can’t relocate to better opportunities. Businesses struggle to recruit. Families spend more of their income on subpar housing and less on everything else. Productivity falls, wages stagnate, and growth slows.

Despite this obvious catastrophe, Britain has made it harder and harder to build. Our planning system gives councils wide discretion to delay or block development, even in places crying out for homes. Layers of regulation add years of uncertainty and cost, especially for small and medium-sized builders who once delivered much of the country’s housing.

The result is a supply crunch that never seems to ease. Even when demand softens, the underlying shortage remains. That’s why prices rebound so quickly, and why rents barely ever fall.

Everyone knows the conventional solutions offered to this problem. The left proposes more social housing. Both sides demand tougher rules on private landlords. On a good day, politicians even propose loosening rules that restrict the supply of high-density housing in town centres or near railway stations. These three proposals are not equal, but all are insufficient. They do not solve the monopoly problem at the heart of the housing crisis.

What we need are competitive urban land markets.

Landowners must feel a rush to build for fear of a missed opportunity and someone else satisfying demand. To make this threat real, governments must enable development on a wide variety of different plots, both inside and outside the city limits, and at a scale much larger than anticipated housing demand. Much of this housing will never be built; it simply needs to be threatened.

This is the concept at the heart of New Zealand’s successful housing reforms. As the Kiwi housing minister Chris Bishop recently put it, ‘abundant development opportunities [will] drive down land prices and create housing choice’. The reforms are still in progress, but they are already paying dividends. Auckland – a city of 1.5 million – is now building three times as many dwellings as London – a city of 9 million. Unsurprisingly, rents are now 19 per cent more affordable, relative to incomes, than they were in 2015.

To create competitive urban land markets in this country, we will need to throw out the discretionary planning system entirely. It should be replaced with a transparent framework of pre-determined, liberal development rights, so landowners know that building is not a special favour granted by the state but a normal economic activity. Crucially, these rights should respond to market signals: If land prices surge in a city, more land should automatically be released for development.

At the same time, councils should abandon the idea of merely meeting minimum housing targets, which entrenches scarcity and monopoly power, and instead enable housing wherever it can reasonably be accommodated, letting the market choose between abundant sites.

Finally, Britain must relax green belt constraints and invest in transport to cut commuting times. Done properly, this growth can pay for itself through land value uplift, just as the Metropolitan Railway once did and Japan’s railways still do today.

Politicians talk a lot about ‘boosting growth’. Unfortunately, a few new towns or tower blocks won’t solve Britain’s housing crisis. De facto rent controls and higher social housing obligations certainly won’t. If the government is serious about making it easier to build homes they need to commit to reshaping our broken urban land market. Until we fix that, Britain’s housing crisis will keep doing what it’s done for years: quietly making us all poorer.