IEA - Political leadership needed to solve housing crisis

3 Mar 2016 10:17 AM

The government's failure to tackle the housing crisis is due to its unwillingness to confront the root cause of the problem and organised 'Nimbyism'.

This is a short sighted strategy considering rising housing costs cause more widespread discontent than Nimby interest groups in the long term. 

A succinct new briefing from the Institute of Economic Affairs argues that the government's aim should be to improve affordability across the board - including all types of tenure - instead of capitulating to interest groups who do not want houses built near them. 

Housing costs in the UK are now among the highest in the world, with average house prices increasing four and a half fold since 1970 after inflation. No other OECD country’s experience comes close. A similar story can be told when looking at median multiples – the ratio of median house prices to median annual incomes. Normal median multiples in developed countries are between 2 and 3; now in most English regions median multiples are around 5, with much of the South above 6.

This briefing explains how we have come to have such an extreme housing crisis and suggests how best the government can rectify the market.

Problems with the housing market

• The UK’s housing stock is not just inadequate in total, but much of it is also in the ‘wrong place’, because what little development we have is skewed towards those parts of the country that are least affected by the crisis & demand is lowest
• There is no specific shortage of social housing, or private rented accommodation, or homes for first-time buyers, but an overall shortage of inexpensive housing of all types. Whichever tenure you consider, the cause of rising house prices is always the same: demand vastly outstrips supply
• Government interventions such as the Help to Buy scheme, changes to inheritance tax and higher tax for buy-to-let landlords are all a step in the wrong direction
• Greenbelts are outdated and conceptually wrong as protecting land should be selective –proximity of a plot of land to for example London or Oxford, is not in itself a valid reason for a presumption against development
• Focusing on boosting homeownership should not be a policy aim in its own right as this fails to address the overall lack of supply problem – increasing the overall housing stock should be the aim in order to improve affordability across the spectrum of different housing types.

Suggested solutions

• Sensible tax changes would strengthen incentives to permit development by ensuring that local authorities gain from it
• For example, introducing a local income tax where local authorities set the rate and retain the revenue.
• Attracting residents would then become a way for local authorities to increase the local tax base and permitting development would be a relatively easy and straightforward way to attract residents
• The government could also replace council tax with a local Land Value Tax

Commenting on the briefing, Mark Littlewood, Director General of the Institute of Economic Affairs, said:

“The root cause of the UK’s housing crisis is simply down to the lack of supply, hurting Brits up and down the country. For too long there has been an absence of political leadership manifested through an unwillingness to confront organised interest groups.

“Instead of introducing schemes such as Help-to-Buy (which have actually pushed house prices up), the government should be aiming to improve affordability by getting rid of planning restrictions that are conceptually wrong, and allowing construction levels to increase to the level that will allow house prices and rents to fall across the board.”

Notes to editors:

For media enquiries please contact Nerissa Chesterfield, Communications Officer: nchesterfield@iea.org.uk or 020 7799 8920 or 07791 390268

The full briefing, by Kristian Niemietz, can be downloaded here.

The mission of the Institute of Economic Affairs is to improve understanding of the fundamental institutions of a free society by analysing and expounding the role of markets in solving economic and social problems.

The IEA is a registered educational charity and independent of all political parties.