Sunday, 8 March 2015

Adam Smith and rationing housing supply

The Adam Smith Institute has brought up several 'solutions' to the housing problem:

The mirage of ‘affordable housing’

Written by Whig | Friday, August 24th, 2012

A free market definition of affordable housing must ultimately be the price that consumers are willing to pay for housing. Only consumers should ultimately decide where they want to live, in what kind of dwelling and by what financial arrangement – constrained by the supply of course. Putting it simply, if a million houses were rapidly built around London, it is pretty clear that house prices would fall generally and that this would increase affordability. Even if these were a million mansions, this would still increase the affordability of housing in general. Such building cannot occur, however, due to planning constraint. As the Hilber and Vermuelen report concludes ‘Regulatory constraints imposed by the British planning system can to a large extent explain the high house prices'.

The mirage of ‘affordable housing’ « Adam Smith Institute

Help to Buy plan 'will make houses even less affordable'


The Government's new Help To Buy scheme will make home ownership less accessible overall by driving up house prices, a think tank has warned.

The initiative, which aims to assist potential buyers through an equity loan scheme and a mortgage guarantee scheme to be introduced in January, will increase the demand for houses without a similar increase in the supply, therefore driving up prices, the Adam Smith Institute said. Homebuyers using the scheme will therefore benefit but everyone else will lose out, the institute said.

The think tank advised the Government to radically liberalise planning laws to increase the supply and affordability of housing in Britain. Otherwise, it warned, the Help to Buy programme "risks recreating the perverse incentives that led to the 2000s–era US housing bubble'' and subsequent subprime mortgage crisis, a major factor in the worldwide financial crash of recent years.

The institute also claimed the scheme would redistribute wealth from taxpayers to house buyers and also expose taxpayers to losses on equity loans with no guarantee of a return. Sam Bowman, research director at the Adam Smith Institute, said: "It is crazy for the government to stoke demand even more without addressing supply and claim that this will help the housing market.

"Making taxpayer–subsidised handouts to homebuyers will only drive further house prices up, risking a bubble, improving access for a select few but making housing even more unaffordable for most people. On the other hand, radical liberalisation of the planning system has the potential to drive massive economic growth, drastically reduce housing costs for the badly off, and give millions more a chance to own property of their own."

Preston Byrne, the think tank's legal fellow, said: "Deregulation is a way of addressing the housing supply shortage, while avoiding recourse to public fiscal intervention. If the Government is serious about finding a long–term solution to the housing crisis, it's time to take a hard look in the mirror and examine the role existing planning regimes, both local and national, play in regulating and inhibiting new housing construction.''

Help to Buy plan 'will make houses even less affordable' - Telegraph

Free up 3.7 percent of London’s Green Belt to build one million new homes, says new report

Written by Kate Andrews | Wednesday, January 14th, 2015

London’s housing crisis could be eased by building one million new homes on the 3.7 percent of the Green Belt within walking distance of a railway station.

Much of the protected land is not environmentally valuable at all—37 percent of London’s Green Belt is intensively farmed agricultural land.

The Green Belt has negative environmental effects; protection of the Green Belt leads to more land being devoted to transport infrastructure and to more pollution and greenhouse gas emissions.

England’s planning system needs radical reform to allow for two and a half million new homes to be built. This would take up less than 0.5 percent of the landmass of England.

London’s housing crisis could be solved by allowing the construction of one million new homes in the 3.7 percent of the Green Belt within walking distance of a railway station, a new Adam Smith Institute report has found.

The report, The Green Noose: An analysis of Green Belts and proposals for reform, looks at the Green Belt’s impact on England’s housing shortage. After a comprehensive review of the causes of the housing crisis, it concludes that the planning structure is out of date and in need of radical reform.

Press Release: Free up 3.7 percent of London’s Green Belt to build one million new homes, says new report « Adam Smith Institute
Futures Forum: Building on the green belt: the case for

Here is a different view from the London Evening Standard, which also invokes Adam Smith:

Anthony Hilton: How we’ve lost the plot on housebuilding

Anthony Hilton: A lack of skilled workers and funding for building firms are just two issues contributing to a housing shortage (Picture: Dominic Lipinski, PA)

ANTHONY HILTON  Published: 05 March 2015

House prices in the UK are very high and new homes are increasingly small because of artificial restrictions such as the green belt, according to Institute of Economic Affairs director general Mark Littlewood.

Responding to the Prime Minister’s declared intention to build many more homes in the next Parliament than in this one, Littlewood said this week that the plethora of existing regulations does damage in the way it hampers private-sector housebuilding. “People not governments should decide where homes should be built,” he added.

But is it really that simple, as two other stories this week suggested.

The first flows from the string of housebuilders’ profit announcements of the past few days showed an industry in the best of health and making a great deal of money. This being the case, the free-market economists of the IEA would have us believe that these same housebuilders will be gagging to construct even more homes next year so they can make even more money.

But that is not how it works. Twenty years ago, three quarters of the new homes in Britain were built by small local builders, often in small lots of a dozen or so homes at a time. The recession has put most of these out of business and they can’t get started again because they can’t obtain finance from the banks. As a result, today three quarters of Britain’s homes are built by a handful of large market-listed companies.

The chief executives of these companies do not want to build vast numbers of homes and risk depressing the market. Instead — and some are quite open about this — they want to build as few homes as they can sensibly get away with because that it is the best way to keep prices high, profit margins up and their shareholders happy.

Far from embracing the free market and competition, they are behaving like monopolists and rationing supply — as Adam Smith predicted businessmen would when they thought they could get away with it.

There is another aspect to this. Because these quoted housebuilders are vast, they are only interested in big developments.

That means most of those inner-city brownfield sites and derelict industrial parks clearly visible on any train journey out of the capital — or indeed any provincial city — are of little interest to them because they are too small and because clearing toxic waste from brownfield sites is a lot more expensive that bulldozing a nice clean bit of agricultural land or a former playing field. So the derelict sites stay derelict and pressure builds on the green belt.

But there is an obvious opportunity for Government here. If it wants to stimulate housebuilding, it should provide grants and loans for small independent builders to clean up these sites and build on them.

Housing associations operate to different criteria but they have problems of their own. Their mission is to build affordable housing to let at affordable rents or to sell on terms that low income groups can afford. They currently account for about 30,000 homes a year out of a new build total of 130,000 but they have problems of their own, most of which centre on finance and well-meaning but unprofessional management.

There are two issues here. The first is that George Osborne cut the central government grant to finance the housebuilding activities of these agencies from more than £3 billion to a few hundred thousand pounds and told them to raise the money elsewhere. The larger ones have done this quite successfully, raising finance from the likes of the Pensions Insurance Corporation and Legal & General. The smaller ones have found it much harder and have resorted to selling the houses they used to build for rent in order to be able to build some more. But with no big injections of unencumbered cash, they are gradually running out of steam.

The second, less-talked-about problem is that a few years ago a large number of the more naïve associations were persuaded by silver-tongued investment bankers that they should hedge their loans against a rise in interest rates. That may have seemed a good idea at a time but some who signed up seemed painfully unaware or uninquisitive about what would happen if the market moved the wrong way and interest rates fell. They know now. Rates have, of course, fallen and these associations find the hedges are costing them dearly.

As the latest report from the regulator shows, across the industry billions of pounds have had to be to set aside as collateral against the potential losses — money which might otherwise have been building more homes. We have not had the really spectacular bankruptcies they have seen in Holland, for example, but it is a close-run thing. Rumour is there are a few associations clinging on by their fingertips.

There is one final issue. The housing associations’ umbrella body says that it could build 100,000 homes a year, three times the current number, with the right Government support. The Labour and Conservative parties talk about building more than 200,000 a year in total and it is generally accepted that even that number is below the minimum needed to make any sort of dent in our housing shortage. But what neither party says is where the workforce will come from. Even building 130,000 homes has revealed shortages of bricklayers, carpenters, plumbers and other skilled tradesmen.

So unless the politicians get a lot more positive about bringing in more immigrants with the required skills, there will be no one to build all these extra homes we so desperately need.

Anthony Hilton: How we’ve lost the plot on housebuilding - Analysis & Features - Business - London Evening Standard
“How we lost the plot on housebuilding” | East Devon Watch

And here's an interesting analysis of Adam Smith's notions and the city of Birmingham:
Adam Smith’s invisible hand and visible hands in Birmingham « Localise West Midlands

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