Wednesday, 18 January 2017

Why are houses so expensive? >>> The Adam Smith Institute and housing in 2017

The latest government initiative for housing is the 'garden village':
Garden villages 'will ease housing crisis'

Which follows on from initiatives for 'garden towns and cities':
Futures Forum: Green cities, garden cities @ Radio 4
Futures Forum: Garden cities and greenfield sites

Another initiative might be to bring down the number of council houses:
Social rented housing stock to reduce by 120,000, CIH predicts | Public Finance
Massive social housing cuts predicted | East Devon Watch

Although this will confuse an already confusing picture over council housing lists:
Futures Forum: Housing in East Devon >>> Where have all our housing waiting list applicants gone?

And meanwhile, we have another government initiative which will affect local authorities:
Futures Forum: The District Council loses its New Homes Bonus - and so its finances 'are starting to unravel'

In the light of these, the free-market think tank the Adam Smith Institute has a few of its own ideas for the coming year:


The problem
National, local, and municipal UK governments have always intervened in housing supply. They have built housing, subsidised it, taxed it, planned where it could go and what type it could be, regulated materials, construction, and standards, and much more. In the 1950s, 1960s and 1970s, swathes of UK cities were destroyed and replaced with unpopular, ugly, post-war developments, most of which reduced housing density. A huge fraction of housing was not traded in the marketplace, and swingeing tax rates contributed to a rapid demolition of much of Britain's architectural heritage.
Thankfully the situation is much better now, but in some ways we still have the worst of both worlds in housing policy. You might imagine that housing policy aims at balancing out two concerns: quality and quantity/price. You might think policy picks one spot along a line: at one end we guarantee very high standards in design, materials, space, and amenity, but prices are high; and at the other we allow lower quality housing to proliferate, meaning prices are low. In fact we have managed to create a planning system that builds mostly ugly, unpopular housing in inconsistent and unpredictable ways, mostly where it's least needed, and builds so little of it that prices in growing cities are staggering.
Why don't we build housing
Currently planning authorities and local residents have every incentive to oppose new developments near them. Local governments do not fund themselves through the local tax base, but from central government block grants, and so they benefit very little from new business and housing in their area. Local residents are mostly homeowners, and while new building raises the total value of housing in the area, it will cut individual house values, because infrastructure, education, and healthcare are delivered centrally, and thus unresponsive to changing patterns of demand. What's more, there is no mechanism to allow developers to compensate locals for their loss of amenity out of the massive gains from meeting market demand for construction and expansion.
This is made even worse by planning regulations, and architect design preferences, that mostly deliver development that locals find ugly. The four and five-storey terraces of Pimlico and Islington, not to mention the six- to eight- storey mansion blocks of Victoria or Kensington, are highly dense by London standards. In practice post-war "slum clearance" usually reduced density. But ill-thought-out regulations effectively ban new estates like this.
This is all exacerbated by the continued existence of policies like housing benefit and the provision of social housing. Instead of giving the badly-off more money and letting them decide how to economise on scarce goods, they hand them high value real estate with no option of buying better food, clothes, training or transport instead. Similarly, we raise taxes on property, not land values, disincentivising improvement, and on transactions, stopping property from reaching those who value it most.
What should we do
The ASI has consistently advocated for a swathe of policies to ameliorate, and even solve, the UK's housing crisis, policies that compromise where group interests conflict, while nevertheless delivering huge social benefits.
  1. Allow some development on the UK's green belt. Just 3.7% of London's green belt—that fraction within 15 minutes walk of existing train stations—would be enough for 1m new homes at unambitious densities. Green belts, which constrict cities like London, Cambridge, and Oxford from growing and providing jobs and output, are often made up of intensive farmland which is neither beautiful nor environmentally beneficial. We needn't sacrifice areas of exceptional beauty to provide Brits with better homes where they want them.
  2. Liberalise height restrictions near city centres. So much of Britain's most valuable land, often a handful of miles from a key city centre, is taken up by ugly one- or two-storey post-war houses. Not only will converting these into dense terraces make neighbourhoods more beautiful, reduce rents, and give everyone more living space, but it will create many more viable commercial areas in cities, with the local shops and businesses everyone appreciates. Automatically allowing all developments to go up to five storeys in zones 2-6 in London, with similar rules elsewhere, would make a gigantic difference.
  3. Scrap a swathe of design regulations. The most beautiful and popular housing styles cannot be carried out with current rules on window size, corridor width, stair steepness, and minimum lift numbers. Authorities should lift these regulations, or pre-approve popular time-honoured designs.
  4. Tax unimproved land values, not transactions. Stamp duty land tax destroys huge amounts of economic value and prevents allocative efficiency—it should be abolished. Council tax and business rates disincentivise improvement and bias buildings toward certain uses—they should be first merged, and then levied only on unimproved values. Housing consumption should be taxed at the same rate for tenants and owner occupiers. Leaseholders should not be able to infinitely extend current terms, so that freeholders have an incentive to lease their houses out, creating a mid-point between owning and renting.
  5. Reform the housing benefit system. Housing is a good like any other. Everyone implicitly accepts this when they decide to live less centrally or in a less beautiful apartment to save money. We should trust the badly-off to make these trade-offs as we trust the well off. Housing benefit should be rolled into general cash benefits, and tenants can then decide how to spend their money. Social housing should be sold off, and money should beef up the credits already going to those in council houses or on the waiting list.
The ASI's role
The Adam Smith Institute has been a loud and consistent voice for planning liberalisation to create output, wealth, jobs, and growth for years, with staff blogging, writing across the web, appearing on TV, commenting in newspapers, and hosting events to build a coalition and drive the message forward.
Highlights include:
We have also created videos for the ASI hub, hosted on youtube, facebook and twitter—our videos often receive thousands of views and large social media traffic.
And we have produced research outlining the baleful effects that policies like the green belt and help to buy have on the UK housing system. These have had ripple effects over time, and people keep coming back to them for clear explanations about the planning failures in the system.
The UK is finally at a point where it may be able to rationalise its housing policy. We have in Sajid Javid a housing secretary who knows what the problem is, and knows what to do. The door is heavy, but if we keep pushing on it, we think it is going to open. The next year will see continued outreach to others who understand the problems, and a special focus on showing conservative supporters and voters—those who might be expected to oppose development—how their concerns can be met.

The ASI and housing in 2017 — Adam Smith Institute

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