More green belt homes and a land value tax are needed to fix London’s housing crisis
News emerged today that house prices have seen their biggest annual fall in ten years. It’s obviously important news and a big deal and it reveals a number of things about the state of the housing market and housing policy in general.
First, the fall is driven by a decrease in demand. This is to be expected given that interest rates are currently relatively high. What’s more, those looking to buy are holding off on purchasing right now as they expect house prices to drop even further for a number of factors including the labour market shrinking.
So far, none of this is surprising. However, despite the fact that house prices have fallen, the cost of renting a property has been increasing and is still at record highs. This is revealing as it shows us that it’s wrong to talk of a housing market and instead we should be talking about housing markets. Although obviously interconnected, the market for renting is radically different from the market for buying and selling homes.
The reason why rents are so high, especially in and around our major cities such as London, is simple supply and demand. The country has failed to build enough homes to keep up with the number of people who live here. As is the case with anything else, if demand far outstrips supply then the price is going to shoot up. Housing is no different.
The current housing situation is dreadful. However, if you are a homeowner then the government tends to be on your side. Few things get policy makers concerned than falling house prices. This is partly a mix of politicians wanting to get re-elected (homeowners tend to be older and they vote) and falling house prices are often a sign that something is amiss in the economy. The government or the Bank of England will no doubt intervene in some way to prop up house prices.
It’s right that people don’t see dramatic increases to their mortgages due to the incompetence of the government; to take a random and totally hypothetical scenario where the government suddenly announces a package of massive tax cuts and increases to public spending, for example. However, the situation is deeply unfair to renters and young people and is incredibly damaging to our economy. We need to have a complete rethink about housing and stop seeing it as an asset which people can use to get wealthy and to one where the house and rental prices are much lower and far more stable.
There are a number of bold policy proposals which could help to achieve this. We could scrap the plethora of different taxes on property and replace them with a Land Value Tax which would have numerous benefits including incentivising house building.
The planning system needs to be liberalised so that it becomes far easier for developers to build homes. We obviously need to maintain and strengthen legislation around safety, but rules about what can be built and where need to be relaxed. For example, we need to reclassify green belt land near London which has little or no environmental or agricultural use. Allowing developers to build on green belt near railways stations will help London to meet its housing need.
On a related note, height restrictions need to be scrapped. Zones One and Two should see far more tower blocks of flats, especially on and near tube stations. Other zones also need to massively increase density to allow far more homes to be built.
The government also needs to take on the NIMBYs. Local people should have very little say about what is built near them and should absolutely not have the right to object. The responsibility for planning permission should be taken away from local authorities and given to the central government. Building developments should be allowed to proceed, even if it goes against the wishes of local residents.
London’s housing crisis is causing numerous problems. For example, it’s exacerbating the cost of living crisis and it’s preventing young people from being able to have their own home with many of them delaying major life events such as moving in with partners, getting married, or having children. It’s also stifling productivity. London is one of the greatest cities on Earth and is incredibly productive, but it could be even more productive. The housing crisis is preventing some of the most productive people from accepting jobs in companies and industries where they would be a perfect fit. Alternatively they fill the vacancy but their commute is long and stressful as they can only afford to live out in the sticks. Given the fact that productivity is the key driver of economic growth, the housing crisis is making London and the rest of the UK much poorer than it should be.
It’s also partly driving the fall in house prices. If people are spending a significant proportion of their incomes on rent then they simply cannot afford to save enough for a deposit to buy a home. This, in turn, exacerbates the high prices on the rental market as it means more and more people chasing rental properties.
A radical rethink of housing policy will be politically difficult and will require politicians to be brave. However, reforming housing will bring huge benefits to London and the rest of the UK.
Ben Ramanauskas is a research economist at Oxford University and was an adviser to Liz Truss at the Department for International Trade.