The self-inflicted UK housing crisis

The UK has been in a housing crisis for decades. According to the government’s own numbers, England alone needs between 232,000 to 300,000 new homes build every year to keep up with demand; only half as many are actually being built. The result is predictable: prices have rocketed, especially in London and the South East. The young – “Generation Rent” as they are known – are finding it impossible to get on the housing ladder. But what explains this lack of supply? Unsurprisingly the government is at the centre of this highly dysfunctional market.

It starts with being allowed to build in the first place. Zones around urban areas – so-called “Green Belts” – are subject to strict planning laws and rarely released for new builds. In general, getting planning permission is a nightmare: an investigation by The Times newspaper found that, despite lofty intentions about making it easier to build, since 2010 the proportion of major planning applications approved has actually fallen and an astonishing quarter of a million applications have failed to be been processed on time. The problem is especially bad in the South, where housing shortage is most severe.

And it is not just planning which is making the UK housing market dysfunctional. Stamp-duty, a tax on moving home, which in 1993 was 1% on properties worth over £60,000, is today a highly progressive tax levied at an astonishing 12% on the value above £1,500,000. The levy has made the UK housing market inflexible; people stay in their homes even after it is no longer the best fit, preventing new entrants from the market. An additional 3% stamp-duty is payable on second homes, a fee designed to punish would-be landlords and allow properties to be available to buy for the occupants. This type of tax rarely has the intended consequences, and this is no different: it doesn’t work at all. This is not least because regulation of the mortgage market puts strict limits on the multiple of income which can be borrowed, meaning that not only do you need a huge deposit to buy a home, many simply can’t borrow even a modest 60% of the average property value. People are not renting because evil landlords have bought all the property, they rent because the can’t afford to buy in the first place. Prices need to fall by a lot more than 3% for that to change. Fortunately, the UK has a fairly well-functioning rental market, with landlords and tenants free to agree terms between them. But when it comes to buying a home there are only two reasons ordinary people can afford it: the equity they have made on a previous property and the ridiculously low mortgage rates which are becoming a permanent feature of every Western economy. If you are on the outside of the property market it is very hard to get in.

There is of course one way to make Generation Rent become house owners: a property crash. It will inevitably happen when rates normalise and the house price bubble pops, but that may be decades away. Otherwise it requires buildable land to become cheap, which means more – much more – must be made available for construction. Will something be done to make that happen? The truth is that planning reform has been on the agenda for as long as the housing crisis has persisted, but, as with much government regulation, it has proven impossible to wrestle power from vested interests and influence-seeking bureaucrats. They have kept the UK housing market locked in its dysfunctional state for decades, a situation which is unlikely to change any time soon.

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