Yes, Britain does have a housing crisis – and building more will fix it

Could put more houses there, lads. Image: Getty.

Most people accept that Britain is in the middle of a housing crisis. Measured by the diminutive size of our homes or the inflated size of our rents relative to other countries, it’s clear that we’re doing something seriously wrong. Most spectacularly, although less robustly, the ratio of house prices to incomes has reached an incredible 14.2 in London, according to Hometrack.

Meanwhile, a small group take the contrarian view that, actually, there is no housing crisis and, if there is, building more homes won’t solve it. The most notable is Ian Mulheirn of Capital Economics, who recently explained his thoughts in a CapX blog.

He makes two good points and one that’s worthwhile, but ultimately irrelevant. The two good points are, firstly, that there is no UK-wide housing crisis. There are plenty of towns where rents and house prices are affordable for people on average incomes. Flattish national rents over the last ten years mean that London’s higher rents must be balanced by falling rents elsewhere.

The second good point is that house prices measure more than just the cost of consuming housing. They are also affected by expectations of the future and prices of other assets and, indeed, money itself, in the form of interest rates. Better to look at rents, which only measure the price of housing consumption during a fixed period.

His worthwhile yet irrelevant point is that household growth has been slower than official projections, upon which the central plans for housing supply have been made. These projections were made by assuming that the fall in average household size in the years to 2001 would continue; in fact, it flattened out. So household numbers only rose in line with population, instead of faster.

But this point is ultimately irrelevant, for two reasons. First, part of the reason why households have stopped shrinking is because of housing shortages. Adults are living with parents for longer and sharing more frequently rather than living alone, because high prices are prompting people to economise on housing consumption.

Secondly, prices and rents offer a far more sophisticated guide to the demand for housing (and its relative shortage of supply) than comparing crude official statistics on the number of housing units and households.

The main problem is that we have too little housing in the economically dynamic places where jobs are available. The fact that housing is cheap in places hundreds of miles from where the majority of job vacancies are based is of little relevance. The fact that councils in depressed areas welcome housing developments, because of the construction jobs they provide and the prospect of regeneration, makes similarly little difference.


Crudely put, we have a marked shortage of homes in London, particularly inner and west London, where job vacancies are most common and highly paid.

Ian points to low rental yields as evidence of a lack of a problem with supply and demand for housing in London. This is true, but the yield is the wrong measure for the question he has in mind. The price of a residential property includes the value of the artificial scarcity of land imposed by restrictions.

A better measure would be to adjust the rental incomes by the additional rent possible if commercial considerations were the only limit on a developer, instead of planning restrictions. Potential yields are enormous. It’s not for nothing that developers try so hard to get permission for extra storeys on their buildings, accused of skull-duggery by the NIMBY groups who oppose them.

And these substantial potential yields indicate that there is indeed a major problem with supply and demand for places to live. Rents in London are the highest in the world (or near enough, depending on your index). They wouldn’t be for long, if developers and landowners were allowed to respond to those enormous potential profits by supplying the homes that high rents indicate we need.

More housing where it’s needed would provide much wider benefits, too, than just cheaper housing for those already living in housing unaffordability hotspots. More of us would be able to move to where the jobs are, not just in London but also other cities like Oxford, Cambridge, Bristol and York.

That would reduce demand and therefore housing costs in the places where people move from, but it would also improve labour markets, removing a block on people shifting their labour into more highly-valued (and highly-paid) uses.

And the knock-on effects on commercial property would further improve productivity. Drawing on work by economists Chang-Tai Hsieh and Enrico Moretti, the pro-housing group London YIMBY has suggested that allowing enough homes to be built where they’re needed could increase national income by 30 per cent.

Yes, we do have a housing crisis. Letting homes be built where they’re needed will fix it. And doing so might also offer at least a partial answer to our "productivity puzzle", too.

Whether or not today’s housing white paper will do enough to tackle the NIMBYism that is at the heart of the crisis is another matter entirely.

Rory Meakin is research fellow at The Taxpayers Alliance.

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