Distorted Markets

Distorted Markets

Distorted Markets

Several weeks ago the Evening Standard held a high profile debate on the housing crisis in London with a six person panel including Ken Livingston, the CEO of Berkeley Group and several journalists and architects. The problem which all but one member of the panel addressed (tellingly the only member of the panel under thirty) was how to encourage the building of more housing in and around London.

Ideas for this ranged from the cutting of the time it takes to get planning permission (CEO of Berkeley Group); spending £25bn of the money created under quantitative easing on a massive public housing programme (Ken Livingston); and forcing the building of housing over railways and car parks (Janet Street Porter).

All of this misses the central point which is that, by and large, the problem in London is not that people have nowhere to physically sleep. The problem is that most people have to spend a vast chunk of their take home pay on the roof over their head. The reason housing in London is so expensive is due to the idiosyncratic distortions in the market. The restricted ability to build is only one of an array of factors that impact supply and demand.

The control of the ever increasing cost of housing is possibly the greatest thing that a government could now do to improve living standards. Housing costs destroys people’s disposable income, and diverts vast amounts of savings towards an unproductive asset and away from real investment. Properly understanding how the market works and where it is distorted should therefore be of far greater importance to us.

So what are these distortions? Well first is the fact that prices seems to always rise, especially in London. This creates its own source of demand as people what to climb as far and as fast up the housing ladder as they can. This leads people to borrow far more than they otherwise would to buy their house, to use interest only mortgages, and to pile their savings into buy to let investments. This effect is huge and spread across the whole market, from the empty 10 bedroom mansions in West London bought as investments, to one bedroom conversions in the East End.

Another distortion is the amount that is spent by the central government on subsidising housing. This amounts to £24bn a year, and accounts for anywhere up to 20% to the total return on housing. People may well ask why 1 in 5 people in a borough like Westminster have their rent subsidised by the state, and what the effect is on the price.

Then there is the plethora of other petty distortions and barriers thrown in the way of a properly functioning, or fair market. Problems like stamp duty loopholes that allow firms to buy houses which may be worth millions at a fraction of the rate. Problems like planning regimes being split into dozens of fiefdoms, lack of space, lack of homes being built, and inheritance tax loopholes which mean that only 3% of estates pay any tax at all and allow accumulated assets to be passed down the generations, effectively acting as a restriction in supply.

The problems in housing need to be attacked on every front. The government needs to state an intention to arrest the general rise in price and to do all it can to end the British obsession with housing. The prize could be great, but it will take a generation to get there.


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