Housing & Government Intervention

Real estate

Housing & Government Intervention

By Andrew White

On yesterday’s Channel 4 News, Faisal Islam revealed that the financial year 11/12 was the worst for housing completions since the war. He also referenced a graph, which showed the increasing cost of housing benefit (it now surpases £24 billion per year) and the decreasing amount spent building public housing (now around £6 billion). He then posed a question on Twitter, as to why it is that the years 1897-1904 saw a bigger expansion in the housing stock each year than in 11/12.

This question is important as it highlights a number of factors that are currently leaving so many millions of young people out of the housing market, living at home or paying exorbitant rents.

The first, and in the 1890s the most, important factor is the interest rate. In 1896, the Klondike Gold Rush kicked off a string of Alaskan gold rushes triggering the first bout of inflation that the global economy had experienced since the Californian and Australian ones petered out in the mid 1870s. Since interest rates were determined by what was necessary to keep currencies on the gold standard, deflation up to 1896 meant there was a punishingly high real interest rate. Economic historians refer to this 20 year period of Victorian history as the great depression.

The discovery of gold meant the real interest rate fell off a cliff, and any large long term capital investments suddenly started to look very attractive. We currently have low interest rates however, so why aren’t we building?

Well the answer to this lies in the other half of the equation that existed in the 1890s and that is the fact that if you wanted to build, nobody was going to stop you. Chronic overcrowding, a small housing stock and almost no urban planning meant you could pretty much build where you liked. Today, if you happen to own some farm land around around a town near London and it suddenly gets planning permission you would be ecstatic. The reason is is that it would cost you about half as much to build houses on it as you could sell them for. The market is subject to a massive restriction in the supply of land. The housing stock has expanded exponentially since 1900 using up a lot of the land available however what is left is subject to huge restrictions on building.

This is the rub of the current problem. The mark up over building costs is a measure of the restriction in the supply of space to build on, and a large reason for this is the government restricting building on what’s left. This is not to say that there is not a good reason for it, there is always a good reason to distort a market and have the government step in, but housing which costs far more than it otherwise would is a cost to some and a boon to others. The baby boomer generation is more likely to own a home than the generations before or after it. They are also likely to have saved less for their retirement, expecting to be able to downsize. This process however relies on being able to extract more from someone else than the asset originally cost.

Some people’s reliance on this is not in itself a sufficient reason to expect the youth of today to continue indefinitely to pay far above the economic cost for their housing.

The situation has undeniably changed since the 1890s. There is no longer the building space that there once was, and it is right that development is balanced with the need to conserve green space. That does not mean that the government has got the balance right, and it does not mean that there are not other considerations which are quite wrongly, taking precedence in their calculations.


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