Winner of the New Statesman SPERI Prize in Political Economy 2016

Sunday, 5 January 2014

Cutting public investment has consequences: house building

A post inspired by this from Alex Marsh

Here are two charts that tell their own story. The first comes from this site.

The second shows UK house prices from Nationwide.

Almost everyone agrees that UK house prices are currently much too high, and (partly thanks to you know who) getting higher. It is also clear that if you cut back on supply, but pressures on demand remain, prices will rise. In the first half of the 1980s, public sector house building effectively came to an end. Mrs Thatcher’s government did this, despite knowing that demand for housing was going to carry on increasing, as Ed Conway discovers (from the just released archives) in this post. In 1984 her housing minister advised against cuts on the scale actually made. Presumably Mrs Thatcher and her advisers hoped that the private sector or housing associations would fill the gap, but they did not, so prices started rising. [1]

Cutting back on public investment, and just hoping the private sector will increase their investment to compensate. Does that sound familiar? Cutting back on public investment, and paying for the consequences later. Does that sound familiar? Never mind, just keep repeating 'private sector good, public sector bad', and continue to get your facts from certain newspapers.

[1] Just to forestall an inevitable comment, the problem may well have been all those restrictive regulations we call planning, and the largely Conservative voting rural areas that use those regulations to resist new housing. (Or maybe it’s a bit more complicated, as Alex Marsh suggests.) But as every economist knows, if you remove one ‘distortion’ (public house building) while leaving others in place (planning), you can end up worse off, which seems to be what has happened. 


  1. I disdain most economic explanations about housing problems. It is not all about demand and supply. It is mainly about early occupation and exploitation. The now defunct feudals passed on their holdings to their descendants who wrote constitutions glorifying the wonders of free enterprise and respect for property rights. Most landlords did not get their plots from diligence or entrepreneurial engagement. They inherited them from their cruel ancestors who trampled on tenants. i do not have the figures. but if you do some survey, you will get the answers.

  2. This is a refreshing view of the origin of the micro-foundations of modern (Anglo-Saxon) economics. And not far from the truth.

    1. Actually the rise of English political economy was linked to the growth in economic and political power of the entrepeneurial class - ie owners of capital. Smith was actually very critical of the feudal land-owning class. English political economy did of course provide a kind of "soft power" - that is an intellectual framework and justification for the things they wanted - free markets and access to foreign markets.

      Economists of the likes of Sargent, Fama and Cochrane are misguided if they think that economics is not ideological. It's reason for being was, and still is, very much part of a political agenda

  3. The housing problem is tricky for the following reasons :
    Firstly, the price problem is mainly a London one and the well off areas where the good jobs tend to be. The reality is that most people will not want to live more than an hour away ( car/bus/train) from their place of work. Space is limited and as such there are only so many houses that can be built in these areas.
    Secondly there is pressure on prices from three sides. On one side , the central areas are now real estate investment heaven for every millionaire in the Emerging Markets or doggy money fleeing from troubled countries. On the second side there are all the youngsters who were originally from the Home Counties, finished university and now are looking for employment opportunities. Thirdly there are the immigrants, be it a banker or a waiter.
    Thirdly , a low ownership percentage appears to be beneficial for the economy , as it keeps people mobile. Countries with high ownership have not done very well economically.
    Fourth, is the fact that if I were a house builder, why would I choose to build 1000 homes for 100k if I can build 500 homes for 200k ? There is no incentive here.
    Fifth ; most house building is done by a handful of firms who were quite careful to market themselves for slightly different buyers, and differentiate their product. As such there is no competition. I am pretty sure they also collude on both pricing and on bidding for sites.
    Also the completions graph is not really as relevant as it might seem, because a lot of the building in the 1950-1960 was slum clearing and reconstruction. If you adjust for this , the differences are not as big.

  4. (i) The graph at the top is misleading as it fails to take account of slum clearances

    See here

    (ii) If you keep the money supply relatively stable, and the price of goods fall because of a dramatic rise of cheap imports from China, the price of land and services will rise.

    (iii) Blaming Thatcher for today's ills is one of the most boring characteristics of the left. She left office 24 years ago. I know housing policy has a long lead time, but this is ridiculous.

    If we are going to play this ancient history blame game, then it we should at least mention the twin pincer on house building, the Town and Country Planning Act 1947, introduced by St Clem of Attlee. Whilst slum clearance was ongoing it was not a problem. Similarly, in the 1980s our population was not growing and Thatcher's policies did not create a serious problem at the time.

    The problem really starts in the 1990s, with house prices getting out of joint with their previous trend.

    Remind me, who was in power then?

    1. Good point about slum clearance. The number of houses demolished for this reason seems to have fallen by about 80,000 since the 1970s:

      I note the mismatch between this omission and the scientific standard demanded by Simon in his previous post (and add that the flooding at Yalding given here as another example of the consequences of lack of public investment turns out to have been allowed by the fact that the villagers declined the protective bank solution they were offered "partly because of its aesthetic impact on the village", according to the Guardian).

    2. I think you both illustrate exactly the tendency I was talking about on standards: deciding what you want to argue on political grounds, and then looking for arguments and facts to support that argument. Do you think if council house building had continued at the rate before Thatcher's cuts, house prices would still be where they are today? And on flooding, I seem to remember writing this: "It is a distraction to try and link specific episodes of flooding to spending cutbacks. These things work on probabilities." Are you arguing that cutting back on flood prevention has had and will have no effect anywhere?

    3. No, the point you made, Simon, which I agree with, was that a scientist would admit the existence of the counter-arguments up front (albeit perhaps with a dig at them!). I have suffered for being unable to suppress my scientific balance all my professional life - when you present both sides of an argument (often even when drawing a conclusion), you get accused of indecision or inconsistency, or worse attacked as supporting whichever side of the debate the person you are discussing with disagrees with!

      As for your presumption that I am "deciding what you want to argue on political grounds, and then looking for arguments and facts to support that argument", would you believe that I am actually a member of the UK Green Party?!

    4. "Do you think if council house building had continued at the rate before Thatcher's cuts, house prices would still be where they are today?"

      Of course they would not be. Who would argue such a potty thing?

      I don't think you have really engaged with what was written.

  5. According to a Policy Exchange study, planning restrictions added £45,000 to the cost of the average house in 2009 when the average house cost £160,000. See:

  6. My own little table of UK home data: Year, Owner-occupiers, Council rented, Private rented:

    1914 10% 1% 80%
    1939 31% 14% 46%
    1966 47% 26% 23%
    1970 50% 30% 15%
    1977 54% 32% 9%
    1985 62% 27% 8%
    1990 67% 24% 7%
    1996 73% 15% 7%

    You must remember that Thatcherism had its heart set on a return to an imaginary 1930s in which mass unemployment didn't exist, and indeed in the real 1930s it didn't exist in the south east of England and in pockets elsewhere across the country.

    I think this explains why the Tory Party exists as it does in an enclave in the south east of England like nowhere else in the UK.

    Oh for a Case-Shiller index for UK home prices, not Nationwide or Halifax (as was). You must remember that Shiller has it that the US-cum-international housing bubble began in 1996 in London then spread in 1997 to Boston, Los Angeles, Paris and Sydney. In the mid-1980s the housing boom went from Boston, to London, to Paris via the media and all against a backdrop of growing economies.

    Bubble-to-bubble feedback.

  7. A lot of private equity money are pouring into buy to let now, with the view of securitizing the income stream . I would be interested to see some analysis on how this will influence the housing prices in congested areas like London .

  8. The reason the private sector is not picking up the slack is because government makes it increasingly difficult to do so. Getting permissions to build on certain pieces of land takes months of red tape, and the arbitrary green belts limit the available land which pushes up land values.

    We have only built on around 2% of the available land in the UK, green belts are completely non-essential. If we reduced all green belts by only 1 mile we could build another 2 million homes in the UK.

    But obviously there is no incentive for a government to do this, because it would actually radically reduce house prices, and all those lovely voters who currently own a home would be very angry as the values dropped. This is why we only see half measures from government such as the help to buy scheme, it "helps" first time buyers whilst not affecting those who already have a home.

  9. One of the reasons why it is hard to revive public sector housebuilding (particularly if the provider is a local authority) is that the tenants acquire the Right-to-Buy. Hence there is a risk that all the programme will achieve is heavily subsidised owner-occupation by a lucky group of tenants selected from local authority housing lists. In that sense the Thatcher reform of the 1980's was an extremely astute political move - not only did it involve a substantial transfer of publicly owned capital to a select group (who were seen at the time as crucial 'swing' voters), but also it was effectively an irreversible change eliminating any possibility of a coherent system of public provision for rent. Policies to maintain high and rising house prices are popular with owners (well over half the electorate). Unfortunately they also push up private sector rents, and hence the housing benefit bill. The result is a system which clearly favours the elderly, and Buy-to-Let private landlords, at the expense of the young and the poor.

    1. Social housing already involves a transfer of publicly owned funds to a select group (rents are somewhere between 30-70% of market). Right to buy has a discount of 25% against market prices. Its less costly for the state than the latter, particularly as it removes the privileged tenant from the social housing rolls.

      I would agree with the point that RTB helped create a political constituency of home owners leading to the conclusions you describe.

    2. If a local authority rents a social dwelling at a sub-market rent to a 'poor' household who would be eligible for housing benefit (HB) there is no additional transfer of public money - the rent subsidy is matched by a reduction in HB. The problem arises partly because, unlike HB, the rent subsidy cannot be withdrawn if the household's income subsequently rises. (This would not be the case if high-income households could be forced to pay market rents for social housing, or evicted and thus forced into the market sector, but this is not how the system currently works). In addition, the RTB allows a tenant to take much of the present value of the stream of future subsidies, and to pass it on in the form of inheritable wealth. Given these arguments, it's not clear that allowing the RTB is less costly for the state than paying a stream of rent subsidies, particularly if those subsidies are at the margin paid to poor households who would otherwise be receiving HB to rent in the private sector.


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