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Environment / Climate change

Yes, Britain does have a bloody housing shortage – and we obviously do need to build more homes

Why are cartels and monopolies bad? The obvious answer is that they generally take from the poor and give to the rich. That is one good reason.

But economists and competition lawyers learn a second reason. Even if you taxed the cartel profits from the rich and gave them back to the poor, people would overall be worse off than with no cartel.

Cartels and monopolies cause what economists call a “deadweight loss” – they mean that less wealth gets created. Society as a whole is poorer because of them.

The owner of the only bridge across a river will probably raise the toll to make as much money as they can. A carpenter might then decline a small job on the other side. A teacher might decide the pay for an extra hour of maths tuition is not worth the toll fee. Less gets made and done, and society as a whole is worse off, as for centuries when the City of London had a monopoly on bridges.

That is what has happened with housing today. An effective cartel caused by our national failure to ensure plentiful housing as the 1947 planning regime originally intended has led to a massive shortage of housing within reach of the best job opportunities. 

That is still being denied by Ian Mulheirn, most recently in a paper published by CaCHE. Mulheirn works for Tony Blair, who as prime minister oversaw a tripling of house prices. And he claims that Britain actually has surplus housing stock, as housing completions have outstripped household formation, which of course neglects that prices affect how many households there are.

And most of Mulheirn’s alleged “surplus” of homes is far from good job opportunities. As Paul Cheshire points out, twice as many houses were built in Doncaster and Barnsley in the five years to 2013 as in Oxford and Cambridge. National averages tell you nothing about the specifics. On average every human has roughly one ovary and one testicle.

The main reason that we have regional wage differences – and low wages – is that the housing shortage in some places makes it much harder nowadays for people to move around, as the Resolution Foundation has shown. With plentiful homes near good jobs, the wage disparities across the country would shrink because people in places with low-paid jobs would move to places with better pay, as they did for centuries. 

Blocking homes near jobs doesn’t rebalance the country. In a world of network effects and “agglomeration economics”, sadly it does completely the opposite.

Had Mulheirn’s arguments won back then, the Industrial Revolution would never have happened, because he would have been agitating against housing and factories near the mines and other needed inputs.

How bad is the shortage of homes? The total of house prices in the UK exceeds the cost to build those homes today by about three times.

For any normal economist, that is the end of the matter. In any well-functioning market for anything, that does not happen. It does not happen in Atlanta, or Houston. The difference is also far smaller in Tokyo, partly because they build more homes per capita.

Low interest rates have not caused high house prices in Atlanta or Houston, which build abundant housing; nor in Blackpool, because there are already plenty of homes for the people who wish to live there. The long-run relationship between house prices and interest rates flagged by Mulheirn only happens when the supply of housing is needlessly restricted. Interest rates do affect house prices in the UK, because that supply is constrained.

When spatial economists like Professors Paul Cheshire, Christian Hilber or Edward Glaeser talk about a shortage, they are talking about that. Homes cost more than they need to. That’s what any economist means by a shortage. No regular economist goes around just counting things. They look at costs and prices.

Mulheirn has proven strangely reluctant to engage with this point, probably because it is fatal to his case.

Solving the politics of where to build homes is hard, of course, especially in the South East. That’s the main reason why we don’t build anywhere near enough. But there is endless room to build more homes, even within existing cities, in popular ways while improving amenity and helping the environment.

Mulheirn’s supposedly killer point is that building 300,000 homes a year would not eliminate the gulf that the failure to build has created between build costs and house prices. But no-one, except Mulheirn’s straw man, is arguing that. In fact from his research you should conclude that we need to be building far more than that. Even back in the 1840s or the 1930s, for example, we managed to grow the national housing stock much faster than today. 

Mr Mulheirn conveniently forgets those decades, and insights from political science and other fields about how to solve the politics of our housing crisis, when blithely asserting that building more homes ‘probably’ wouldn’t help much.

Every home that gets built, especially if it is near good job opportunities, helps to reduce the shortage, compared to not building it. The Redfern Review for which Mulheirn wrote the economic evidence estimated that a 1 per cent increase in the housing stock means a 1.7 per cent decrease in rents and a 1.8 per cent decrease in house prices, holding other factors constant. If we built more homes, they would be cheaper. Most of the rest of his argument is just sophistry.

It is a pity that his opinion piece – not endorsed by the publisher, CaCHE – was not subject to normal double-blind peer review, but then it would probably never have seen the light of day. (EDITOR’S NOTE: Mulheirn has since been in touch to point out that, as a CaCHE publication, his report was subject to the Centre’s normal process of academic  peer review.) The two peer critiques by economists published alongside it strongly disagree with his arguments. They, and the endless other papers debunking Mulheirn’s claims, should get more attention.

John Myers is co-founder of YIMBY Alliance and London YIMBY, which campaigns to end the housing crisis with the support of local people.
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