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Britain's housing crisis: What are we going to do about it?

Rent control: Better than bombs at destroying housing

Worstall @ the Weekend We talked last week about how macroeconomics is still pretty terrible at telling us what we ought to do about the world around us, which is why I always rather scratch me head at people who insist that rent control is going to be a good way of solving our current housing crisis.

For amongst economists, there's a pretty good consensus on price controls. There have been a number of surveys about what economists generally believe about it, the chief among them is:

... a table of propositions to which most economists subscribe, based on various polls of the profession. Here is the list, together with the percentage of economists who agree: 1. A ceiling on rents reduces the quantity and quality of housing available. (93 per cent)

That's the number one thing upon which economists agree: do not impose rent controls. And yet I know of at least three different countries (or parts of countries) where rent control is seriously advanced as the solution to housing problems.

Specifically, we are told that rent control increases the amount of housing available and possibly increases its quality. It's very difficult indeed to think of anything where expert opinion is so divorced from political opinion.

Supply and demand

As to why price controls are so disdained, think it through from the beginning. The market price, whatever it is, is the price at which supply and demand balance. That's actually the definition of it. So, let's set our controlled prices below that market clearing price: that means that fewer people are willing to supply whatever it is and more people want to consume it. By definition we will get shortages when we set a low price. This explains why Venezuela doesn't have any toilet paper.

We could also set prices above that market clearing price: suppliers love this and will expend extra effort to make more. But fewer people want to buy these more expensive whatevers and so we get gluts: the EU's wine lakes and butter mountains come to mind.

We could, of course, if it were possible for us to determine what it was, set the price at the original market clearing price – but what on Earth's the point of that?

There are, of course, times when things just aren't this simple – for example when there's a monopoly of supply or a monopsony (a single buyer) and the temptation is then to try to fix prices. The proper solution, of course, is to get rid of the monopoly and if that's not possible (say, the National Grid, an obvious natural monopoly) then be very very careful indeed about how you do try to set prices.

Economists really, really, don't like price fixing. Which is what makes this little story about swedish rent control so interesting:

Sweden’s rent regulations, which for decades have kept housing affordable, are now fuelling a surge in home prices that’s threatening the Swedish economy. The low rents in attractive areas such as central Stockholm have encouraged many Swedes to stay put in their apartments and discouraged builders from constructing properties for lease. This has exacerbated a housing shortage that has sent prices and private debt to record levels in Sweden.

Eventually this sort of shit does catch up with you. By preventing anyone from making any money off building rental properties, no one has been building rental properties. Thus those houses which are not rentals are much higher in value due to the scarcity.

Much the same has happened with rent control in New York City. It's one of the few places in the world with vast areas that could be built upon (even in Manhattan there are huge areas of old docks and the like that could support blocks of flats) and yet a shortage of anywhere that anyone, other than those rent controlled, can afford to live.

And then there's our own Dear England. In London these days you have to get your youngest grandchild to cosign the mortgage so long will you have to stretch out the repayment to make it affordable. And yes, there really are those who argue that the way to deal with this shortage of affordable housing is to have, erm, rent control. Something which, as outlined above, ain't gonna work.

We could just stop here. For as Ben Bernanke has noted (he was head of the Federal Reserve and did pretty well during the Great Crash), there is a usefulness to economics:

Economics is a highly sophisticated field of thought that is superb at explaining to policymakers precisely why the choices they made in the past were wrong. About the future, not so much. However, careful economic analysis does have one important benefit, which is that it can help kill ideas that are completely logically inconsistent or wildly at variance with the data. This insight covers at least 90 percent of proposed economic policies.

We can and should do better

So what's the use of economists? We can tell people not to do damn fool things. However, we might, in this English case (and this applies to coastal cities in the US as well, given their propensity for zoning etc) want to take this further and ask, well: "C an we propose any policy that is better than just muddling along?" To which the answer is: "Yes. Yes we can."

At the moment, some 2 or 3 per cent of England is covered with residential housing. So we've not actually got a shortage of land in the country. This is true even in the environs of London: more of Surrey is golf courses than housing (yes, we could actually double the amount of land in Surrey devoted to housing without touching agricultural land or undeveloped land).

What we should probably do is repeal the Town and Country Planning Act of 1947 (and successors). For this was the first time that someone started drawing lines on the map and insisting that you may build houses there but you may not there (the Green Belt and the like).

It was written because those that rule us were simply appalled by what happened in the 1930s. The newly minted middle classes went off and got houses built where they actually wanted them to be – in ribbon developments across the South East, all those now highly desirable little villages and plots of semis that people cough up a million or more for. It's also the last time the free market was able to supply England's housing needs: not all that much of a surprise as it was the last time there was a free market in housebuilding plots.

Well, clearly, we cannot have that... the recently proles just being allowed to live where they like. Thus there's a law to stop them. Another way of analysing the same problem is to say, quite contrarily, that housing just isn't expensive in the UK. We can test this if any commentards actually own a house in London. Look at what your building insurance will pay you if it falls over/burns down/suffers a sudden dematerialisation event. You'll see that it's a great deal less than what someone is willing to offer you in folding fivers for that des res.

A reasonable guess would be that the insurer will offer you maybe £200k for biggish three-bed semi, while the market will offer you from 200k (somewhere most undesirable) to £1m for most places inside the M25. The difference between what the insurer will pay and what the market will is the value not of the house but of the land upon which the house sits. Much more importantly than the land, it also takes into account the value of the building permit for that piece of land.

There was a fun court case a few years back proving this. A little company owned a piece of land that a local authority had incorporated into a park. The company said, “Oi! Back in WWII there were bomb-damaged houses there and that means that land has automatic planning permission. And we own it too. Sure, you can keep it as part of the park but that will be £1.5m, please."

The LA said that actually, as it was now part of the park and had no planning, it was only worth £50k. That £1.4m was the value of the chitty that enabled housing to be built on that sliver of land.

The company won: but that's not the point of the story – the chitty being worth £1.4m is. So, what is it that we've actually got a scarcity of? We've not got a shortage of land within commuting distance of London. We've not got a shortage of ability to build houses. We've not even got expensive housing: build costs are much the same everywhere and I know absolutely, because I've done it, that you can put up a nice two-bedder for £100k or so. Bulk building means a three-bed semi should be in the £80-120k range maybe? So what do we have a shortage of? Those chittys, the pieces of paper that say that you are allowed to build upon a specific piece of land.

A quick and dirty fix

Given that this shortage is entirely caused by the Town and Country Planning Act, if we get rid of that then we'll have neither a housing shortage nor expensive housing. High housing costs in SE England are simply caused by the rules and laws that restrict the building of housing. Relax those laws, get closer to an actual free market, and prices will fall as supply grows to meet demand.

Ben Bernanke may be right that the major use of economics is to stop politicians doing something stupid, he's certainly right that it can explain when they have done something stupid, but there are times when it can also tell them the right thing to do to undo that previous stupidity.

Of course, no one is actually going to like this solution and any government that brought it in would lose the Home Counties for a generation or more – but that's just politics not the pure and clear light of economics being shined upon the problem. ®