The UK really needs better housing policy

Things are very very bad

Following the Nazi conquest of France, Hitler set his sights on the United Kingdom, only to see German aviation defeated in the Battle of Britain.

This success was one of the true turning points of history — despite its military strength, Germany essentially could not invade and subdue its adversary and so switched tactics. Rather than attempting to beat Britain in the skies, Germany began a strategic bombing campaign, launching poorly targeted raids over industrial areas and population centers that aimed to kill people and blow up fixed capital, thereby damaging the British war effort.

These raids, known as the Blitz, were also ultimately unsuccessful. Britain was able to disperse aviation production, and the population responded to the attacks by getting mad at Germany rather than pushing their own government to sue for peace. But the Germans did kill tens of thousands of people and destroyed more than one million British homes.

What’s really strange, though, is that not only did the Blitz fail to subdue Britain, but there’s a sense in which it actually enhanced the UK’s long-term economic growth. In a 2018 paper, Gerard Dericks and Hans Koster looked at detailed microdata on London office rents and bombing maps and concluded that if the Blitz had not taken place, London’s contemporary GDP would be 1-2 percentage points lower. Why? Well, buildings demolished in the Blitz were replaced with larger, more modern structures that would have otherwise been banned by London’s historic preservation regime.

Looking at office rents, Dericks & Koster conclude that the agglomeration value of facilitating increased density means the Blitz made London richer.

The UK has big economic problems

I was reminded of that when I read this Kwasi Kwarteng op-ed about the British economy in the FT:

We do not have to appease the voices of decline. The same old economic managerialism has left us with a stagnating economy and anaemic growth, with labour productivity growing at just 0.4 per cent a year since the financial crisis. Taxes are now at their highest in 70 years. This toxic combination needs to be urgently addressed.

That sounds pretty bad. But note that the author is the new Chancellor of the Exchequer and has been serving as Business Secretary — his Conservative Party has held office continuously in the UK since the spring of 2010. When the long-serving incumbents are denouncing economic stagnation, anemic growth, and pathetic labor productivity, you know things are bad.

Unfortunately, the only prescription Kwarteng really has to offer is regressive tax cuts. I’m not a close student of the British political scene, but my sense of the general tenor of the conversation is that the Tories have decided the previous dozen years’ worth of Tory governments have been too focused on fiscal responsibility and that the government should run a larger deficit. Labour naturally argues that if you’re going to run a deficit, you should do it in a way that benefits either most people or the poorest people, rather than in a way that benefits the richest. Kwarteng is striking back, arguing that growth is more important than distribution.

That’s fine as far as it goes. But suppose a large amount of financial capital were to wash into the United Kingdom, seeking a high return on investment in light of more favorable tax treatment and a generally improved economic outlook. What would actually happen? Where would it be invested?

Because of the very high price of housing in the United Kingdom, especially in London and the southeast, that sector seems like an obvious target for investment. And if an influx of financial capital meant a huge increase in the actual stock of physical housing, that would be great. It would mean construction jobs. It would mean more access to the prosperous, high-productivity labor market of Greater London. And it would mean higher living standards as people got larger or better-located dwellings.

But that’s not at all what an influx of financial capital to the UK housing sector would generate. There is, currently, plenty of financial capital available to build more. What’s lacking is planning permission to actually do it because the UK has a permitting regime that’s so restrictive, Nazi bombing raids actually improved the economy.

The UK housing situation is dire

The nature of the UK housing issue should be familiar to Americans, especially those who read Slow Boring. There is a lot of demand for living in Greater London (and also Oxford, which isn’t far away), and that demand is not met, which leads to high prices.

But the extent of the problem can be hard for an American to grasp.

For example, as best I can tell, the average size of a home in the United Kingdom is 1033 square feet versus 968 square feet in New York City, so it’s not that Greater London is experiencing a housing squeeze comparable to Greater New York City — the UK as a whole is experiencing a housing squeeze similar to that of NYC. London is worse, and not coincidentally, the UK doesn’t have an equivalent of Dallas or Phoenix or Atlanta — a big, cheap city that is growing fast.

Worst of all, as Anthony Breach from the Centre for Cities points out, English homes are getting smaller over time because the market is so squeezed.

As it happens, the UK is also suffering an intense energy crisis right now, so residents of tiny homes are probably glad to have fewer square feet that need to be heated and lit.

But it would be a huge conceptual error to treat this as an actual virtue. You can absolutely make the case that Americans would be better off if we lived in England-sized houses, but the upshot of that argument would be that our houses would be much cheaper under those circumstances, which would free up more money for other things and ameliorate homelessness, among other virtues. But English people don’t live in small homes because their homes are cheap — their homes are small because the cost per square foot is astronomical. And the astronomical cost reflects an intersection of bad planning choices. One, illustrated by the Blitz, is the difficulty of building tall, modern structures in historic areas.

Another is that UK cities are surrounded by green belts that prevent urban growth by perversely pushing people into further-out exurbs.

This in turn generates really weird outcomes, like Underground stations surrounded by random vacant fields.

The idea of incurring some economic cost for the sake of preserving nature is perfectly reasonable. But one really ought to think this through. The economic burden of preserving an acre of meadow immediately adjacent to a London metro station is astronomical, and if you developed it instead, you could preserve many, many acres of less valuable land elsewhere.

Back to Kwarteng’s point, if British people feel that economic stagnation is fine, I’m not going to try to talk them out of it. But if you agree with him that the country is on a bad track and would benefit from a surge in investment, growth, and higher productivity, then you ought to make policy changes that actually address those issues, like legalizing investments in highly productive physical capital (i.e., more houses where they are expensive). Don’t cut taxes on the rich.

Bad housing makes everything dysfunctional

When a city in the United States lets its housing supply become overly constrained, every political issue starts incorporating back door concerns about gentrification and displacement. You’ll hear that bike lanes cause gentrification. Or dog parks cause gentrification. In D.C., we had a panic ten years ago that planting trees was causing gentrification.

The basic problem is that if the housing supply can’t expand, then anything that makes a neighborhood nicer is going to raise rents and potentially push out poorer residents.

The solution isn’t to make everyone’s neighborhood crappy — it’s to reduce the rigidities of the housing sector to prevent these perverse results.

But in the UK’s hyper-rigid national housing market, everything is perverse. Brexit imperils London’s status as a global financial center. However because that reduces housing costs, it’s arguably good for some British people. Similarly, I’m incredibly pro-immigrant, but given the housing rigidities, it’s probably true that the free movement of people from the EU into Britain was exacerbating housing cost burdens and making many Britons worse off. Boris Johnson tried to blunt the negative economic impact of Brexit by specifically turning the UK into a destination for highly skilled immigrants. But since the big problem with immigration in the UK is competition for scarce housing rather than labor market competition, I’m not sure that changing the skill profile of the immigrants helps. Skilled migrants are just better able to bid for scarce housing.

I could go on and on.

Johnson had this notion of “leveling-up,” a regional equality agenda aimed at spreading opportunity outside of London. That’s fine, but the non-London housing situation in the UK is not great, either. Prices are lower because the cities are poorer and demand is lower, but the same mix of preservation rules, greenbelts, and an onerous planning process bind throughout the country. Broadly speaking, my understanding is that the UK has no concept of “by-right development” and absolutely everything has to be approved on a case-by-case basis. That means even if you did have some surge of economic growth in Leeds or wherever, you’d still see a ton of local price appreciation — good news for incumbent homeowners and landlords, but still not a real opportunity for growth or physical capital investment.

The housing theory of everything

I’m obsessed with housing policy, as you know. And it’s a big deal for the United States of America, especially at a time when remote work and other technological changes are shifting patterns of demand in ways that are hard to predict.

That said, in the grand scheme of things, the United States is a very sparsely populated country. We have lots of important localized housing shortages, but we also have huge swathes of the country where housing is abundant. Some of that is in areas where demand is low, but most of it is in areas that just have unconstrained sprawl geography. This is far from economically or ecologically optimal, but it’s workable enough that it makes housing one important issue that sits alongside other important issues.

The UK situation is much more extreme.

It’s not that there are no other important issues in British economic policy, but essentially anything you do is bound to ram into housing constraints or be made worse by housing scarcity. I know the country has a lot on its mind with a new prime minister and a new monarch arriving in the same month. But if they want to fix anything at all, they desperately need to fix this.