Building the future – how new homes could unlock economic potential

Labour Party leader, Sir Kier Starmer, recently suggested that a commitment to build more residential homes, including on green belt land, could form part of the Party’s manifesto as we head into the next election. Even the suggestion of building on green belt land is a significant departure from the two major parties’ usual rhetoric. Recent Labour Party policy eschewing rent controls in favour of increasing the supply of properties may seem a departure. However, if we look further back, we can see that the largest annual housebuilding occurred under the Labour Government led by Harold Wilson.


As an electoral strategy, it’s risky, with many voters blocking housebuilding in their area. What it does show us is how serious an issue unaffordability in the housing market is in the UK and, therefore, how attractive an alternative political approach could be. Increasingly it is not just those on average incomes who can no longer afford to buy but also those on above-average incomes.


UK consistently misses housebuilding targets


The Conservative Government’s commitment to building 300,000 homes a year has not been met once in the thirteen years they have been in office. It’s barely reached more than halfway, see chart 1. Nor are they likely to by the time an election must be held, given that building targets for residential homes have been abandoned by the current Government.

Chart 1: UK barely achieves half its housebuilding target of 300,000 a year
Chart 1: UK barely achieves half its housebuilding target of 300,000 a year (Source: Bank of England)

A recent report by the Centre for Cities on February 23rd, 2023, said Britain is short of 4.3 million homes because they’ve never been built. It found that although the sell-off of council homes, from 1981, exacerbated the problem, it actually started much earlier. The report’s Chief Executive Andrew Carter states:


“This research shows that UK planning policy has held back the economy for nearly three-quarters of a century, stifling growth and exacerbating a housing crisis that has blighted the country for decades.


“Big problems require big solutions, and if the Government is to clear its backlog of unbuilt homes, it must first deliver planning reform. Failure to do this will only continue to limit England’s housebuilding potential and prevent millions from getting on the property ladder.”


But if the figures for the shortfall quoted in the report are correct, it would take 50 years to fix based on building 300,000 homes a year, and that’s assuming that housing demand does not rise in the interim. A target of 442,000 homes per year would cut the shortfall in 25 years, while to fix it over a decade would mean a target of 625,000. It’s clear that there is no easy fix, and this is a long-run problem that requires long-run solutions.


The link between planning control and economic growth


Planning difficulties in the UK are not just limited to residential properties. Planning restrictions also prevent companies from getting commercial property built where they want (say for lab space close to a university) and block wind, solar, nuclear power, and electricity pylons making businesses less competitive, and impacting economic growth.


The economic costs of planning restrictions are complex and multifaceted. Awareness of the potential costs of these restrictions must be weighed carefully against the benefits. Generally speaking, research shows that planning restrictions do have a negative impact on economic efficiency and growth.


A study by the National Bureau of Economic Research, for example, found that a one standard deviation increase in regulatory restrictiveness raises the mean deviation of house prices by 6.6 per cent. Another study by the Centre for Cities found that the UK’s planning system is responsible for a housing shortage of around 500,000 homes. An Institute for Fiscal Studies (IFS) analysis claimed that planning restrictions cost the UK economy £10 billion annually in lost productivity. 


These costs can be reflected in several ways, including:


Higher house prices – planning restrictions can lead to a housing shortage, increasing prices. That can make it difficult for people to afford to buy a home and can also make it more expensive for businesses to rent office space or warehouse space.


Reduced economic growth – a housing shortage can also lead to reduced economic growth. That is because businesses need workers, and workers need homes. Suppose more houses are required for workers to live in an area where planning prevents that from occurring. In that case, companies may relocate to other areas with more affordable housing or scale back their operations. Both of those things can hit their ability to fund investment and therefore harm output and profitability.


Increased inequality – although there may be a debate about whether some disparity is required to incentivise and reward work ethic, something needs fixing when people on more than average incomes can’t afford to buy. Interestingly this effect works by locking people out of areas that they need to work in even if they are ‘essential’ workers – nurses, doctors, dentists, plumbers, electricians etc. They, too, must live in areas that are ‘desirable’. If not, the costs for their services will be higher, and their travel time to work will be longer if they are forced to live further away, proving economically inefficient.


We can see how this works. Since 1997, average earnings have doubled, but house prices have increased 4 1/2 times. That resulted in the ratio of house prices to earnings more than doubling from under four to over eight times earnings, see chart 2.


Chart 2: Housing has become less affordable (house prices to earnings) over time
Chart 2: Housing has become less affordable (house prices to earnings) over time (ONS)


As pointed out by the analysis above, the result is economic inefficiency, worsening productivity, and an increasingly uncompetitive economy.

People are being prevented from moving between different parts of the UK to where the jobs are and employers can’t go to where the best talent is because of insufficient housing. This is leading to soaring rents and house prices rising to levels that make it grossly economically inefficient. So, it’s an issue of supply rather than demand.

The simple solution is to make more land available and build more homes. But if it were that simple, it would have been done long ago. At a time when incomes are under pressure from rising costs, and tax is growing as a share of GDP, it seems some inflexion point is approaching or has arrived.

A possible splintering of the political consensus is a sign that something is beginning to change. The good news is that if anyone in Government is looking for options, they can find them in other countries where they have overcome planning restrictions and have successfully built substantially more homes, such as New Zealand and Japan.