The internationally high price of housing in southern England means that salaries for highly skilled internationally mobile workers have to be higher to compensate. Ever rising house prices (see graph below) have a serious effect on the distribution of real incomes and wealth. The old are favoured compared to the young; owner-occupiers over renters; and the children of house owners are the lucky winners in the next generation. We do not just have an increasing problem of housing haves and have-nots but also intergenerational transmission of wealth inequality.

How has our housing got into such a state? The root cause is our planning policy, although our local tax system plays its negative part. This effectively fines local communities that allow anything to be built, since Council Tax gains from more houses are offset by lower payments in grant from central government, but services still need to be provided.

The coalition’s New Homes Bonus is supposed to address this imbalance of fiscal incentives but since it does not come in till after existing housing targets have been abolished and - even if it is 'new money' - will be quite modest, it is doubtful, given other pressures for ‘nimbyism’, that it will have much impact.

Policies to restrict land supply for housing remain unabated. Urban containment came with the 1947 Town and Country Planning Act and has been successively reinforced since then - most recently by the requirement that 60 per cent of new housing should be on brownfield land. We deliberately constrain the supply of something - space - which would-be house buyers most value.

Over the two generations we have been constraining the supply of land for urban development the real price of houses has increased by a factor of 4.5 but that of housing land has increased by a factor of 12 (see graph). More unresponsive supply means that not only do prices trend inexorably upwards relative to incomes but that short-run changes in demand require ever larger changes in prices to accommodate them. That is why we have such price volatility.

But if you constrain land supply its price gets bid up and in the process houses become smaller, and less funds are available for good design and materials. Recent Spatial Economics Research Centre research has demonstrated that the restrictiveness of local authorities in terms of allowing development is the most important direct cause of rising real house prices.

From the ESRC magazine Society Now

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