Rethinking the economics of housing

Thu, 20 Apr 2017

You can’t exist long in London without being drawn into debates on house prices, and in the hope of having something coherent to say, I recently read “Rethinking the Economics of Land and Housing” by Ryan-Collins, Lloyd and MacFarlane (disclaimer: two of the authors work at the New Economics Foundation which I support).

The book is aimed at readers with an interest in economics, particularly those willing to question some of the prescriptions of the neoclassical framework.  That it discusses implications of competing theories on an example as practical as the housing market makes it particularly engaging (I enjoy highly abstract philosophical discussions - though I appreciate that most people don’t!).

The fundamental point the book makes is that neoclassical economics tends to treat land as just another capital input, ignoring its distinctive characteristics: that changes in value are seldom attributable to its owner (but rather to societal improvements, particularly the availability of jobs) and that supply of land does not increase in response to rises in price.  This should call into question the standard assumptions that the free market produce good outcomes and that landowners ‘deserve’ the majority of their gains.  

Instead, however, the past 50 years has seen a reduction in regulation.  Banks have been encouraged to increase mortgage lending, governments have scaled back on supply side interventions (eg building of social and affordable housing), and there has been a massive increase in wealth inequality as a result of transfer of wealth to home owners (mostly as a result of land value increases).  

The book provides a good theoretical justification for rethinking the underpinnings of this market, and our collective assessment of how a fair, and indeed economically rational property market might work.  The book makes some good practical suggestions, but is far more concerned about starting a dialogue than prescribing a political solution.

Then last week I attended a conference held by the Labour party on Fairer Housing within Westminster.  The key point raised was how badly Westminster Council and Local Housing Associations are addressing the housing needs of lower income residents: that the wrong people are profiting from the situation, that bad contracts are being entered into (including nowhere near enough social and genuinely affordable housing), and that the council is forcing residents to move out of London, destroying social ties.

Unfortunately, despite reading the book and attending the conference, I’m still not too sure I’ve got anything to coherent to conclude.  As a citizen of this great city, I do want a diverse and vibrant community, which requires genuinely affordable housing.  I do recognise that the free market doesn’t lead to collectively optimal outcomes, and rational economics dictates that we need policies to correct for this.  I do believe we need more community empowerment, but without it giving a substantial voice to those most reliant on social housing, we’re going to get decisions that prioritise existing home owners.  

I recognise that these kinds of policies are going to be a tough sell politically, particularly to those who have come to consider their gains from property entirely entirely appropriate.  But books like this one definitely help, along with the wider discussion that I hope they’ll spark.