Fixing Britain’s broken housing market

Britain’s housing market is broken. England has among the lowest numbers of homes per 1,000 people in western Europe, and dwellings are among the smallest and most expensive. UK house prices are about nine times average earnings; they were last at such heights in Queen Victoria’s reign. With home ownership falling, the Labour party is drawing up plans that would force landowners to sell plots to councils at lower prices to stimulate housebuilding via so-called compulsory purchase orders. It is part of a broader attempt by the opposition party to be seen as the “party of home ownership” ahead of next year’s election.

The plans would set an undesirable precedent for expropriation, and CPOs are unlikely to significantly reduce the UK’s deficit of more than 4mn homes. That is because the country’s sclerotic planning system and vested local interests will continue to hinder housebuilding. Unless these underlying issues are addressed, a reasonably priced home will continue to be a pipe dream for many.

The Conservative government has already diluted housebuilding targets and planning reforms following opposition from MPs. Prime Minister Rishi Sunak may instead reboot measures to support first-time buyers. Alongside CPOs, Labour has proposed “first dibs” on new houses for first-time buyers and a ban on “entire developments” being sold to overseas investors. Both parties, however, risk stoking demand more than supply by not doing enough to address blockages in the housing market.

Britain’s planning systems create uncertainty, with authorities able to veto projects on a case-by-case basis. Indeed, not knowing what can be built and where is one reason why establishing a fair price for forced land purchases will be difficult. A less discretionary system that allocates zones for development would be better. Councils would also benefit from a greater ability to retain revenues from property taxation, which would give them more incentive to build.

Boosting the supply of land is important too. In England, the greenbelt — protected land — covers more area than developed land and infrastructure combined. Height regulations mean housing in London is constrained both horizontally and vertically.

Dealing with inefficiencies in the existing housing stock is also important, alongside unlocking more land. Stamp duty — a property purchase tax — gums up the market by raising the cost of buying a home and discouraging owners of larger properties to trade down. England also levies a council tax on properties based on decades-old valuations. This has led to higher burdens falling on the young and less well off. Both taxes in England could be replaced by a simple 0.5 per cent tax on current property valuations in a way that is revenue neutral, according to Fairer Share, a charity. It could also apply to undeveloped plots with planning permission to encourage building.

The problem is that these measures run counter to the interests of homeowners — the bulk of voters. New developments irk so-called Nimbys who see them as an eyesore and a threat to property values — that is why compulsory purchases do not guarantee more building. And reforming taxes on property risks alienating older and wealthier voters. Successive governments have instead pushed cosmetic measures. Labour’s recent noises around building more on the greenbelt and taking on Nimbys are welcome. Following through is the challenge.

Britain’s chronic housing shortage has contributed to its low-growth malaise. It reduces workers’ mobility, and high housing costs damp demand. The next government will need to abandon ineffective attempts to appease both prospective and existing homeowners simultaneously. If Britain cannot rapidly start to build more homes and raise home ownership, its long-run economic growth prospects will remain lacklustre. In that case, nobody wins.