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Only free-market economics can fix Britain’s housing crisis

UK Property Market
UK Property Market

Cars are bigger, better and cheaper today than they were 100 years ago, yet our houses are smaller, more expensive and less well-built.

Why? Governments have failed to embrace free-market thinking in the property sector.

Cars have benefited from a huge number of innovations, scientific, technological and financial, over the past century. The key is the structure of the industry, and is a lesson in the power of international trade and markets to make everyone better off.

The foundational technological innovations happened in the two decades around the turn of the nineteenth and twentieth centuries. Both the petrol and diesel internal combustion cycles were invented, hotly followed by the commercial adoption into the motive power for vehicles. Innovation like this happens very, very fast.

I have driven a 1904 Cadillac, and while it possesses a fully-fledged internal combustion petrol engine, it is very quirky to handle, and its controls are oddly laid out to the modern eye – no clutch in the normal sense, throttle on the right hand, and much of the power control on the advance knob.

Cadillac
The 1904 Cadillac epitomises the trial-and-error nature of innovation and progress - Andrew Crowley

But only 12 years later, the 1916 Cadillac type 53 was the first to adopt what became the standard pedal layout: clutch, brake, accelerator, from left to right.

From the first internal combustion vehicle to the standard pedal layout, a myriad of alternative designs to control the cars were tried, and ultimately abandoned. This epitomises the trial-and-error nature of innovation and progress.

But by modern standards, a 1916 Cadillac would be regarded as an overpriced death trap – unreliable and underpowered, and grossly fuel inefficient.

Yet at the time, this was the best that engineers could do. Roll forward 100 years, and the power of trial-and-error, and mass production, to create continuous improvement is truly amazing.

Modern cars are super-safe, extremely fuel efficient, very good value, quiet, cool in summer and warm in winter. They are also cheap to run and rusting bodywork is a thing of the past.

In 1924, a modest car in the UK – say a 14 horsepower four-seater saloon – would have cost about £550. Average earnings in 1924 were about £200 a year, so a modest family car would have cost nearly three times average earnings.

At today’s prices, that would be about £100,000. No wonder there were fewer than 500,000 cars on the road then. Today, there are about 35 million cars on the road in the UK, and the average price of a new five-seater hatchback is around £27,000, or about 75pc of average annual salary.

What has powered this incredible and continuing improvement? Government intervention? Government subsidies and investment? No. The answer is consumer-led demand, leading to intense competition among manufacturers to keep improving their models and to keep finding ways to bring down costs.

The most remarkable thing about this story is that the number of man-hours needed to build each modern car (filled with electronics and gadgets compared to its 100-year-old ancestor) has fallen and fallen.

This has been achieved through continued investment in capital equipment that has automated nearly every stage of the manufacturing process. And manufacturing does not all happen in one place now. Your typical car will have parts manufactured in dozens of countries, with raw materials sourced from yet more countries.

This supply chain is continuously honed and tested for efficiency and the moment one supplier loses quality, puts up their prices or fails on any number of other tests, the large-scale manufacturers look elsewhere for that part.  .

In stark contrast, during the same time period a three-bedroom late-Victorian house in the suburbs could be bought new for about £250.

Average annual earnings in, say, 1896 were about £70, so a house like this would have cost about three and a half times the average annual salary. And in 1896, there would have been no income tax on average earnings, so all of that earnings could go on personal and household expenditure.

According to a government survey published in 2017, houses have been shrinking. The average size of a three-bedroom semi-detached pre-1919 house was about 1,300 sq ft.

Today, the average size of a new three-bedroom semi is about 850 sq ft. Now, while there are certainly technological improvements that modern houses can boast – such as much better insulation, central heating and modern lighting – the core quality of construction of modern houses is arguably lower than that of pre-1919 homes.

Victorian homes had more mass in the walls, the roof and floor timbers were larger and stronger, decorative mouldings in wood and plaster were standard, and the joinery was high-quality, solid and long-lasting.

They remain very popular for all these reasons and lend themselves brilliantly to renovation and the installation of modern technology to make them as comfortable as modern-built homes.

In addition, the average plot sizes have shrunk dramatically – 25pc of pre-1919 dwellings have a back plot depth greater than 65ft. Post 2002, only 5pc of dwellings had a plot that large.

And, here is the most dramatic difference, the average price of a UK home is now £290,000.

Average salaries are £35,000, so houses are now on average more than eight times the typical salary. No wonder housing is at the top of young people’s financial worry list.

How have we managed to do so badly on housing?

The answer is complex, but boils down to two elements – the price of land and the cost of construction.

The price of land is not, as many would have us believe, simply a result of overbuilding on a small island. It is, essentially, an artefact of government-regulated planning law and practice, as well as tax and other rules around planning and land-banking.

It would be possible (although it would require too long a debate to have here) to enormously lower the cost of development land by changes in planning and taxation law.

The price of development land is in many ways circular. Developers will bid on land up to the point that they can make a profit on their planned developments – lower house prices would lower those bids.

On construction costs, all the benefits of trade, innovation and investment which have succeeded so brilliantly with cars are almost wholly absent in house construction.

Construction is still basically by hand with increasingly expensive (and lower-skilled) labour. Government regulations have also enormously increased construction costs by mandating at micro-level the detail of construction and its environmental impact.

Like all regulation, it is well-meaning in its initiation, but developers will tell you that much of it does not improve the quality of the houses and just increases the cost.

The moral of this comparison seems to me to be that a government that is truly interested in lowering house prices should study ways in which the property market could be subjected to the kind of competition and technological innovation that has been so successful in the car industry.

There is a big unspoken barrier to this route – namely that a majority of the electorate have an interest in rising house prices, as homes represent by far their single largest asset.

This is not an easy knot to untangle, but a government that wants to survive in the longer term, and to provide a better life for its inhabitants, is going to have to address it.

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Neil Record is the former Chairman of the Institute of Economic Affairs, and a former Bank of England economist

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