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The costs of housing policies

I live in Croydon. Like many parts of the country, we are experiencing a severe shortage of quality housing. Yet Croydon Central’s current MP is the Shadow Minister for Housing, Labour’s Sarah Jones; its previous MP was Gavin Barwell, then the Minister for Housing. If these politicians were serious about their jobs, they would do well to acknowledge the actual outcomes of their policies.

Politicians, in order to win votes, will very rarely inform us of the cost of enacting their policies. Some might not even be aware of these effects – career politicians are interested in winning votes, not necessarily helping people. They risk the welfare of their voters when they ignore the economics at work.

As voters, we need to be aware that all policies will always come with unintended consequences. We need to weigh up whether the intended effects of these policies are actually worth the cost of their unintended consequences.

To begin with, we should understand the fundamental idea behind economics: the interaction of supply and demand. Prices are determined by the interaction of supply and demand, so that when demand increases, prices go up; inversely, when supply increases, prices go down. This explains what will happen if demand or supply goes up or down.

There are two types of demand on housing:
1. Rental
2. Purchase
But there is only one type of supply for housing: actual physical houses.

Using these basic ideas, we can understand some of the secondary effects of government policies on housing – those economic consequences that governments and politicians do not tell you…

Policy
Intended effect
Economics
Actual outcome
Help to buy
Financially helping first-time buyers.
Increase demand on housing at the lower end.
Cheaper houses become more expensive.
Taxing ownership of 2nd homes
Discouraging ownership of multiple houses, making more houses available for first-time buyers.
    1. Decrease demand for house purchases.
    2. Decrease supply of houses for rental.
    1. Houses become cheaper.
    2. Rents become more expensive.
Increasing stamp duty for expensive homes
Redistribution of wealth.
Decrease demand for expensive houses.
    1. Expensive houses become harder to sell.
    2. Less retirees will downsize.
    3. Less people can move up the housing ladder.
Rent controls/caps
Making rent affordable.
Artificially suppressed prices:
  1. decreases supply of rental houses.
  2. demand for rental units outstrips supply.
    1. Excess demand causes waiting lists for renting a home.
    2. Waiting lists mean rental homes become poorly maintained.
Right to buy
Helping poor people get on the housing ladder by letting them buy their houses at a discounted price.
    1. Decrease supply of social housing.
    2. Subsidise house buying, increasing overall demand for houses.
    1. Shortage of social housing.
    2. Houses become more expensive.
Affordable housing
Providing cheaper homes everywhere new houses are built.
    1. Increase supply of low-quality housing.
    2. Decrease supply of high-quality housing.
      1. New houses are smaller and poorly fitted in order for developers to maintain profit margins.
      2. Good houses become more expensive.
Housing regulations
Ensuring newly-built houses meet a standard of quality.
Increases costs of building houses.
Houses become more expensive.
Landlord regulation
Ensuring rented homes meet a standard of quality.
Increases costs of being a landlord.
    1. Rent becomes more expensive.
    2. Fewer landlords: Shortage of rental accommodation.

The side effects described above is further compounded when the government enacts policies in order to counter the side effects of other policies.

For example…

Renters might be complaining that they are unable to afford to get on the housing ladder because wealthy landowners buying up properties have been pushing up the cost of houses. Thus they demand the government enact policies to discourage this practice by heavily taxing ownership of second homes. As described above, house prices do reduce due to decreased demand for purchased properties, but for every house that is no longer owned as a second property, another house is taken off the rental market. The side effect of decreasing the supply of houses for rent is that rental costs increase. Thus although houses might become cheaper to buy, those struggling to get on the housing ladder are now paying a higher proportion of their income on rent. Resulting problem: high rents.

Now the same renters are crying that houses are too expensive to rent, demanding the government enact rent controls. As described above, this will cause the supply of rental properties to reduce even further, as the excess demand ensures a ready tenant for the landlord regardless of the quality of their housing. Resulting problem: poor quality rental housing.

In order to tackle poor quality rental housing, the government now enforces regulation on landlords and rental houses. The increased bureaucratic cost of complying with regulation means two things: casual landlords withdraw from the rental market, and remaining landlords cut corners elsewhere in order maintain their profit margins. The end result: even poorer quality rental houses, and even longer waiting lists.

From the sequence of cause and effect above, it can be seen that the government’s misguided efforts at appeasing renters’ demands can actually end up hurting renters the most. The intent does not necessarily translate into the outcome. This is not to say that the government should necessarily do nothing. Rather, this is a critique of enacting policies without taking into consideration their outcome, and the problems of tackling the symptom without addressing the cause. As the illustration above demonstrates, tackling the symptom without dealing with the cause only creates more problems than they solve.

From the previous example, the problem of renters not being able to get on the housing ladder is a symptom of some underlying problems. Using basic economics, high cost of houses can be addressed by either increasing supply or reducing demand. However, the government cannot control where people want to live. But they can control where houses are being built. Thus, to tackle the fundamental cause of the problem, the government needs to address why houses are not being built to meet demand.

Perhaps there are building restrictions in place, such as ‘green belt’ designations. Then it might be wise for the government and local authorities to review whether existing green belt designations are appropriate – it may be worth redrawing the green belt boundaries so as to maintain the same amount of green space.

Perhaps the ponderous planning process is holding up the pace of housebuilding. Then the government and local authorities should identify the bottlenecks in the bureaucracy to streamline the processing of building applications and speed up the pace of housebuilding.

Perhaps the planning rules themselves are excessively restrictive. Governments should not rule out reviewing town planning rules by local authorities so that locals can decide what rules best suit their local needs.

Perhaps excessive levies are being placed by the local authority on housebuilders. Local authorities should then review the levies and settle on more appropriate rates that encourage housebuilding.

Perhaps it is more cost effective to build elsewhere. Then governments could identify what costs are discouraging building in the high demand areas. They could even offer financial incentives in the form of tax breaks in order to increase the supply of housing in high demand areas.

However, these are not recommendations. These are just illustrative examples of how governments can tackle problems by identifying the cause rather than just addressing the symptoms. Any good trouble-shooter knows that there is little point dealing with the symptom if you don’t resolve the cause.

This post was originally published by the author on his personal blog: https://hoongwai1984.wordpress.com/2018/06/18/the-costs-of-housing-policies/

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About Hoong-Wai

Profile photo of Hoong-Wai
Software analyst. Engineering graduate. A social progressive at heart, and a former atheist. Believes in protecting life and liberty. Recently developed a strong interest in economics despite having given up the subject many moons ago. UKIP parliamentary candidate for 2017. Emigrated from Malaysia to the UK in 1998.

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