A capitalist revolution in housebuilding

New paper by top architect Patrik Schumacher for the Adam Smith Institute calls for radical capitalist reform to solve Britain’s housing crisis

• Housing crisis is a failure of politics not markets and is the result of restrictive planning laws.

• Restrictive planning laws have led to an increase in house price to earnings ratio in London from 4:1 in the early noughties to 10:1

• Rent-to-income ratio has climbed from 1:5 to 1:3 in the last 15 years

• Government should resist calls to impose rent controls or mandatory long-term tenancies as they reduce supply and hamper labour mobility

• Sadiq Khan’s plan to mandate that up to 50% of developments be “affordable” will discourage development and push up prices elsewhere

• Micromanaging land uses creates high price distortions in our cities and should be abolished

• Reliance on home ownership as a savings and retirement vehicle is risky and hampers locational adaptation and labour mobility. Saving and housing should be decoupled

The housing crisis of ever rising prices and unaffordability can only be ended by a capitalist revolution in housing, a new paper by leading architect Patrik Schumacher, released by the Adam Smith Institute, argues today.

Instead of populist state-led solutions, the housing crisis can only be fixed effectively through the denationalisation and depoliticisation of development rights in general and in the radical liberalisation of housing in particular.

London’s house prices have gone from four times to over ten times the average annual wage over the past two decades. Meanwhile the average renter has gone from spending one fifth of their income each year on rent to spending over a third. Fifty years ago land values in the UK amounted to just 50% of GDP, now prices are nearly 200% of the national income. Local planning restrictions on supply, and increased demand to live in cities has led to these price rises. An expansion in supply, the paper argues, would help to alleviate the price rises that have made housing increasingly unaffordable for so many city dwellers.

While most of the 20th century was marked by increased numbers living in suburbs, recent decades have seen this trend reverse. IT, finance, and other service industries are most productive in dense urban clusters. With growing numbers needing and wanting to live in cities like London, prices have increased as new supply has been prevented from meeting demand.

Politically motivated nimbyism, as seen in the rejection of the 2,000 home redevelopment of an ASDA car park on the Isle of Dogs, and the discouragement of the redevelopment of the Bishopsgate Goods Yard in Hackney, shows the difficulty that developers face with any project in the capital. Delays or outright rejections of development are the most obvious costs of political interference. But the report also highlights the high cost of restrictions on different land uses, with residential plots reaching values nearly four times those of office space in London. As heavy industry has moved out of the city there is little social benefit to cities micromanaging land uses. Leaving decisions about the best use for a plot of land to entrepreneurs and consumers would increase affordability and boost growth.

All of this is hurting Britain’s productivity, argues the paper. London, which Patrik Schumacher calls the global prosperity engine, is artificially held back as many workers are discouraged due to the cost of living. While those that do choose to live in the city (and other high-price cities like Oxford, Cambridge, and Manchester) see their disposable income shrunk, live in less desirable locations, and spend more time and money commuting.

The answer to this problem, Schumacher argues, is to end the cycle of restrictive planning and price rises. More homes must be built to reduce house prices. Current land values are hugely enhanced by the permissions they receive if they receive them, with windfall gains as permission is granted. Removing planning restrictions across the board would push land prices down and make housing more affordable. Further restrictions on the number of small units allowed per development and size should also be reviewed to increase the number of studio flats available to those on lower incomes.

Government should resist calls to impose rent controls and mandate long-term contracts, argues the paper, with such actions reducing the supply of low-income housing. In doing so these measures hamper labour mobility and further hit productivity.

Plans by London Mayor Sadiq Khan to force developers to earmark up to 50% of developments as ‘affordable’ will have the opposite effect, suggests the paper. Affordable housing requirements act as a tax on new development. Schumacher argues this creates a vicious cycle as developments are disapproved, disrupted or abandoned, and other plots on sites are hiked in price to reflect politically imposed rationing.

A capitalist revolution is needed in house building the paper suggests, arguing “there is no need to infantilize people via paternalistic subsidies” but instead to reform planning laws to enable house builders to “deliver decent, truly affordable housing”.

Patrik Schumacher, top architect and author of the paper, said:

“Capitalism was and is the great prosperity engine behind all the material freedoms of modern life. Tragically capitalism is not allowed to work its magic with what matters most to us, namely our dwellings and cities. Urban development and housing provision have been unduly politicised and thereby paralyzed. We should be experiencing an urban Renaissance as a crucial productivity boosting component of our knowledge-and network society. Instead planning restrictions and imposed standards block the adequate supply of urban residences leading to prohibitive prices. Paradoxically, the “affordability” system contributes to rather than alleviates the affordability crisis.”

Sam Dumitriu, Head of Research at the Adam Smith Institute, said:

“There is a growing consensus that our planning system is not fit for purpose. Restrictive planning systems are pricing people out of the places where they are most productive and redistributing wealth upwards. This situation is crying out for change, so it is great to see a leading architect call for a capitalist revolution in housebuilding.”

Sophie Jarvis, Research Associate, Adam Smith Institute, said:

“Millennials already know that they are at a massive disadvantage to their parents in terms of getting on the housing ladder. What they don’t know is that rent caps and restrictive planning laws are holding them back, not helping them out. Liberalising planning laws, however, could get them on that ladder. The best example of this is if developers were allowed to build smaller houses, millennials could live in a compact, ergonomic flat in  Zone 1 or 2, instead of a rundown, cold flat in at the end of the Central line or half-way to Hull”.

Notes to editors:

For further comments or to arrange an interview, contact Matt Kilcoyne, Head of Communications, matt@adamsmith.org | 07584 778207. 

You can read the full paper here.

The Adam Smith Institute is a free market, neoliberal think tank based in London. It advocates classically liberal public policies to create a richer, freer world.