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The OBR’s Economic and Fiscal Outlook [ [link removed] ] report from last March was mostly doom and gloom, but it did contain a little silver lining, namely in the chapter which tries to model the impact of recently announced policy changes. It finds that as a result of the government’s planning reforms announced to date, Britain’s housing stock will be about 0.5% larger than it otherwise would have been by the end of this decade, which is going to add 0.2 percentage points to the UK’s annual growth rate.
Yes, I know. That’s one fifth of a percentage point. It won’t exactly enable us to pave the streets with gold.
But that’s the wrong way to think about it. Pro-growth reforms often require some difficult trade-offs. Somebody loses out in the short term, and the benefits take time to materialise. The pro-housing reforms are different insofar as they have no downside whatsoever (unless you consider the whining of anti-housing NIMBYs [ [link removed] ] a “downside”, which I don’t). They are a pure gain. They are the policy equivalent of finding a pile of money lying around on the pavement.
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The aforementioned 0.2% is just the effect of the construction activity as such, the assumption being that building houses is a more productive use of economic resources than what the likely alternatives would have been. But building more houses has positive economic effects over and above that. The OBR also points out that if the extra housebuilding is biased towards those parts of the country with the highest productivity, this would enable more people to move to those places in the medium term, making the country as a whole more productive and richer. These effects are harder to model, but the OBR reckon that the figure of 0.2% additional annual GDP growth could quite easily more than double by the mid-2030s.
That’s obviously still not nearly enough to turn us into a booming economy. But what’s remarkable is the fact that these growth effects are detectable in the OBR modelling at all. Growth rates are determined by millions of different factors, most of them too small in isolation to even show up in a model like this. It is all the more remarkable if we bear in mind that the government hasn’t even done especially anything radical. They are just pushing local governments to release a bit more land for development. That’s all. That’s how easy this is. That is all it takes to give the British economy a detectable growth impulse.
Which should raise the obvious question: if this is so easy (and it really is so easy!), why not do a lot more of that? Why not double down, triple down and quadruple down on those reforms?
The only reason why such a modest, unimaginative and boring reform can have a detectable impact on growth at all is that Britain is so desperately starved of housing. We have fewer housing units [ [link removed] ] that most other OECD countries; the Centre for Policy Studies [ [link removed] ] today estimates the gap at 6.5 million homes. Those units are, on average, also much smaller. As a result, housing in Britain is far more expensive relative to income levels than almost anywhere else in the developed world. This is a nationwide problem, and it is worst in the richest regions of the country, strangling these regions’ growth.
Under those conditions, the ability to make it easier to build things is a licence to print (non-inflationary) money. It has become a cliché to say that “there is no magic money tree”, but in Britain, this is not entirely true. There sort of is one. The current government is even aware of the tree’s existence, even if they are not making much use of it.
This makes it all the more bizarre that last month’s Spending Review contains a pledge to throw over £40bn at social and affordable housing over the next ten years, on top of existing spending commitments. Why on earth would you throw money at any kind of housing in Britain when this is the closest thing we have to a money tree? It would be like subsidising breweries under prohibition: they don’t need subsidies, and they don’t need extra incentives – just let them brew!
Non-market housing already accounts for one in six housing units in the UK: that’s more than twice the EU average. The cheapest and easiest way to help people on social housing waiting lists is to allow an expansion in market housing, so that many more people can find accommodation there: this would reduce demand for social housing, and shorten waiting lists. And it would not cost the taxpayer a penny; on the contrary, it would lead to additional tax revenue.
We have a magic money tree (although its “magic” is actually just basic introductory economics). We just need to give it a good shake.
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