Lessons from UK's dysfunctional housing system

Bonus series on the political economy of housing

This post builds on last week’s discussion of ‘supply skepticism’. It is based on this recent intervention by several British academics, in particular it summarizes Ben Ansell and Avner Offer’s contributions to that piece. Offer’s piece is based on a similar perspective to that of Jaime Palomera, discussed last week, in the sense of honing in on two key market failures, one relating to the responsiveness of private supply and the other to mortgage markets and how they decouple house prices from incomes. The second part of the post, based on Ansell’s work, discusses the associated political/voter behaviour dynamics. Most of the below applies readily to Ireland and, in my view, can really help us to start thinking about structural problems that underlie our housing system. This post goes out to paid subscribers first and all subscribers in two weeks

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Just like here in Ireland the British housing system seems to lurch from crisis to crisis and the perennial solution is ‘more supply’. While supply might be part of the solution, insights from this recent intervention reveal that this crisis is more complex, a "wicked problem" born from financialisation and entrenched political resistance. Let’s start with Offer’s analysis of two key issues: supply and affordability.

Before 1980, Britain's housing system operated on a fundamentally different, and arguably more stable, footing. Peak housebuilding occurred in 1936, and between 1946 and 1980, the UK averaged 5.5 new homes per thousand people annually. This supply came largely from two sources: over half (around 55%) was public housing built by local authorities and housing associations, with the remainder financed by building societies.

Offer argues that building societies were "true financial intermediaries". They converted household savings directly into loans, funding mortgages exclusively from member deposits. This system "aligned the supply of credit, and hence of house prices as well, roughly with household incomes".

This all changed with the Thatcher reforms from 1980 onwards. This was a two-pronged transformation:

1. The Supply Squeeze: The supply of new housing was almost halved, falling to an average of just 3.3 homes per thousand people after 1980, and it never recovered. The most dramatic collapse was in new social housing, which fell to 18% of the total. Thatcher's "right to buy" policy famously allowed public tenants to purchase their homes, while simultaneously making it difficult for local authorities to build new ones – a preference New Labour did not reverse.

2. Financialization: Equally consequential was the liberalisation of mortgage lending. The abolition of the 'corset' system in 1980 freed commercial banks, which had historically avoided residential lending, to enter the mortgage market. Many building societies soon converted into banks.

Unlike building societies, Offer argues, banks are not "true financial intermediaries". They have the discretion to leverage their funding and increase lending "at will," crediting borrower accounts without needing to draw down existing funds.

The resulting increased flow of credit created an "irresistible incentive": it drove up house prices, and as prices rose, the loan's security improved, creating a self-reinforcing "house price spiral". Between 1980 and 2010, domestic credit expanded an astounding "eight times more than GDP from trough to peak," directly fueling am escalating market (for a longer discussion see this earlier article).

Winners and losers

A housing system based on low supply and high prices shouldn’t, on the face of it, be politically popular. But, for the time being at least, Offer argues it has created more winners than losers, with the former constituting a powerful political majority. The winners include:

1. Commercial banks were major beneficiaries, shifting their lending towards real estate, largely financing the purchase of older housing. Offer notes that "most of this credit created nothing new except transaction costs," potentially diverting capital from "productive investment" and contributing to a "larger economic malaise". The financial and real estate sectors also became major political donors.

2. Early movers and existing homeowners reaped significant "windfalls," as house prices rose between 1980 and 2008. Their housing wealth grew faster than both their earnings and their debt, enriching them with "no effort". By the 1980s, homeowners represented nearly two-thirds of households. Homeownership also became an attractive tax shelter, with imputed rental income untaxed and family homes wholly or partly exempt from capital gains tax, stamp duty, and death duties.

The losers, of course, are the latecomers to the party who have found themselves increasingly priced out. Unfortunately, as this cohort is largely made up of younger households, low-income households and migrants, it’s much less influential in terms of electoral politics. Offer concludes that the "abundant flow of housing credit is the most potent driver of the housing crisis," yet it is "little noted in policy debates".

Political attitudes & housing supply

Ansell’s piece sheds further light on the politics of all this, looking in detail at public attitudes towards housing and especially new construction. His survey results show that while there's broad consensus on the existence of a housing crisis, views on how to deal with it remain "rather vague". Despite the perceived need for more homes, there's "ample evidence of people’s resistance to change", especially concerning local housebuilding. When asked about building new homes in their "local area," support is almost perfectly divided, with 38% supporting and 39% opposing.

Homeowners are substantially more wary of living next to social housing. They are also more likely to use words like "doctor," "school," "road," and above all "infrastructure" when explaining their opposition to local building, expressing concerns about negative impacts on local services (this will sound familiar to Irish readers).

Renters, by contrast, are more likely to use words such as "affordable," "price," and "homeless," reflecting their direct experience of the wider affordability crisis.

Ansell's conclusion is that "the public, on the whole, are inclined to be ‘blockers’". Somewhat polemically, he argues that "the cause of the British housing affordability crisis is, well, the British public".

There is of course a lot of overlap between the above analysis and the situation we find ourselves in here in Ireland. But there are some notable differences that are worth pointing out. Most importantly, the neoliberal undermining of social housing from the 1980s/1990s has more or less been reversed, with social housing now making up around 30% of new supply, as high as any time in Irish history. Critics like Lorcan Sirr will argue that this is misleading as much of this supply is acquired from the private sector, but I have never fully grasped why this distinction is so significant.

Second, banks in Ireland are in a different position in two senses. First, a combination of the hangover from the crash and international banking regulations has limited their ability to lend to the housing sector. Second, they are subject to our macro-prudential mortgage regulations. While loan-to-value ratios are still quite liberal (especially for households in receipt of Help to Buy), our loan-to-income ratios can be viewed as quite conservative, and certainly maintain a link between house prices and wages of some description. Parental support has played a crucial role in allowing first time buyers to chase higher house prices, but how this fits into Offer’s analysis is unclear to me.

(As an aside, it is interesting to note that, according to some analyses, parental gifts and financialization stem from the same fundamental issue: a much larger proportion of older households with high levels of savings).

Nevertheless, the fundamental insight I draw from the pieces discussed here is that we need to understand the complex interaction of politics, supply and finance to get a true understanding of the challenge we face.

Next week we’ll look at a concept from the US which has become quite influential in housing policy debates there: ‘cost disease socialism’.