UK Housing and Planning Policies : the evidence from economic research

• In 2014, UK house prices per square metre were the second highest in the world (topped only by Monaco), with especially high valuations in London and the South East. New houses are about 40% smaller than in similarly densely populated European countries. • Over the last 40 years, house price growth in the UK has been faster than in any other OECD country and has far outstripped earnings growth. Consequently, a 'housing affordability crisis' has developed. The homeownership rate has been in decline since the turn of the millennium, falling from 69.6% in 2002 to 63.6% in 2013. Extending Right-to-Buy might halt this decline, but it would be likely to worsen the affordability crisis. • The ratio of London house prices to average UK house prices has increased substantially since the 1970s. The price-to-income multiple in the Greater London area in 2014 was 8.5; for the UK as a whole, it was 5.0. • The UK's planning system is the main cause of the affordability crisis, especially in London and the South East. Despite population growth and rising real incomes, construction of new housing has been decreasing steadily since the 1970s, leading to a substantial housing shortfall. • Where supply is constrained, the main effect of policies that stimulate housing demand – such as Help-to-Buy – is to increase house prices rather than supply. These policies may thus be an ineffective waste of taxpayer money at best, and counterproductive at worst. • A similar argument applies to property-related tax reforms. In supply-constrained areas, higher taxes are capitalised into lower property prices. • The failure to revalue the council tax since 1992 and introduce effective property taxes has made the idea of a 'mansion tax' popular. Such a tax would be likely to reduce the prices of expensive houses making them more affordable for wealthy would-be buyers and imposing a one-time negative wealth effect on current owners. It may have the effect of encouraging owners to subdivide their properties in an attempt to circumvent the tax. • The evidence firmly suggests that the stamp duty land tax – which taxes property transactions – reduces household mobility. The resulting mismatch in the housing market exacerbates the affordability crisis. • The 'bedroom tax' is most likely to affect landlords, who reduce rents to keep their tenants. This limits the potential to free up used space. To the extent that landlords do not …