My Fair London member Tom McDonough reports on a recent public lecture by Professor Christian Hilber from the London School of Economics. 

The impact of house prices on inequality

Soaring house prices are intensifying levels of inequality in Britain by deepening the wealth divide between children from low and higher income families and preventing many without inherited capital from achieving the dream of home-ownership, according to London School of Economics (LSE) Professor Christian Hilber.

Speaking at the LSE on 21^st March, the Swiss Professor of Economic Geography argued that planning and taxation policies, rather than immigration or foreign investment, have created a dysfunctional housing market that is harming all of us, especially those on low incomes.

Hilber’s figures show that house prices in Britain have surged by 300% since 1970, more than any other OECD country. New Zealand has seen the second highest rise at 275%, while the US recorded an increase of 110% and Germany saw a gentle upwards shift of 40%.

Unsurprisingly, London has seen the biggest growth in property values in the country, with average prices rising from £100,000 in 1993 to £700,000 today. The house price to earnings ratio in the capital now stands at 10 while the ratio for the whole of the UK is 5.

Impact on inequality

The relentless rise in house prices in Britain over the past several decades, says Hilber, has worsened levels of inequality by giving the children of long-term home owners access to large sums of capital while presenting the children of poor parents with house prices that are beyond their means.

Unless the children of low-income parents with no housing-wealth buck the social mobility trend in Britain and become very high earners they will have difficulty saving enough for a deposit and with making the monthly mortgage payments, especially if they live in London or the South East. Even if their earnings and savings allow them to buy a home, many will find themselves forced to put all their assets in one basket, leaving them exposed to considerable financial risk.

But, argues Hibler, the rest of society is also adversely affected. Home owners may find it satisfying to watch the value of their asset increase every year, but they will struggle to cash in on their prize as long as they remain in Britain.

“If people want to upsize to accommodate growing families they will find that the prices of larger homes have increased at the same rate as their current homes so they cannot really benefit from their capital gain unless they go to a country where house prices are much lower,” says Hilber.

Additionally, even those with higher incomes may find it necessary to plough all their resources into the single asset of a home, leaving them in a weak financial position. To illustrate this point, Hilber gave a personal example.

“When my wife and I arrived in London in 2003 we rented a flat that was half the size of our Washington home because I was too scared of a market downturn to invest all my money in a London house,” he said, adding that he finally dared to purchase a house here in 2012.

And Hilber’s not the only one who’s been fretting. Ipsos MORI surveys for London councils (10/2015) and the UK (2/2013) have found that Londoners think that housing is the number one challenge facing the capital while 80% of British people think we are living through an unprecedented housing affordability crisis.

Causes

If Hilber’s argument about the effect of house prices on inequality appears grimly inevitable, his hypothesis on the causes of the crisis offers a slither of hope. Rather than suggesting that the problem is the consequence of the natural laws of supply and demand in a country that attracts large numbers of immigrants and foreign investors, he argues, on the contrary, that our housing market is distorted by planning regulations that prevent the supply of housing from responding to demand.

Britain’s planning system, established in 1947 through the Town and Country Planning Act, is complex and inflexible. One issue is that development decisions are made at the local level, where they are subject to pressure from individuals with strong vested interests, including people, known as NIMBY’s (Not in My Back Yard), who resist development schemes in their areas. Meanwhile, regulations create horizontal, vertical and conservational planning constraints. Horizontal constraints prevent construction on undeveloped land, such as the green belt, while vertical constraints impose height restrictions on buildings and conservation constraints protect heritage sites including view corridors. Some regulations may be necessary but Hilber suggests that others are harder to justify. Is it really more important to keep 516,000 hectares of green belt around London than to provide people with homes? Is the 16-kilometre view corridor between Henry VIII’s Mound in Richmond Park and St Pauls Cathedral so valuable that it should impede building projects?

The construction of housing in Britain is further limited by taxation policies that offer local authorities almost no fiscal incentives for taking on building projects. In Switzerland and the US, where the fiscal rewards for local construction projects are significant, house prices have remained far lower than in the UK, according to Hilber’s figures.

The combination of all these constraints prevents the supply of housing in Britain from keeping pace with rising levels of demand, causing house prices to be pushed ever upwards. Hilber says that the South East of England would see house prices drop by 25% if the restrictiveness of its planning regulations were reduced to the same level as those in the North East, while the average cost of a home in Britain would fall by an 35% if planning regulations were relaxed completely. Hilber, it should be said, does not advocate that all of these regulations should be eradicated, but rather that they should be loosened up significantly.

So what of the demand side of the problem? Aren’t immigrants and foreign investors placing intolerable demand pressure on our housing market? Hilber gives these arguments little credibility.

“There is no denying that if there are more people this pushes up housing demand but the evidence suggests that income and earnings are much more important. Demand is very income elastic so if earnings go up a lot, demand goes up too. Also, immigrants consume much less housing than natives,” he said

When it comes to foreign investment, Hilber concedes there is a big effect on prices in the prime market in central London, but doesn’t think this has any relevant effect on the rest of the country.

“What affects us all in terms of being able to have a decent home is not foreign investment. It can even have a positive effect by increasing the overall supply of housing stock,” he adds.

What it means

The Spirit Level focuses on income inequality and the negative impact this has on all levels of society, especially those on low incomes, by creating division, stress and competition. Income levels are taken to denote social status, with each of us feeling our earnings and material possessions determine our standing in the social rankings. The resulting feelings of anxiety, distrust and shame impact on us deeply, causing problems ranging from ill health to violence. The Spirit Level shows that more unequal a country is, the worse it scores in nearly every health and social indicator. Hilber’s argument illustrates how factors other than income differentials can also contribute to economic inequality and how housing wealth is every bit as pernicious a demarcation of social status as income. What other socio-economic factor could challenge someone’s sense of inclusion or self-worth more thoroughly than being a sofa-surfer in a city crammed with property millionaires?

It is heartening to see that the housing inequality could be at least partially alleviated through altered taxation and planning regulations, but with a wealth-worshiping Tory Government in power it is hard to envisage the implementation of any policies that would reduce the value of voters’ properties. Weakened demand in the aftermath of Brexit saw house prices drop by 0.3% in March 2017, the first fall in two years, but property market analysts believe that the shortage of supply will ensure prices remain at an elevated level overall (Guardian 1^st April 2017). There is little hope then for a reduction in housing wealth inequality in the near future. And with the Tories’ latest round of tax and welfare cuts set to transfer huge amounts of wealth from low and middle income households to richer ones this year, income inequality will continue to deepen.