The Financial Times’ Kate Allen describes Rethinking the Economics of Land and Housing as “a lucid exposition of the dysfunctional British housing market.”

The full review is copied below. The original article is available on the Financial Times website here.


Rethinking the Economics of Land and Housing — theft and freedom

An analysis of land as the overlooked problem at the heart of an overheated market

Property values have outpaced growth and incomes in many major economies in the past three decades, particularly the UK. At its root, the problem is land. That is the argument that the authors of this book seek to advance; it would sell many more copies if it were titled This Is Why You Can’t Afford To Buy A House. As it is, Rethinking The Economics Of Land And Housing is not an appealing title but this is a very appealing book.

Written by a trio of economists and policy wonks — Josh Ryan-Collins and Laurie Macfarlane work for the New Economics Foundation, while Toby Lloyd works for Shelter, a homelessness charity, it is a lucid exposition of the dysfunctional British housing market.

The authors set out how housing markets around the world have changed in the past three decades, and why we should all be worried.

Since the early 1980s, UK banks’ mortgage lending has risen from 20 per cent of gross domestic product to more than 60 per cent; in the same period lending to non-financial firms remained at 20-30 per cent of GDP.

Meanwhile, in the mid-1970s, more than 80 per cent of UK housing subsidies were supply side: intended to encourage construction. By 2000 more than 85 per cent of subsidies were on the demand side, such as helping buyers into ownership.

It is no surprise, perhaps, that three-quarters of the growth in house prices between 1950 and 2012 were due to rising land prices rather than rising construction costs. The UK is not alone in this. Across advanced economies land value increases were responsible for 81 per cent of house price growth in the same period.

Something significant has changed in the housing market in recent decades, and the authors feel this is insufficiently appreciated by mainstream economics. Land is distinguished from other forms of capital because of its unique characteristics: it is fixed in quantity and does not depreciate. In fact, as the population grows it tends to appreciate.

As a consequence land is, the authors say, both “theft and freedom:” theft because possessing it necessarily deprives others of something without which they cannot do; freedom because its possession — with secure title and the right to sell — brings economic power. The ability to use land as collateral formed the basis of modern finance, via the creation of credit. As Winston Churchill said in 1909, “Land monopoly is not the only monopoly which exists, but it is by far the greatest of monopolies — it is a permanent monopoly, and it is the mother of all other forms of monopoly.”

The creators of Britain’s postwar system understood this: the 1947 Town And Country Planning Act took an approach which, in addition to the system of planning controls, gave the state a significant role as an actor in the land and development market.

From the 1970s onwards that part of government’s role was lost. Now Britain is “almost alone as an advanced nation” in “not having any major state investment or infrastructure bank”, the authors say.

Alongside this withdrawal by the state, housing-based financial instruments emerged, which fuelled a positive feedback loop between house and land prices and mortgage credit, crowding out business investment.

The link that has emerged between house price rises and consumer sentiment means that spiralling credit and property values feed into the economy, making nations’ wealth perilously sensitised to housing-related shocks.

The authors speculate that this financialisation of the housing market could be a key contributor to secular stagnation and the productivity puzzle. Ultimately, they say, the 19th century system of land economy, in which most people rented from a small number of wealthy landowners, seems to be reasserting itself; 20th century mass home ownership and state intervention look like a blip.

What to do about this issue remains problematic. It is difficult to escape the conclusion that in the absence of radical political ambition, the most likely future is continued polarisation.

Little will change until there is either a price crash, or extreme economic inequality results in political crisis.

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