We are stuck in a disastrous spiral of misplaced interventionism

 
Allister Heath

VICIOUS circles are the new normal in British politics. Bad, often economically illiterate, policies create poor outcomes; voters become angry; the opposition (and in some cases the government) responds with hopeless populist policies intended to alleviate the symptoms of the previous round of bad policies; the situation worsens; disenchantment with the establishment rises ever further.

The original problem is never acknowledged, the root causes are not addressed, unpopular groups are demonised and we slide ever deeper into a morass of unintended side-effects. It’s depressing beyond words.

We’ve seen this with energy prices; now we are seeing it with rents. House prices are too high, and therefore so are rents. If you want to reduce the price of homes (and also of rents), while wishing to make sure that as many people as possible remain able to buy or rent, there is only one answer: policies that drastically increase the supply of residential property.

The problem stems from the artificially limited availability of buildable land: even though more than nine-tenths of the country isn’t built upon, the supply of land with building permission is highly restricted, especially in areas of greatest demand. The kinds of dwellings that can be erected are also regulated, and there is insufficient joined-up thinking in terms of infrastructure. This creates all sorts of distortions in the market, has led to price hikes, encouraged investors and developers to engage in one-way bets, seen the average size of a new home fall and created much misery. To make matters worse, demand for housing is subsidised while supply is taxed.

In the mid-1930s, when we had liberal rules, the private sector built almost three times more homes than today’s broken system. In other countries, the supply of private homes is also far greater than it is here; like for every good or service, functioning markets respond to high prices by increasing supply. Regulations mean this isn’t possible in Britain.

The government understands this; but none of its deregulatory attempts have been sufficient, and many conservatives dislike the idea that supply must be increased, especially in their neighbourhood. So Labour has decided to start tackling the symptoms of the problem by introducing a set of new rules limiting rent hikes and the sorts of contracts that can be offered. Economists describe these as “second-generation rent controls”; they will include a provision to review rents annually, with a ceiling set against some sort of benchmark. This will reduce the incentive to modernise and invest in properties, as hiking rents will become harder to justify.

Labour knows that landlords are hated – and blamed for pushing up house prices – just like bankers and energy suppliers, so its proposals will be popular, even though they will merely exacerbate the problem.

Anything that cuts the returns to providing rented accommodation, or increases the inherent risks (by making contracts harder to end) will make marginal producers less viable and reduce supply. Given that the buy to let bubble will probably burst when rates go up, this policy will reduce the supply of rentable properties, push up rents and may increase homelessness. When that happens, Labour will undoubtedly return with even more counter-productive policies and tougher controls.

We saw a similar reaction to high energy prices, which in reality are caused by the government dictating that expensive renewable sources must be used, rather than cheaper ones, and because of extra costs slapped onto the industry. But the silly threat of price caps is already leading to a drop in investment, increasing the risk of power outages. Never mind the real reasons for high prices: it’s easier to blame “exploitative” producers, and to decree that prices must not rise too much. If only life were that easy.

allister.heath@cityam.com
Follow me on Twitter: @allisterheath

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