Our current experience contrasts starkly with the 1930s, when Britain recovered impressively from a double-dip recession which ended in 1932. The country recorded growth of over 4 per cent in each year from 1933 to 1936, with rearmament only having its effect in the later 1930s. Policy stimulus did play a part, but success was mostly due to the so-called “cheap money policy” – the 1930s’ equivalent of Japan’s “Abenomics”. It drastically reduced real interest rates and increased the money supply by about a third over these years.
The main monetary transmission mechanism worked through house-building, in this era of the “1930s’ semi”. The number of houses built anually by the private sector rose from 133,000 in 1931-2 to 293,000 in 1934-5, and to 279,000 in 1935-6. The construction of these houses contributed (both directly and indirectly) to about a third of the increase in GDP between 1932 and 1934.
Why was house-building so responsive to “cheap money” in the 1930s? Two factors stand out. First, the supply of mortgage finance grew rapidly and became more affordable. Building society mortgage debt rose from £316m with 720,000 borrowers in 1930, to £636m with 1.39m borrowers in 1937, when about 18 per cent of non-agricultural working-class households were buying or owned their own homes. Deposits fell and repayment periods were extended, thereby reducing weekly outgoings by 15 per cent.
Secondly, houses were cheap. A massive 85 per cent of new houses sold for less than £750 (£45,000 today). Terraced houses in London could be bought for £395 in the mid-1930s, when average earnings were about £165 per year. At a time when there was an almost complete absence of land-use planning restrictions, the supply of land for housing was very elastic, and there was no incentive for developers to sit on large land banks.
Could we repeat the 1930s’ experience today? Clearly, it would be difficult since both mortgage availability and planning rules are very different. With more liberal planning rules, the equilibrium housing stock might increase by 2m. Building these houses over a decade would help construction, add about 2 per cent to GDP each year, make houses more affordable, and address a real social need.
A house building-led recovery, stimulated by de-regulation rather than fiscal largesse, seems attractive to many economists. Unfortunately, the politics looks very different. Unless a way can be devised to achieve a major liberalisation of land-use planning, without losing swathes of votes in the South-East, this is a non-runner. “Cheap money” today would raise house prices rather than the construction of houses.
Nicholas Crafts is professor of economic history at the University of Warwick.