Red tape will hit property investors

Allister Heath
HERE is another reason to be downbeat about the housing market. Buy-to-let investors are being hit by yet more red tape from 6 April; with many already licking their wounds from the slide in house prices, landlords may eventually come to the conclusion that it just isn’t worth the hassle any more to invest in property.

From next week, landlords will require planning permission if they wish to rent a property to three or more unrelated tenants (such as an informal group of young professionals or students sharing a house), unless the property is already operating a shared tenancy. This will create delays – landlords may have to wait 8 weeks to obtain planning permission – there will be extra costs and uncertainty – what if the decision is turned down? The rules will also give the authorities sweeping new powers over the social make-up of a street or district. Until now planning law has controlled building use, not the type or number of people who may live there. Slowly but surely, the march of officialdom is threatening to squeeze out private investors from one of their last remaining strongholds.

One of my favourite economists is David B. Smith, for many years chief economist at Williams de Broe. Having retired from the City, he now chairs the Institute of Economic Affairs’ shadow monetary policy committee.

A day after the Office for National Statistics upped its estimate of fourth quarter GDP growth to 0.4 per cent, it is worth examining the interesting things Smith has to say about what happened to the private sector during the recession – and the best way to get the economy moving again.

During the first three quarters of 2009, Britain’s GDP fell 5.4 per cent but private domestic expenditure plummeted 11.7 per cent, according to a paper by Smith published by the Institute of Economic Affairs. This helps explain why many in the private sector felt as if the economy was falling into depression whereas the overall figures, bolstered by continuing growth in the state sector, were terrible but not disastrous.

The huge size of the state also helps to explain why rock-bottom interest rates and quantitative easing had less of an effect on overall GDP than some had expected. The simple truth is that government expenditure, which now accounts for 52 per cent of UK GDP, according to the OECD, is unaffected by how much money there is sloshing around the economy and on corporate balance sheets. This is because the authorities can create public spending at will. So pro-growth monetary policy only affects 48 per cent of the economy’s expenditure.

At the same time, Britain’s bloated government is squeezing out the private sector: Smith’s research suggests that private activity falls by 1 per cent for each 1 percentage point rise in the burdens of taxation and government borrowing. The rise in the government spending share between 1997-98 and 2009-10 means that private domestic expenditure was 9.1 per cent lower than it would otherwise have been last year (equivalent to a 0.73 per cent compound annual hit) – a £81.6bn loss. It helps explain the collapse in the nation’s taxable capacity.

The answer is as simple as it is painful: we need public spending cuts to stimulate a private sector recovery. There is no time to waste: only a large dose of reverse Keynesianism can save us.