Abundant Housing?

In 1930 Keynes forecast that today we would be living lives of leisure, with little need to work.

Why was he so wrong? He was right about the scale of progress over 85 years. What did he miss? Here’s what he said:

Thus for the first time since his creation man will be faced with his real, his permanent problem—how to use his freedom from pressing economic cares, how to occupy the leisure, which science and compound interest will have won for him, to live wisely and agreeably and well.

The UK example

The answer in the UK is easy. Most people’s post-tax earnings are mainly spent on housing. Housing has entirely failed to show price/quality improvements since the 1940s—in fact, completely the reverse.

Why? If Paul Cheshire and his LSE colleagues are right, rents in central London are about ten times higher than they would be without the current planning regime. That doesn’t just impact rents themselves: it raises the cost of every service offered in London, crowding out valuable activity and jobs. The deadweight losses to the economy are unbelievable.

Why do British people buy houses? Because they subconsciously know that rents keep going up, even if they don’t know why.

Housing supply has not kept up with demand since the common-law right to build on your own land was restricted in the late 1940s and the 1950s.

Astonishingly, despite being more densely populated, the UK is less built over than Germany, although Germany doesn’t seem to be covered in concrete. Germany seems to have a much better planning system.

Let’s imagine a different world, where the 1947 Town and Country Planning Act was never passed—where residents are compensated for the loss of direct sunlight due to higher buildings and where there are incentives to create and preserve attractive buildings, but where more freedom to build has led to abundant housing. (Let’s imagine also that the shortsighted planning restrictions on roof terraces are removed so London becomes a city of green roofs where people can enjoy the sun, not grey tiling used only by pigeons.)

In that world, for example, a two bedroom flat in central London might rent for a hundred pounds a week. Imagine how many more businesses could be created and how many more people could afford to live near enough to work in them. Imagine how much happier we would be, and how much more leisure time we could afford.

Everyone, that is, except those collecting rents or needing to sell their homes. It wouldn’t be fair or sensible to cause a massive fall in prices and rents by overnight liberalization. But we could pass laws now to unleash supply gradually over the next twenty years, causing a sustained economic surge.

Keynes was fundamentally right—he just failed to forecast that a coalition of homeowners would vote for restrictions to keep supply lagging further and further behind demand. Anything unsustainable must at some point stop. I just hope we manage to stop it gracefully before anger among the renters turns into more extremism and nasty political outcomes.