Will house prices and rents stay high forever?
Are planning and zoning rules the main cause of high rents and prices?
Yes is the clear answer to the second question from academics who study the numbers. If you restrict the amount of housing that people are allowed to build, supply is lower and prices are higher.
London has mainly prohibited building up and building out. Even digging down is now being restricted. Those are the clear reasons why London rents are so high — perhaps literally ten times higher than they otherwise would be.
How long can this continue?
Homeowners are generally opposed to more building near them, but well-informed renters would prefer lots of new housing. The majority of UK homeowners own their own home and the UK has very tight restrictions on building.
How will the political battle of homeowner versus renter play out over time? That is incredibly important but little studied. Here’s one theory.
Owners versus renters
As prices go up, the number of homeowners decreases, and there are fewer votes for housing restrictions.
However, homeowners tend to be older and wealthier and by definition have a much bigger economic stake in their area, so they are more likely to be politically active and to vote on these issues. So long as they have a voting majority, they will tend to keep restrictions on building.
Ultimately the number of homeowners will be low enough to let the renters vote to unleash more building, reducing house prices and increasing homeownership.
The increase in homeownership will then push the politics back towards restrictions again.
If that’s right, the system is essentially self regulating (a stable equilibrium) and will keep house prices at a high level.
Unless, of course, the renters manage to cause a revolution in the planning or zoning system and a drastic change in the pace of housebuilding (to the tune of millions of homes), before the homeowners can stop them.
Even then the new homeowners will want to see their own property prices go up again…
What about public and social housing?
More decent housing is good, whether public or private. The interesting point is that tenants with fixed below-market rent often have a much lower incentive to vote with the private renters, because they are much less affected when private rents go up.
That might mean that an increase in public and social housing (and reduction in private) tenants will tend to skew politics towards more building restrictions. That means higher market rents and house prices.
Similarly, measures to increase financing available for non-homeowners to buy homes will tend to increase homeownership and the support for building restrictions, and drive rents up again…
Is Germany better?
This sort of logic might help explain why Germany has built so many more homes than the UK. In Germany, there is a much higher proportion of renters. German politics therefore tends to allow more building.
In the UK, one reason to own a home is because of the upward trend in rents (and house prices). German renters are more relaxed that the supply of homes will continue and don’t feel the same primal urge to buy.
Both systems have a stable equilibrium, but the German system builds many more houses and has much lower rents.
A paradox?
If all that is right, the most effective things to do to ensure the votes to increase housebuilding and reduce rents in the long term would be to:
- Reduce government assistance for first time buyers
- Reduce the number of social and public housing tenants
- Encourage landlords with properties rented out at market levels
Does that sound counterintuitive?
