Could cap-and-auction resolve the UK housing crisis without blowing our net zero commitments?
By Stefan Horn and Josh Ryan-Collins
The housing crisis is not just a social justice problem. It also poses an ecological challenge which requires a different way of thinking about the allocation of domestic space.
A s house prices are approaching record highs in the UK and urban rents are also rising outside London, the government has committed to address the housing affordability crisis by building more houses. Yet new home construction is environmentally damaging and resource intensive. The built environment accounts for 42% of UK carbon emissions, of which 6% result from new construction.
In the 2008–2018 period both the UK housing stock and number of households increased at a similar rate of 0.7% per year. A recent analysis of different empirical estimations of the sensitivity of UK housing prices to increases in supply found that, on average, a 1% increase in stock of housing leads to a 1.75% fall in prices. Extrapolating forward using these figures, for UK house prices to halve over the next ten years would require increasing annual new construction to fivefold the current level. Assuming that these houses would be built using existing building practices this would increase UK carbon emissions by 24% per year.
It goes without saying that this would blow apart the UK’s net zero carbon commitments, recently rubber stamped at the Glasgow COP26 summit. And this is without taking into account the emissions from operating the increased housing stock nor non-climate-related environmental impacts such as resource depletion and habitat destruction.
But might there be enough housing already? This depends on high we define ‘enough’. High level data shows that households in England have on average been occupying more, not less, space over the last 25 years — up from 35sqm to 37.5sqm (see below chart). Things are bit tighter in London but still on an upward trajectory.
In aggregate, over the past 25 years, households appear to have reacted to gradually rising prices and an increasing affordability crisis by using more, not less, living space. It follows that whilst building new homes may increase living space per capita in the aggregate, it may not improve housing affordability. Wealthier people who already own homes will be in a stronger position to purchase any new property that becomes available. This suggests that the underlying problem is not a lack of housing but how the existing stock is allocated.
A thought experiment: capping and auctioning living space
The large environmental impact of new construction makes clear that housing is intimately tied to natural resources. The main inputs in housing supply are land, raw materials and energy. All three are “non-produced” inputs dependent on nature for their provision.
Land, as the founding fathers of economics understood, is inherently limited in supply. Fossil energy, as the COP26 summit illustrated, is also limited — at least if we want our planet to be fit for human habitation. In response to this, there have been a range of programs — such as the EU Emissions Trading Scheme — to cap the right to emit carbon emissions at sustainable levels and then auction the remaining rights in order to support the market to transition to a net zero carbon economy. A carbon dividend from the auction could then be used to support lower income households facing higher energy costs.
Could such an approach be applied to the housing stock? Let us conduct a thought experiment, putting to aside one moment the political reality of private ownership of the majority of stock and assuming it is under common- or public ownership.
It helps to consider the key steps involved in cap-and-auction. First, consumption is capped at sustainable levels. Given that the purpose of housing is to shelter the population, a sustainable level of housing would have to be at least high enough to provide sufficient housing to everyone. The legal minimum size of a dwelling in the UK is 37sqm per person (the same as the average mentioned above), with decreasing per capita floorspace for larger households. It might then be fair to assume that basic housing needs are fulfilled if adults have 37sqm living space at their disposal and children half of that.
In 2019 England had a housing stock of 2.3bn sqm available for 45.5m adults and 10.8m children. This means that 81% of the existing floor space would be sufficient to fulfil basic needs. The sustainable level at which housing supply might be capped would therefore be the existing stock, since it is already higher than the stock required for basic needs.
Second, occupation rights to the existing stock would be auctioned. This auction would not have to be much different from the existing housing market, except that monthly payments for the right to use the auctioned property would be made to a public housing fund instead of a landlord or mortgage provider. Third, the proceeds would be paid to citizens as housing dividend analogous to a carbon dividend.
Finally, measures should be adopted so that basic housing needs — beyond just physical space — are actually being fulfilled. This highlights a fundamental difference between housing and the atmosphere. The atmosphere is homogenous: it does not, in principle, make a difference which unit of atmosphere of the same quality a person uses for their carbon emissions.
Housing, on the other hand, is heterogenous. There are no two units of the same quality, because no two housing units can be in the same place. The place where citizens consume housing is — usually — where they invest in social relationships including those vital for their physical survival, such as care networks and professional contacts. Housing is therefore not simply about ensuring that every citizen has enough floor space, but that they have enough floor space in the right place.
A simple auction model would see higher income groups purchase higher cost 37sqm of living space in those areas of the country where there were the best jobs or living conditions, and lower income groups would end up in poorer areas, reinforcing existing inequalities. There would have to be a safeguards that prevented households from being displaced. Protection could be provided by exempting a minimum dwelling in a relevant existing place from the auction.
This carve-out would reduce the pool of housing available for auction by the stock required to fulfil basic housing needs (the 81% mentioned above). In one way this exemption might be thought of as an in-kind housing dividend that is tailored to the circumstances of each citizen. But at the same time the exemption could also be understood in analogy to carbon emissions. Marketable emissions rights are capped at the Earth’s absorptive capacity to maintain nature’s regenerative capacity. Following the same logic, marketable housing rights could be understood as capped at a level beyond which they would impair the regenerative capacity of its users. Adequate housing is linked to both physiological and mental wellbeing and the adverse effects of involuntary displacement are well known. Having exempted regenerative capacities, of both users and nature, the result is a pool of “discretionary” emissions and housing rights that can be freely allocated.
Back to reality
Of course, in reality, the principle of cap-and-auction cannot be readily applied to the housing market because most housing in high income economies is private property. It is difficult to envisage a politically feasible scenario where everyone’s home is “put on the market” against their will.
But attempts to increase the allocative efficiency of the housing market along the lines described do already exist. The most straightforward measures are land and property taxes that make it costly to hold on to dwellings that exceed one’s means and needs. But the exercise of a pure housing cap-and-auction shows up the limitations of such approaches. A fundamental problem is that the holding cost of, for example, spare bedrooms tends to be lower than their market price. They will often have been bought or leased when prices were lower, and their value will likely appreciate in the future. But even when there is no prospect of capital gains or locking in low contract rents, such as when renting a house at market price, many people still like to have a spare bedroom and also have the means to afford it.
In other words, in the current housing market the demand for spare bedrooms competes with the demand for basic housing needs. It is quite probable that a wealthy individual might be willing to spend more for a spare bedroom than a low-income family is able to spend on basic housing needs. The cap-and-auction scenario avoids this situation. Since only basic housing needs are exempted from the auction, high-income households would have to enter the market for “discretionary” stock to obtain even their first spare bedroom rather than a second home in the countryside. But instead of outbidding lower-income households, high-income households now bid in a competitive market for prestigious “discretionary” housing without affecting the other household’s basic needs. Given that housing is a positional good, this suggests that the market price in the cap-and-auction scenario may be higher than the market price in the current market.
What financial incentives might be required for spare bedrooms to enter the “discretionary” housing pool in the current housing market? In principle, the only way to find out would be to subject the entire housing stock to the market (exempting basic needs) so that the market price reflects the actual willingness to pay for “discretionary” housing that is currently withheld from the market. The principle is the same as finding the carbon tax rate that caps consumption at the desired level. It can only be derived by actually capping consumption and auctioning the discretionary pool of rights.
Taxation of second homes is one way of considering the problem. In Germany municipalities can tax second homes practically without upper limit. The town of Baden-Baden, for example, taxes second homes up to 35% of imputed (or contract) rent — on top of a (low) property tax. This might have put some potential buyers/renters off but the number of second homes has been increasing nevertheless. Berchtesgaden in Bavaria raised second home tax to 20% but then stopped allowing new second homes altogether when that did not have an effect.
It would have been interesting to see what have happened at a 100% second home tax. The thinking presented here suggests that high-income households would happily “rent” prestigious second homes from the local authority at market price. In addition, it is important to remember that a second home tax does not stop local higher-income households from moving to larger primary residences, consuming more housing than they actually need and squeezing out lower-income locals.
Domestic space as a common good
Thinking of housing as a common, limited resource should reverse our thinking about housing policy. Rather than focussing on the supply of new housing units, our focus should be on the existing stock and how it could be mobilised to fulfil basic housing needs. Considering housing as something that can be freely produced and consumed without adverse effects makes it difficult to argue against withholding it from the common pool. If, on the other hand, housing is considered a derivative of a limited stock of natural resources, a logical first step would be to take stock of what is actually already there and then decide which housing might reasonably be exempted from the common pool. Private property might be thought of as such an “exemption”, a privilege to extract from a “non-produced” common resource pool. The crucial question is at which point the use of domestic space ceases to fulfil a basic need that warrants exemption from market forces and instead becomes discretionary consumption good that directly competes with basic universal needs.
This perspective sheds new light on the regular demand to “remove housing from the market” made by some academics and housing activists. If the market is understood as the “market for actively utilised domestic space” then, arguably, most housing is already removed; much of it for discretionary purposes such as spare bedrooms, entertaining guests or generating capital gains, and only made available for other households’ basic housing needs when it suits private considerations.
In the cap-and-auction scenario presented here, only basic housing needs would be exempted, not all the domestic space that a particular household can get their hands on. Thinking of housing as scarce common resource subjects the entire housing stock to the political “market”. Only once basic needs are met only the “discretionary” stock would flow to the economic market.
