For an entire generation of young people, the barriers to living in big UK cities are immense. High rents, consuming ever-larger proportions of salaries, are not the only issue. Flat hunting is now a gruelling months-long process strewn with many expected rejections before one is finally able to acquire a new home. Privately rented accommodation makes up only 15% of UK dwelling stock, but is an unavoidable step in most people’s housing journey.

The highly-salient issue has naturally attracted a wide-range of purported solutions, from across the political spectrum. They include reduced down-payments, 50-year mortgages, rent-controls and immigration restrictions, it’s clear that we aren’t suffering from a lack of ideas, merely a lack of political consensus.

Consensus does exist in the economic academic literature, however.

It’s clear that the reason rents and house prices are so high, and still increasing, is because homes are scarce. For 30 years, UK homebuilding has failed to keep up with demand. Estimates have put the number of new homes needed in England alone at up to 345,000 per year – that leaves us about 100k short.

When demand for housing continually outpaces supply, the housing deficit grows, leading to the current affordability crisis.

In many UK cities, population growth exceeds growth of households. Looking at England and Wales, the divergence appears insignificant. Between 2011 and 2021 population growth was 6.3%, household growth was 6.1%. It is when we look at figures at subnational level that a very different story becomes apparent.

In cities and towns, population grew by 6.5%, households grew by 4.9% – ergo, the average household size is growing. This is because home-sharing, and overcrowding, is on the rise. As rents become increasingly unaffordable, more people are forced to live in Houses of Multiple Occupation (HMOs.)

Household formation is contingent on the availability (and affordability) of housing. We see the greatest rent increases in the parts of the UK where systematic under-supply of homes, relative to local demand, is most acute. The solution is to build more homes. Evidence is abundant; when new market-rate homes are constructed, homes get cheaper. 

Recent research from a trio of Finnish economists demonstrated that new market-rate housing naturally leads to increased housing affordability. Their key finding:

“For each 100 new, centrally located market-rate units, roughly 60 units are created in the bottom half of neighborhood [sic] income distribution through vacancies,”

Notre Dame University economist Prof. Evan Mast, writing in the Journal of Urban Economics in 2021, found the same empirical evidence to support increased homebuilding.

“Market-rate construction loosens the market for lower-quality housing through a series of moves”

These two papers are merely the most recent and influential in an outpouring of empirical evidence. 

• New York Federal Reserve research said America needed to ‘build more housing’ to increase affordability. 
• Professors Quigley and Rosenthal at USC Berkley blamed restrictive zoning restrictions, limiting housing supply, as the main cause of increasing house prices. 
• A trio of MIT professors found that building large apartment buildings in low-income areas limit gentrification by increasing supply of homes, ensuring current residents are better protected from displacement.

In every case, building more homes leads to a healthier, more affordable housing market. With academic evidence so one-sided, why is housing construction not happening faster? 

One critical answer: highly restrictive planning processes.

The discretionary nature of the UK’s planning system gives local councillors power to decide developments on a case by case basis. Compared to other countries, our planning system is unusually restrictive. The results are widely felt. New housing is concentrated in specific areas. Between 2011 and 2019, 45% of suburban homes were built in just 4% of suburban areas. Half of suburban neighbourhoods are building under one home a year.

Our current planning system is totally inadequate. By implementing a more flexible zoning system, such as currently exists in Japan, where most new developments are automatically permitted in areas where demand is greatest, we can deliver the most impactful relief to the housing market. Even moving towards a less arbitrary, more rules-based system, as is implemented in France, would spur home building, reduce rents and revitalise our economy.

Allowing for easier development near public transport links would be especially beneficial.  New research predicts that using just 2% of the Green Belt, targeting commuter train stations, we could build between 1.7m and 2.1m new homes. Furthermore, increasing use of permitted development rights would help cut red tape and fast track urban infill and upward extensions.

Making homes affordable, especially in London where the issue is most acute, is vital to our economic prosperity. Increasing real earnings, by decreasing housing costs, would catalyse demand for goods produced all over the UK, generating jobs and tax revenue and spurring important quality-of-life increases across the board.

The faster we come to terms with the necessary reforms in the planning system, the sooner we can deliver affordable housing and economic prosperity.