Feeding the housing crocodile


The government plans to launch a new housing loans scheme for first time buyers. (Hat tip to Thomas Byrne for the link.) It will lend £500 million to first time buyers to help them “get on the property ladder”. Unfortunately, funnelling even more money into the housing sector will do nothing to address the root cause of expensive housing: a rigid planning system that makes housing development artificially expensive and is preventing supply from meeting market demand.

As I have written before, we are sitting on top of a decades-long housing bubble. The long-term trend of prices is to fall in real terms, as productivity gains allow us to make things more cheaply. Housing prices, on the other hand, have risen steadily. The mini-bubble of the 2000s may have burst, but this is probably just the tip of the iceberg. The long-term housing bubble is relatively huge and owes its existence to the planning system that prevents development in urban areas, among other things. The prophesy has become self-fulfilling, as people see houses as a safe long-term investment rather than somewhere to live. That's driven prices up even further, and led to an expectation by a key electoral group that the government will protect their investments.

The problem isn't a lack of cash, it's the restriction on supply that stops enough decent houses from being built. Throwing even more money at the housing sector, as the governments proposals will do, won't prompt enough new houses to be built, because the restraints on construction that planning regulations impose will still be there. What that £500 million will do is inflate the bubble even more, drive prices even higher, and redistribute money into the hands of people who haven’t earned it.

It's said that an appeaser is someone who feeds the crocodile in the hope that it will eat him last. It looks like this government is doing the same thing with the housing sector. Too weak to do the right thing and let it burst by taking away the barriers to construction, it is instead trying to feed the crocodile hoping that the worst effects of the bubble will be deferred. We’ve tried this before, and it rarely works. Better to face reality now and deflate the bubble carefully and gradually, through reform of the planning system that allows more development. Instead, the government is letting it get so big that, when it finally does burst, it ruins us all.