Usually, The Economist lives up to its name in analyzing important issues. But it misses the point in its latest article on housing affordability. The article notes that the British government has set a target of building enough homes so that real housing prices rise only 1 percent faster than inflation.
That’s an idiotic target. First, why should housing prices rise faster than inflation at all? In a market unhampered by government regulation, housing prices will rise and fall with incomes, and rising incomes lead to higher prices because people buy bigger or more luxurious homes, not because homes themselves rise in price faster than inflation.
Second, the idea that government planning can control housing prices is as bad as the idea that government should plan housing in the first place. The government’s plan is to relax some housing regulation, which is good, and to subsidize new homes, which just transfers the burden from one group of people to another. What the government should do is get out of the way entirely.
Currently, land in Britain may be privately owned, but the right to develop that land is held by the government–which makes private ownership pretty meaningless. The practice of American homebuilders of buying 10 to 10,000 acres and subdividing and developing them is almost unheard of in Britain because no one can assemble that much land on which the government has granted permission to develop.
The Economist is appropriately skeptical that the British government’s plan will work. But the magazine-that-calls-itself-a-newspaper proposes its own idiotic plan. “More than one-third of households have two or more spare bedrooms,” the writer notes. “Allocating housing more efficiently–encouraging elderly couples to downsize after their children fly the nest, for instance–would free up some of these 16m or so rooms.”
The first problem with that is that maybe those people have two or more spare bedrooms for a reason: one is a guest room, perhaps, while the other is a home office. The second problem is that, even if some of those people want to downsize, thanks to the government-created artificial housing shortage, they can’t afford to do so. They probably bought their current house when prices were lower and, even though the price of their home has gone up, the transaction costs of moving are a lot higher when real estate is expensive than when it is affordable.
Instead of trying to calculate how many spare bedrooms are appropriate, government should just get out of the housing and land-use planning business. The benefits of zoning and planning have proven illusory while the costs have practically destroyed Britain’s economy.