I blogged last week about a report predicting ever higher UK house prices, and separately on UK workers being more likely to work long hours than those in any other affluent nation. Having read a short article this week by Martin Weale, the Director of the UK’s National Institute for Economic and Social Research, it’s clear that the two are connected.
His argument runs like this. The effect of high house prices on the economy is like having high levels of government debt. It improves the living standards of those who benefit now, and the price for this is paid by others in the future. It transfers a liability or cost from a present generation to a future one.
And in doing so, it reduces the need of this present generation to have to save (e.g. for their retirement) and also reduces the ability of people just entering the housing market to save (because their money is being spent on ever-higher mortgage payments).
Without going into economic theory, savings is the main factor which underpins investment in an economy; and UK investment per worker (the capital stock) is typically lower than in other affluent economies. Which leads in turn to lower productivity per head, and to long hours (needed to make up for lower investment in the workplace). In other words, althought there are other factors (cultural and so on) it’s not a coincidence that France and Germany have better organised housing markets than the UK does, and also higher productivity.
Martin Weale also makes a good point about the lack of ambition in the government’s oft-stated desire to increase the supply of housing.
The government, he notes, has made a commitment (in the 2007 Budget) to raising net additions to the housing stock from 180,000 housing units per annum achieved in 2006 to 200,000 in ten years time. By historic standards this is deeply unimpressive. In 1951 the Conservative government took just two years to increase the overall annual net additions to housing stock by 100,ooo. The Labour government of the mid-60s had a target to build 500,000 new houses a year – which it failed to reach – but it did build 425,000 new houses in 1968 (this figure doesn’t include demolitions). As Weale notes laconically:
“Compared to what was delivered in the 1950s and 1960s it is difficult to conclude that the Government is seriously concerned about the consequences of the failure to expand housing supply.”
Especially since the technology of rapid housebuilding is probably better developed than it was then.