This article was co-written with Josh Ryan-Collins and was originally published by Zed Books.
Our financial system is hooked on the buoyancy of an unsustainable housing market. Homes routinely ‘earn’ more than people do. How did we get here? And is this actually ever going to change?
As the UK government admitted in its Housing White Paper, published in February 2017, the UK is facing a housing affordability crisis on a massive scale. By 2020 it is predicted that only a quarter of thirty-somethings will own their own home, down from half in the 1980s. The average couple who rent now see half their salary disappearing into the pockets of their landlord, making it virtually impossible to ever save enough for a deposit.
Average house prices are eight times incomes across the country and many times that in the fastest growing cities where there are the most jobs. In other words, a whole generation is getting priced out of the market: commonly known as ‘Generation Rent’.
But ‘rent’ also has another meaning, on which you will find no mention in the Housing White Paper. In economics, rent – or ‘economic rent’ – refers to profits made purely on the ownership of a scarce resource, unrelated to any efforts expended. A good deal of economic regulation is focused on limiting such rents which are often a result of monopoly and are both inefficient and unjust.
But there is one kind of economic rent that gets a free ride. In advanced economies like the UK, the biggest source of economic rent comes from the ownership of land – and the homes on top of it. Anyone lucky enough to have bought a home in London and South East England in the 1980s, and held on to it, has seen their wealth increase by around twelve times. In other parts of the country wealth gains have been less but still way ahead of wages, which, adjusted for inflation, have only doubled.
The reasons for this are manifold: successive waves of ill-thought-out housing policy, changes in welfare and taxation and financial deregulation have resulted in land and housing in the UK becoming ‘financialised’.
It may come as a surprise to some, but banks in the UK lend the majority of their money not to businesses but for mortgages on existing homes. This pumps up house and land prices, further meaning larger mortgages are needed for people to afford a home. Banks can be seen to capitalise a proportion of the economic rent in the form of ever larger interest payments.
Whereas one hundred years ago houses were mostly regarded as simply somewhere to live, today homeownership is viewed as an investment opportunity which offers a means of accumulating wealth in the face of stagnating wages, dwindling pensions and reduced state welfare provision.
This is why the term ‘Generation Rent’ has two meanings. For every household facing up to a lifetime of renting in insecure, expensive, low quality accommodation, there is a landlord enjoying unearned ‘rentier’ profits. They are two sides of the same coin.
While this seems intuitively unjust, it is also inefficient. Soaring land and housing costs can end up absorbing the majority of peoples’ incomes, threatening the vibrancy of successful urban centres. It also diverts investment from more productive areas, damaging productivity growth.
Projecting these trends forwards, it seems that society is on track to become ever more divided between those who own landed property, and those who do not. In some lucky cases, people are rescued by Mum and Dad. Realising their children will never have the opportunity they had, parents provide children with a lump sum – or indeed hand over the keys to a second home – to give them a foot up onto the housing ladder. But for the majority it is an unfeasible option.
How did we get here? For decades policymakers and economists have failed to address, or even understand, the role of land in the economy.
In our new book Rethinking the Economics of Land and Housing we show how many of the key challenges facing modern economies – including the housing crisis, deepening inequality, poor prospects for sustainable growth, intergenerational conflict and financial instability – are intimately tied to the land economy. Looking at the ways in which discussions of land have been routinely excluded from both housing policy and economic theory, we show that in order to tackle these increasingly pressing issues a major re-think by policymakers is required.