How to Solve the UK Housing Crisis

September 2008

First we have to understand that the cause of the current crisis is the failure of hosing starts to keep pace with housing demand. What happens if supply falls well sort of demand? Bubbles are created in which excitement drives prices to overshoot and eventually crash. When prime London home prices eclipsed even those of Monaco the outcome became inevitable.

A long term solution to the housing crisis can not fail to address the underlying problem. However, massive new building will tend to further depress prices. Nevertheless, in this article I will I tentatively suggest a very radical and rather speculative solution. Although my analysis focuses on London, the principles can be applied countrywide.

The problem of the London property market, compared to Paris for example, is the shortage of good quality property. Poor quality social housing and modern architecture, combined with the damage inflicted during the second world war, has created, for the majority, a dreadful city. The hapless inhabitants of London are forced to compete for a handful of desirable areas. The unlucky majority live in squalor, with consequent impact on morale, creating the disenfranchised estate mentality and reinforcing the class barriers so famously characteristic of English society.

In general, social housing amplifies crime, and a free market in housing supported by ample supply is a much more desirable solution (Note, a free market with inadequate supply, therefore unaffordable prices, think Africa and Food, is the least desirable solution). Remove from man aspiration, achieved by competition, and you remove his humanity. It was of course an understanding of this principle that motivated Margaret Thatcher's hugely popular 'right to buy' policy. Since 1981 social housing as a proportion of the total housing stock in the UK has fallen from one 31% to 18% today (although it is much higher in London). However, selling uniformly poor quality housing does not create aspiration. The scarcity, and therefore unavoidability, of quality property has created a nation of mostly like minded philistines, primarily interested in celebrity gossip, binge drinking and football. The free market can not solve this crisis; partly because low expectations allow maximum profits to be generated by building dreadful 'Wimpy Homes', and partly because free market development is by dint of it's organic nature, piecemeal and chaotic. Grand design requires government intervention. 

The resolution can only be the wholesale rebuilding of London!

Using compulsory purchase orders the government could buy large swathes of London at late 2007 prices and rebuild them with both greater housing density and greater aesthetic quality. Such a radical plan need not cost the government a fortune, indeed it can even make a profit. Remember that Kensington and Chelsea has both the highest housing density and the highest housing prices. Thus the transformation of large areas of London need not be done at a loss. Government land sales in low tax Hong Kong raise 40% of the government's revenue, the compulsory purchase of agricultural, industrial and run down residential land in the UK has potential too. In addition, the short term impact on the property market might be, to some extent, positive as supply contracts and repurchases are effected at inflated prices.

However the policy is very radical because:

(a) It requires compulsory purchase orders and although private tenants will be happy to sell at inflated prices many council tenants will suffer or need compensation.

(b) The new property must be sold or rented on the open market, not returned to the original owners and tenants, both to achieve the highest possible prices supporting the highest possible build quality and to allow the market to flourish effectively. The quality of the new homes must vary, and on the outskirts where existing property is relatively inexpensive, or agricultural land can be confiscated at agricultural prices, some very cheap second rate apartment blocks are probably required.

(c) Vast areas have to be aggressively rebuilt in order to avoid creating pockets of high quality homes in undesirable areas. Naturally the government should begin by developing areas on the periphery of existing hot spots.

(d) Much of the property build should be, as Poundbury, in traditional English style. A area of high quality New York sky scrapers in South London makes sense, but Chelsea is Chelsea because it is old not new. Even in New York historical architecture, including brownstones and art deco skyscrapers, is a vital attraction. Housing construction costs in Poundbury are surprisingly low and the development has proven both hugely popular and profitable.

The end result of such a policy could be the profitable redevelopment of London, ultimately only the wealthy property owners in existing rare pockets of unblighted London need loose substantially. I am speculating that is possible, with modern technology and at a profit, to reproduce Napoléon III's success in creating Paris, a city of both outstanding beauty and extreme density. The splendid neoclassical Nash terraces of Regents Park could provide, I suspect, the inspiration for new London. My own home in Hampstead, an area now high valued for it's Victorian streets mostly free from modern squalor, would doubtless decline in price dramatically.