Where does housing fit into the productivity puzzle?

Our country has faced a productivity slowdown at a level not seen for the last 250 years. This slowdown impacts living standards, investment in public services, and paints a bleak outlook for the level of future tax revenues the Government will be able to spend.

Historically, UK productivity growth has been weak. However, since 2010 labour productivity has been 1.5x lower than the US, and as much as 2.5x less as Germany and France. We know that 75% of the ‘productivity puzzle’ comes as a result of a fall in a handful of sectors; namely finance, manufacturing, professional services and information technology. These are sectors that the UK not only has a competitive advantage in, but the very sectors that drove much of the growth before the great financial crisis.

If Labour is to build a strong foundation for a new economic settlement, then it must find answers to the productivity puzzle. One such element key to solving it lies within how we plan our land use. We know restrictive land use regulations raise the cost of housing, limit access to work opportunities in productive places, reduce economic growth, and widen wealth and income inequality.

For too long we have underestimated the national implications of not addressing the issue of restrictive land use regulaitons. Cheshire and Hilber demonstrate that our planning regulations often impose significant economic costs on society. We know planning in the UK intentionally restricts the availability of land for retail, commercial, residential, industrial and many other uses. And has done so since the introduction of the Town and Country Planning Act 1947. Shockingly, their research found that restrictions within our planning system reduced productivity output of the retail sector by as much as 32%.

Further studies by Saks in the United States demonstrate that restrictive planning regulations reduce employment by restricting migration. It found that by reducing migration to more productive areas, highly restrictive land use regulations are associated with as much as a 10% reduction in employment. Hsieh and Moretti suggest that restrictive land use regulations constrain supply of new homes in the most productive areas of the United States. It found areas with restrictive land use regulations have lowered growth by at least 36% between 1964 to 2009.

Restrictive and stringent land use regulations to new housing supply effectively limits the number of workers who have access to high productivity areas. In most part down to the enormous challenges brought about to the permitting process from local opposition. Instead of increasing local employment, productivity growth in such supply constrained areas primarily pushes up housing costs and nominal wages. This misallocation of workers and resources results in lower economic output and wealth.

Hilber and Mense released a groundbreaking study on what has caused the lack of affordable housing in highly productive large cities across the world. It found that house prices were rising at a much faster rate than market rents. In Greater London the research revealed that 63% of the increase in price-to-rent ratio since 1997 was explained by local labour demand shocks – like an increase in jobs, and tighter local planning constraints on supply. Outside of Greater London, where supply is less tightly constrained, macroeconomic factors accounted for 84% of changes in price-to-rent ratios over the same period.

Before the 1947 Town and Country Planning Act new construction of homes was lightly regulated in most parts of the United Kingdom, with considerable amounts of housing built in the areas of high demand. Since this move to ‘development control’ housebuilding effectively became illegal without permission. London has never built more than its housing construction peak of 73,000 homes in a single year. It achieved this as far back as  1934. The introduction of this post-war act it has made it much harder to build in areas with strong economic growth, excluding many from prospective opportunities. It does not deliver the sustainable and inclusive growth a progressive Labour Party would hope to achieve.

Labour Party voters are expected to care less about the protection of housing wealth and more about the affordability of housing. Primarily due to most Labour voters having below-average incomes and housing wealth. However, until we recognize our current regulations put up huge barriers to the construction of new homes and is a leading cause of inequality, low growth and productivity, and reducing opportunities for workers – we will continue to let them down and hold back our economy. To end this we must progressively legalise housebuilding once and for all.