The UK is stagnating because it's banned investment in housing, transport, and energy

It's hard to make physical capital investments when they're illegal

Foundations: Why Britain has stagnated. A detailed diagnosis by Ben Southwood, Samuel Hughes, and Sam Bowman.

The most important economic fact about modern Britain: that it is difficult to build almost anything, anywhere. This prevents investment, increases energy costs, and makes it harder for productive economic clusters to expand. This, in turn, lowers our productivity, incomes, and tax revenues.

Everyone reading this will already be aware of the country’s present economic sclerosis. Real wage growth has been flat for 16 years. Average weekly wages are only 0.8 percent higher today than their previous peak in 2008. Annual real wages are 6.9 percent lower for the median full-time worker today than they were in 2008. This essay argues that Britain’s economy has stagnated for a fundamentally simple reason: because it has banned the investment in housing, transport and energy that it most vitally needs. Britain has denied its economy the foundations it needs to grow on.

On housing specifically:

The Town and Country Planning Act moved Britain from a system where almost any development was permitted anywhere, to one where development was nearly always prohibited. Despite some minor later liberalisations, like the introduction of permitted development rights in the 1980s, the underlying problem remains. Since the TCPA was introduced in 1947, private housebuilding has never reached Victorian levels, let alone the record progress achieved just before the Second World War.

Today, local authorities still have robust powers to reject new developments, and little incentive to accept them.

National governments have not been blind to the fact that development is not happening. Their solution to the problem has generally been to try to force local governments to permit the homes the country needs (and take the political flak that engenders) through targets and punishments. But this system has never managed to raise building rates by anywhere near enough to return prices to the downward trend they were on for hundreds of years until 1938.

Attempting to force local governments to build more homes has repeatedly backfired, and where it has delivered new homes they have often been low quality and far from where the highest demand for homes is, since the targets are calculated with almost no reference to actual demand for new houses.

And:

Since the introduction of the British planning system in 1947, there has been very little increase in housing supply when better jobs make an area more desirable. Instead of extra homes being built, workers competing for scarce housing are forced to bid up the price of existing homes. This means that many of the income gains go to existing landlords and landowners, and that many people cannot move to better jobs at all.

Because only the best paid people can afford to move to the most prosperous cities, there is no longer general migration across the economic spectrum, as there was in the nineteenth century when it was the poorest people who were most likely to move to find better work. Today, this has created a situation where only the most gifted and educated people can afford to move to richer cities and stay there. Their less well-off peers are quite literally ‘left behind’, and compete with one another over a narrow pool of jobs, driving the wages down even further, making those places feel even more deprived.

Matthew Yglesias on the UK housing shortage

The UK really needs better housing policy. Slow Boring, September 2022.

Suppose a large amount of financial capital were to wash into the United Kingdom, seeking a high return on investment in light of more favorable tax treatment and a generally improved economic outlook. What would actually happen? Where would it be invested?

Because of the very high price of housing in the United Kingdom, especially in London and the southeast, that sector seems like an obvious target for investment. And if an influx of financial capital meant a huge increase in the actual stock of physical housing, that would be great. It would mean construction jobs. It would mean more access to the prosperous, high-productivity labor market of Greater London. And it would mean higher living standards as people got larger or better-located dwellings.

But that’s not at all what an influx of financial capital to the UK housing sector would generate. There is, currently, plenty of financial capital available to build more. What’s lacking is planning permission to actually do it because the UK has a permitting regime that’s so restrictive, Nazi bombing raids actually improved the economy.

Just how bad is it?

The nature of the UK housing issue should be familiar to Americans, especially those who read Slow Boring. There is a lot of demand for living in Greater London (and also Oxford, which isn’t far away), and that demand is not met, which leads to high prices.

But the extent of the problem can be hard for an American to grasp.

For example, as best I can tell, the average size of a home in the United Kingdom is 1033 square feet versus 968 square feet in New York City, so it’s not that Greater London is experiencing a housing squeeze comparable to Greater New York City — the UK as a whole is experiencing a housing squeeze similar to that of NYC. London is worse, and not coincidentally, the UK doesn’t have an equivalent of Dallas or Phoenix or Atlanta — a big, cheap city that is growing fast.

As Yglesias puts it: in the US, housing is “one important issue that sits alongside other important issues. The UK situation is much more extreme.”

More

• Why Britain doesn’t build. Samuel Watling, Works in Progress, May 2023. Delves into the history of the 1947 Town and Country Planning Act, and subsequent attempts at reform.

• I think the UK may be unique in the prevalence of earnest-minded people who are convinced that that there’s no housing shortage, despite low vacancies and sky-high rents. The end of landlords: the surprisingly simple solution to the UK housing crisis. Nick Bano, Guardian, March 2024. “Mass-scale housebuilding isn’t necessary – there is already enough housing stock.”

• Along the same lines: Meeting housing needs within planetary boundaries requires opening the black box of housing “demand.” Stefan Horn, UCL Institute for Innovation and Public Purpose, May 2024. A sardonic comment from Twitter: “This statistic [that 44% of bedrooms in the UK are spare bedrooms] comes from an unusual definition of ‘spare bedroom’, which includes two teenagers having separate bedrooms as involving a ‘spare bedroom’, because the teenagers could be sharing one of the rooms instead.”

• The Nimby’s guide to taking on developers - and winning. Mattie Brignal, Telegraph, July 2024. Quotes Rosie Pearson, head of the Community Planning Alliance: “We oppose anything from 40 houses at the edge of the village to a garden town of 20,000 homes.”

• Britain’s Labour government has declared war on NIMBYs. The Economist, July 2024.

• Comments on the essay by Dominic Cummings, a former advisor to Boris Johnson.

• Matt Webb on Twitter. “This essay is a sobering and essential read -- forensic and eviscerating on the UK's housing, infrastructure and energy woes. But also... when you get all the way to the bottom... the webpage plays a little song??? and the background goes disco????”