Taking the Hard Road

I was thinking the other day that GCSEs aside, the past couple of months have been quite good for the government. They have not introduced any new stupid policies, nor have they been forced to scrap any existing ones. Compared with the year they have had this seemed quite promising. Then I remembered that they had been on summer holidays for six weeks.

Anyway, today, with the holiday coming to an end, it was time for David Cameron to reappear with another broken light bulb taped to his forehead. The new policy is planning deregulation which will make it easier to build houses in rural areas such as the Green Belt area around London. This, in his own words, is the problem he is trying to solve:

A familiar cry goes up, “Yes we want more housing; but no to every development – and not in my back yard.” The nations we’re competing against don’t stand for this kind of paralysis and neither must we.

The construction sector, according to Cameron, is paralysed due to a lack of places to build houses.

There is no doubt that the construction sector, along with the rest of the economy, is depressed but once again, the government is failing to understand the problem. Example time.

Imagine that Susan runs a shop that sells television sets. Susan opened her business in 2003 and her business grew nicely for four years. In 2007 she tried to get planning approval to double the size of the shop by building an extension on the park next to her. Demand was high for her televisions and by expanding she could sell even more televisions. Her application was rejected though and she had to make do with the floor space she had.

Then in 2008 the economic downturn happened and her sales dropped off a cliff. All thoughts of expanding the business disappeared and instead she had to downsize, making two of her staff redundant and cutting the number of televisions she held in stock.

Then in 2012 the council comes back to her:

Council: About that planning application you filed in 2007 – the rules have changed and you can expand your shop now!

Susan: No thanks. Things aren’t too good with my business right now.

Council: You’d be helping the construction sector.

Susan: <click>

Council: ….Hello? ….Hello?

In a depression, the problem Susan has isn’t that she doesn’t have enough shop space, it is that people are not buying televisions. Increasing the number of televisions she has in her shop won’t help if she can’t sell the few she already has. Similarly, the problem that the construction sector has is the number of people who want to have houses or extensions built has also dropped off a cliff. When people don’t want to pay for new houses or new extensions, there is no benefit in making more land available to build on – the construction industry will only build more houses when they can see there is a demand for them.

Cameron’s policy demonstrates that he either doesn’t understand the relationship between supply and demand or he believes that the construction sector suddenly fell off a cliff in 2008 because they ran out of land to build on and it happened at the same time that the rest of the economy fell off a cliff by coincidence.

I’ve talked a lot on here in the past about how to solve the problem with demand and it’s really not that complicated. But as Cameron boldly pointed out in his article:

At every turn we are taking the hard road over the easy path

Yes David, we certainly are.

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About RedEaredRabbit
My name is RedEaredRabbit, King of Kings. Look on my works ye Mighty and despair.

4 Responses to Taking the Hard Road

  1. I’m still appalled that house prices are beyond the reach of most people, especially in areas like Devon where I live. Cameron is also talking of relaxing the proportion of ‘affordable’ (!!!) homes in developments; who’s going to buy the houses in any case? Recently an entire estate in a Devon town where businesses are folding fast and where only a couple of houses were sold was offloaded to a housing association in Liverpool, who filled it with people for whom there are no jobs.
    I looked at new estate locally, and a one-bedroom flat is £100,000 in a place where wages are low and work is often seasonal. Rent for similar is £550 a month! Come on! Someone (the Government maybe?) needs to consider the problems and regulate the housing ‘market’. Housing is a right in a civilised society, not a commodity.

    • If the government were to finance a scheme for building affordable housing they could drive economic growth and at the same time start to address the problem you are talking about.

      As it is they are choosing to cut spending and hoping a deeply depressed private sector sorts the problems out. No sign of that on the horizon though.

  2. One of the constraints that Mervyn King put on quantative easing was that it had to go via the banks and could not be put directly into state projects such as building affordable housing. This has meant that the money has not reached small businesses because the government’s (slightly psychotic) faith in the banks is badly misplaced.

    The announcements yesterday are looking to circumvent that constraint as far as I can see.

    Secondly, councils have naively put onerous percentage requirements on developers for affordable housing. If a developer has land and planning permission but doesn’t build, you have to ask why. The issue as far as I can see is that the public sector is unsympathetic to the needs of the private sector, such as turning a profit, which is how jobs are protected and companies grow. Allowing a slightly smaller proportion of affordable housing will mean more sites are developed so we will end up with more affordable housing.

    One alternative would be for government to engage with developers to build 100% affordable housing projects but I think this is a step to towards “ghettoisation” and, therefore, not a good route.

    The only way to bring house prices down is to meet demand with supply, which, in theory, would ultimately result in all housing being affordable. The next generation will need to see their homes as somewhere to live and not an investment.

    Sorry for banging on about this but I think that state investment in construction is one of the few ways of practically kick0starting the economy. The Tories need to stop shying away from state intervention. The private sector can’t solve this problem.

    Finally, I’m not in construction!

    • I take your point, but disagree that meeting demand with supply is the only way, or indeed the right way, to solve the problem. We need market regulation – it’s the wish of people to live in areas like mine that drives purchase and rental prices through the roof, to the point where local people have no hope of affording a HOME as opposed to an ‘investment property’. Our communities are literally being destroyed as wealthy people from other areas move in and treat the country as a theme park. This is not simply about economics, and can’t ever be. Why do we not tax people (massively) on second homes and invest the income in local housing? By the way, the term ‘affordable’ is a nonsense – very few new homes are that.

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