(Bloomberg View) -- Rarely has a solution to a problem been so easy to imagine and yet so hard to implement as in the case of the U.K. housing crisis. Britain needs to build more houses, particularly in overcrowded areas such as the southeast. Yet politicians prefer to tinker with demand: This will simply to push up prices, at the expense of new buyers.
The housing market in the areas in and around London has taken a knock since Brexit, but properties continue to be unaffordable for most. It now takes the average Londoner 14.5 times their annual salary to buy a home, a study by Hometrack, the research company, has shown. Other nearby cities, including Oxford and Cambridge, have similar house price-to-earnings ratios.
Philip Hammond, U.K. chancellor of the exchequer, made housing one of the centerpieces of his budget last week. "We send a message to the next generation that getting on the housing ladder is not just a dream of your parents’ past, but a reality for your future," he said. Yet his actions did not match his words.
Hammond's most eye-catching announcement was scrapping stamp duty for first-time buyers for the first 300,000 pounds ($402,240) of the purchase price. This follows a tradition in recent U.K. governments of passing measures that have the appearance of making it easier for those who want a home to purchase it. Other such schemes include the so-called Help-to-Buy program, which gives first-time buyers a loan to help with the cost of a deposit. This is not necessarily high as a proportion of the asking price, but often new buyers don't have that kind of cash set aside.
The trouble is that the supply of new homes in the most populated areas of the U.K. remains insufficient. Demand stimulus just results in price increases as sellers raise the asking price on limited housing stock. Little wonder the Office for Budget Responsibility, Britain's fiscal watchdog, believes that the reform of stamp duty will make housing even less, not more, affordable.
What is to be done? One solution is for the state to build more homes directly or give house-builders financial incentives to do so. The budget included spending commitments worth 44 billion pounds over the next five years, aimed at increasing the housing stock by 300,000 new homes a year. The chancellor also pledged there would be five new garden towns in the corridor between Oxford and Cambridge, providing 1 million extra houses by 2050. However, the OBR did not change its short-term forecasts of housing starts as a result of the changes, questioning the effectiveness of Hammond's plans.
The other lever to pull is a reform of the planning system. Hammond established an urgent review to look at the gap between planning permissions and housing starts, threatening to use compulsory purchase powers if needed.
These ideas, while welcome, are less ambitious than needed. As Christian Hilber, a professor of economic geography at the London School of Economics has argued that the British planning system is "extraordinarily rigid by world standards." He points to the existence of green belts and strict controls on heights as among the main causes restricting housing supply.
These constraints vary across the country and are particularly strict where they are least needed: In a paper he wrote with Wouter Vermeulen, an economist at the CPB Netherlands Bureau for Economic Policy Analysis, he shows house prices in the southeast of England would have been about 30 percent lower in 2015 if the region had the same regulatory environment as the the more liberal northeast. A key change they suggest would be to revise the boundaries of the green belts to release some accessible land -- by some estimates, taking less than 2 percent of London's green belt would create space for 500,000 extra houses.
An additional change, as noted by Martin Sandbu in the Financial Times, would be to give greater autonomy to local councils. Decentralization should come with suitable financial incentives: Local authorities that release more land for development should be rewarded for it. The "new homes bonus" passed by the U.K. government in 2011, and then revised in 2016, matched the local tax raised on each new home built for a number of years. The measure however has proven too timid to have a sizable impact on the market.
The biggest problem for the government is that a housing policy that is truly effective would make prices fall. This is bound to hit home-owners, including many older people who typically vote for the Conservative party. This political calculation, however, is myopic: young voters are shifting rapidly to Labour, which has made affordable housing one of its key pledges. Even older voters will see the younger members of their family struggle with the current levels of house prices and may choose to vote against the government.
As Britain exits the European Union, many economists predict that the U.K. housing market will come under pressure, especially where prices are highest. However, with real incomes also expected to take a hit, relying on Brexit to bring down house prices is not enough.
This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.
Ferdinando Giugliano writes columns and editorials on European economics for Bloomberg View. He is also an economics columnist for La Repubblica and was a member of the editorial board of the Financial Times.
For more columns from Bloomberg View, visit https://www.bloomberg.com/view.
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