England's Mortgage Bailout: The High Cost of Town Planning

The Daily Telegraph in London reports that the government bailout of mortgage lender Bradford and Bingley will raise the exposure of the United Kingdom taxpayers to £150 billion (nearly $300 billion). Overall, this is approximately $5,000 per capita, considerably more than the $3,000 per capita United States taxpayer exposure likely after the nearly $800 billion in bailouts, including AIG and the proposed congressional package.

It may be surprising that the cost in the UK would be competitive, much less higher than in the United States, until the causes are analyzed. Surely, US lenders appear to have been more profligate with their (and now taxpayers’) money than UK lenders. Yet the bloated prices have started to fall, as prices begin to return to reality.

Lending profligacy was only the start of the problem. Blame town planning, or what is called “smart growth” in the United States. Elsewhere, we have documented the fact that the excessive price increases that led to the US mortgage meltdown were concentrated in markets with strong land use regulation (smart growth). In these markets, land use policies limited the amount of land available for development, interfered with the competitive pricing of land for development and otherwise increased costs. The smart growth markets, while accounting for only 30 percent of the population, represented more than 85 percent of the housing price increases. Without smart growth, the financial crisis might well have been handled in the United States without government intervention.

The British are not so lucky. Because of the Town and Country Planning Act of 1947 and its subsequent administration, the entire nation is victimized by smart growth style policies that simply do not allow enough houses to be built. Last year, British house construction fell to the lowest level since World War II, and has dropped 30 percent just since 1992. This is barely one-third of the level required in the nation according to James Hearfield, in Let’s Build: Why We Need Five Million New Homes in 10 Years.

For all the good it has done, the Blair government has made the housing market a “dog’s breakfast.” By requiring an untenably high share of new housing to be built in brownfield sites, the government has raised the price of housing and discouraged its development. It is not as if housing has not attracted the attention of the government. Indeed, it seems as if the more it has talked, the less has been built.

But there is much more than national policy. Local authorities have long since caved to property owners who think that their rights to property they can see is no less than their rights to property they own. The result is a nation that is saying no to the next generation. Never mind that the UK is among the most poorly housed nations in the developed world.

It is not, therefore surprising, that housing prices have risen with a vengeance. Owner occupied housing costs have doubled in the last decade relative to incomes. This means that the value of the owner occupied housing stock stands at nearly £3.5 trillion, when historic norms would place it at £1.7 trillion. The £150 billion (£0.150 trillion) may just be the beginning.