Where is it better to live, UK or USA?

“England [sic] is just a small island. Its roads and houses are small.” – Mitt Romney

When it comes to housing, which country is best, the UK or the USA?

Here is a completely scientific and in no way impressionistic answer.

1. The number of people who own their own home is on the decline in both the USA and the UK

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Verdict: Draw

2. Far more Americans than Brits sleep rough

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Verdict: UK wins

3. Partly because there is so much more public housing in the UK than the USA

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Verdict: UK wins (showing my bias)

4. Compared to average wages, houses in the UK aren’t anymore expensive than in the USA (on average)

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Verdict: Draw

5. But American homes are a lot larger than homes in the UK (Romney was right about something)

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Verdict: USA wins

Final score: UK wins 2:1. 

Rent controls?

Should landlords be able to charge whatever rent they want?

This question has recently resurfaced on both sides of the Atlantic.

A recent report from the IPPR think tank in the UK came close to calling for some kind of regulation of rent pricing but actually shied away from calling for controls. However, following a positively worded article from journalist Dave Hill and pressure from new lobby group Rent Action Now the debate about rent controls in London is warming up.

In America debates about ‘inclusionary zoning’ where a percentage of houses in a new development are given over to people on low incomes have lead critiques to rehearse what might be familiar arguments to some, on the folly of attempting to buck the martket.

What are we to make of this debate?

The housing market and the labour market related to each other in a strange and multifaceted ways.

Housing policy however is almost completely subservient to the labour market.

When thinking about housing policy we have to remember two big facts about the labour market in both the UK and the US.

Firstly, there are lots of people in jobs with low wages.

The US and the UK lead the rich world in having the highest percentage of workers in low paying jobs.

Secondly, the amount of money your parents have is very closely related to how much money you will have.

The US and the UK lead the rich world in hereditary wealth (and poverty).

By and large housing policy takes these points for granted. The question policy makers often ask is, how can we create enough affordable housing for the number of people in low income jobs?

The economists’ perhaps counter intuitive argument is that putting a cap on the amount landlords can charge for rent will not create more affordable housing for people on low incomes because fewer people will want to be landlords.

Here is a chart which shows the percentage of households in the UK living in private rented accomidation.

You can see that after rent controls were introduced during the First World War the number of people renting privately declined steeply.

After the war there were 6,490,000 households renting from private landlords. By 1981 there were 1,904,000.

Capping rents did not create lots of affordable rented accommodation for people on low incomes.

But, if you look at what happens in other countries you can see that the picture is more complex.

Some of these countries have some forms of rent control, others do not. For example, Sweden does, the US has some but not much. These different countries have varying amounts of private rental accommodation.

What is clear, as the UK Treasury recently made clear, is that a whole number of factors determine the number of people that will rent at market rate in a given country. These include cultural factors, tax arrangements and the extent of institutional investment in the sector.

(An interesting argument could be made for regulation of renting on the basis of Robert Frank’s excellent book on Darwin and the Economy, but that will have to wait for another time).

However, all of this misses one enormous point. Governments have a role in funding the rented sector in all rich countries.

Here is a graph that shows the change over time in the percentage of households in the UK that rent.

Although there is a decline it is not nearly as pronounced as the decline in the numbers privately renting.

If we compare the situation across countries this is what we get.

A country like France actually has a higher percentage of people renting than Sweden or the US if you include public housing.

Of course, the situation is more complex even than this since governments also give various monies to people to help them pay for their rent. (There are more “section 8” units in the US than there are public housing units).

With this complex situation in our mind we can return to the original question; how can we create enough affordable housing for the number of people in low income jobs? And what part should caps on rents play in this?

The concern is that capping rents will reduce the number of places people can actually rent. As we have seen, this concern is perhaps not that important if the government builds houses for people to rent. It is perhaps also not that important if governments guarantee the rent of people on low incomes.

The question for advocates of rent controls then is how they think government should fund building new homes for rent. This is tricky given, on the one hand, how expensive it is to build houses and, on the other hand, the public’s resistance to taxation, the partial discrediting of PFI type schemes and the enormous budget deficits governments are running.

But this is all to skirt around the bigger question: Is there some way that housing policy can actually be part of building a society with fewer low paying jobs and where wealth and power are not quite so hereditary? Debates over rent controls, much like so much housing policy, don’t really address this bigger question.

Economic with the truth

A friend sent me this interesting article from the Economist about problems with the Mumbai housing markert http://www.economist.com/node/21556584

What are the problems the Economist highlights?

  • Lots of people live in slums (60% of the population)
  • People’s houses are very small at 4.5 square metres (48 square feet) per person, compared with 34 square metres in Shanghai
  • Houses are expensive with the average price of a 1,000-square-foot pad in the city costing 90 times GDP per head(
  • Corruption is endemic 
  • There is an overriding sense that problems in the housing market might be constraining the city in some way
For me the first two points are by far and away the most important points. However, the Economist dwells much more on the last three. This is itself revealing.
What is the Economists recommedations? Well, firstly, recommendations might be a strong word but there is some discussion on the following topics;
  • Relaxing regulations to allow taller buildings (worth reading this article on good and bad density when considering this recommendation – height by itself is not good enough)
  • Reforming finance so that more people get mortgages (implicitly, I think they are saying that mortgage are currently not used by poor people. This relates to the idea that poor people in India are ‘underbanked‘)
  • Combating corruption so that, um, well, there is less corruption. The article is perhaps not as clear as it could be about why corruption is bad other than hinting that there is a system that is manipulated by a well connected elite to benefit themselves to the detriment of others (presumably this only happens in Mumbai). They do specifically identify regulations on the maximum height of buildings as coming from corruption, which is not entirely convincing. There is an interesting hint that nationalizations might be a way of combating corruption, but this is not explored.
  • Finally, there is some talk that improved transport would improve the situation. Although they don’t come out and say it there clear implication is to build mass transit to move poorer people out of the centre of the city and into new suburban developments.
There recommendations are ok, as far as they go, although I am not sure that they particularly deal with lots of the problems in a particularly systemic way.
In particular, I thought it was interesting that there was little or no discussion on the following ideas;
  • Slum upgrades possibly including giving people deeds to the land they are living on so they can then expand and improve their houses (including through getting credit). This would of course be a transformative policy.
  • Public housing where the government builds new housing for lower income people. This has to be done carefully so that it is actually affordable, is given to people in housing need (and not just given out through patronage) and is built in places near work and transport. This is currently being done a lot in various Chinese cities.
  • Alternative investment vehicles could be created by the government, for example, giving people the chance to invest in infrastructure development. This is important because one of the big things that pushes up the price of formal (ie not slum) housing is people using real estate as an investment vehicle (because there are so few other safe investments).
  • Building the capacity and accountability of state officials as a way of combating corruption. This means paying decent wages and giving proper training to people involved in town planning. It also means building up the ability of other groups  to hold officials to account and prevent ‘winner takes all‘ politics whereby only a wealthy few are able to influence the government. One way of doing this would be through funding for community organizers such as the ones who have set up the Slum Dwellers International

I think these are all realistic policies but also ones that could have a profound impact on all the problems that the Economist highlights. It’s worth thinking about why they are not event discussed in the article.