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


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. 

Kirby’s cunning plan

Paul Kirby, former head of the No 10 policy unit claims to have come up with a simple idea to solve the housing crisis


In essence he says we should start building social housing with a grant of £50,000 per unit. HMT would recoup this outlaw by insisting that any social housing that becomes vacant is sold on the open market. Kirby estimates that each unit will go for £120,000 per unit.

It sounds like a win-win with more housing being built and more money for the government to build garden cities and other goodies.

From another way of looking at it, this is a deficit financed growth strategy.

Kirby is probably right to say that you can build a new social housing unit for £50,000 per unit. The reason that this is possible is because the housing association or council that build the unit borrow the rest of the money, on the basis that they will pay back the loan from rents.

Council housing debt is certainly a form of government debt. Housing association debt is probably a form of government debt, since, ultimately, the government would stand behind housing associations if they were threatened with insolvency.

(It is also worth noting that much of the money for the rents will be paid for through housing benefit.)

This is the first way that Kirby’s plan is financed through deficit spending. The second way is contained in the idea that you would ‘build the new houses quicker than the old ones are sold off’. Kirby explicitly says that this means a Treasury ‘guarantee’ of £240 billion. ‘Guarantee’ here in effect means spending money that the government does not currently have but will have in the future. This is another way of saying deficit financing.

Perhaps there is nothing wrong with housing associations, councils and central government borrowing money now to build housing given that interest rates are low and there is lots of slack in the construction industry.
However, this form of deficit financed growth strategy is precisely the approach that the coalition government has rejected.

Housing quality and equality

Is it possible to improve the quality of housing for people on low incomes in an unequal society?

That might be a strange question but the case of the Decent Homes Standard shows how hard it actually is to improve the quality of social housing when society is unequal.

The Decent Homes Standard was introduced in 2000 as a way of ensuring that all social housing in the UK was up to a certain quality.

It cost somewhere between £19 billion and £37 billion and was, by its own standards, a success.

Here is a chart showing, over time, the percentage of houses owned by local authorities or housing associations that met the standard.

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As a result of a significant investment of public funds many people had new kitchens and bathrooms and other improvements made to their homes.

You might expect that people who live in social housing would be much more satisfied with their housing as a result of this investment, but you would be wrong.

Here is a chart showing how satisfied people were, over time, with their accommodation.

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We can see that there was no noticeable increase in the number of people living in social housing who said that they were satisfied with their accommodation.

Why might this be? One reason is inequality.

If a government spends public money improving the quality of social housing, this doesn’t stop middle class people who own their own homes spending their own money (or their parents money) improving their homes.

In fact, it is conceivable that public investment in social housing might encourage middle class people to spend even more money on their homes, to make sure that their homes remain of a higher quality than social housing.

Housing is, to an extent, a ‘positional good‘, a lot of the value of a house comes not from some objective measure of it’s worth, but through a comparison with other houses. It gives people little satisfaction to look at their kitchen and to think that it is much better than the kitchen their grandparents had, when their neighbours have a nicer kitchen still.

We all know the phrase ‘keeping up with the Joneses’. It might just be that it is impossible for public investment in social housing to keep up with the Joneses, when the Joneses are so much richer than those on low incomes.

Mortgage advice

Mortgage lenders and house builders are more concerned with rebuilding their balance sheets than in building the number of new homes the UK needs.

Some facts for you;

  • UBS, the ‘financial services’ company, have been fined $1.5 bn for rigging markets.
  • HSBC have been fined $1.9 bn for laundering money from drug cartels.
  • The new Governor of the Bank of England will be paid an additional £250,000 per year to cover his housing costs.
  • Over the next 20 years there will be 232,000 new households formed each year in the UK
  • In the middle of 2012 mortgage lenders lend half as much money in mortgages as they did in the same time in 2007
  • Private house builders built under 100,000 new houses in 2011
  • UK companies currently have cash reserves of over £700 billion

What does this all add up to?

Evidently there are deep problems in the UK banking industry and the UK house building industry.

Mortgage lenders are less keen to lend. Here is a graph of the amount of money lent for mortgages in the UK over the past 5 years;

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Not only has there been a dramatic decline in the amount that is being lent for mortgages, there appears to be some stablization. We seem to be in a new equilibrium, a new normal. There is just a lot less money being lent out to people to buy houses.

This is having the expect impact on house building. Here is a chart of the number of houses that were build by private house builders (i.e. by private businesses not by housing associations or councils);

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Again, we see a dramatic reduction in the numbers, and an apparent stablization of the numbers. This appears to be the new normal. Less money being lent out, fewer homes being built. Here is a chart showing the two trends together;

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There is little prospect of any of this improving. As Robert Peston, the BBC’s Business Editor, recently wrote;

“Banks are trying to shrink the loans and investments on their balance sheets, relative to the capital they hold as protection against losses.”

A similar movement is taking place in the house building industry. Taylor Wimpey, one of the largest house builders in the UK, said in their annual report;

“we continue to prioritise margin performance ahead of volume growth”

This is understandable. As a trade publication put it,

It has been a long road back, but the UK house-building sector is finally starting to make money again. The top 20 house builders have returned a healthy aggregate profit in 2012 of £538.7m – four years ago, they lost almost £4bn. In 2008, as the housing bubble burst spectacularly, the house-building sector imploded with such force that the survival of many of its biggest names seemed unlikely.

This chart shows this return from the brink (data from here). It shows the combined profits of the 5 largest house builders in the UK and quite how badly they were doing a few years ago.

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The sector is now making profits, although modest ones. However, they are doing so through a model that focuses on getting large profit margins through building (relatively) small numbers of houses.

For the country, this is a terrible equilibrium to have hit upon. We are not building enough houses to keep up with the number of new households being formed. We are not building anywhere near enough houses. The longer we build too few houses the harder it will be to build enough houses for these households.

The irony is that if policy makers could come up with a clever investment vehicle to fund the building of these new homes it would be exactly the kind of thing that non-financial corporations would be interest in investing in, and this in turn would be exactly the kind of thing that would stimulate growth in the economy.