Guardian Housing Network

Do we need to reinvent the wheel on housing finance?

[Originally posted at the Guardian Housing Network, 18/12/11]

If the government finally accepts that fiscal consolidation, even when coupled with quantitative easing, is not a policy that can deliver adequate economic growth, what might a credible plan B look like? A recent report for Shelter made the case for investment in housing as a key component of an alternative. The report focuses primarily upon using construction as part of a short-term stimulus package, but it also recognises that housing investment has a longer term impact on economic growth.

Housing can make a strong claim to be an appropriate vehicle for more active fiscal policy. There are strong multiplier effects: the report notes that every additional £1 of demand in construction generates a total of £2.09 of economic output. There is relatively little leakage from spending on construction.

Much of the spending on inputs goes to UK industry and UK households. The companies involved in the industry are mostly domestic. Given the current state of the building industry there is little chance that public investment in construction will either discourage private investment or fuel inflation. There remains substantial unused capacity; putting that capacity to work will prevent skills degrading and create somewhere for the government’s expanded cadre of apprentices to move on to.

While housing shares many of these features with other infrastructure projects it has an advantage in terms of speed of implementation. The government’s housing strategy recognised this. There is plenty of land already in the ownership of developers and projects already with planning permission just waiting for an economic turnaround. In contrast, most other large infrastructure projects are likely to entail lengthy periods of planning before anything happens on the ground.

Investment in housing also has a more predictable impact than other measures. The government might intend a tax cut to feed through into additional spending or investment – but it has no control over whether that actually happens. If households and businesses lack confidence in the future then it may just as easily end up paying off debts or saving for a rainy day. Even if tax cuts deliver the hoped-for economic stimulus it takes a while for this to work through the system.

In contrast, investing in construction puts money into people’s pockets now. And they will start spending it. At the same time their reliance on benefits will reduce as they (re)enter the labour market and start to pay taxes.

Shelter’s brief but forceful statement on the case for housing could form a key component of plan B, drawing on evidence wherever possible. And it does so as a contribution to a broader macroeconomic debate.

The report does not explore the housing market arguments in favour of additional new build. Given that the housing system is in such a critical condition, the case would be strengthened further by adding into the mix arguments about access and affordability of accommodation.

So this report provides some useful ammunition to be introduced into the policy debate when the time is right. For this, it is surely welcome. And the report offers a platform upon which an even more compelling case could be built, should one be needed.

Yet the most striking thing about this report is that it doesn’t contain a particularly original argument. All the arguments have been well rehearsed, in the UK and beyond. They have all formed part of the extensive debate on housing and the macroeconomy over the past 20 years. Many of the arguments resonate with debates over the New Deal and Keynesian demand management from the 1930s. So in many senses, we are reinventing the wheel here.

Yet maybe this is a wheel that needs reinventing for each generation. The ideas need to be restated in a form that can be transported into the contemporary policy process. This report means the vehicle is ready for the politicians, if and when they reconcile themselves to the need to change course.

Image: © illarionovdv –



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