We need more housebuilding for a stronger economy

Lost in the debate about of how to build more new homes, is the less controversial subject of why housebuilding is good for GDP growth and even helps improve national productivity.

If the number of new homes built declines, it is probably not good news for economic growth. The rough estimate among those of us who are enthusiastic about building more new homes (Yimbys, or “Yes, in my back yard”) is that we need 340,000 new home starts every year, including social and affordable housing, to meet demand.

We are very unlikely to hit that target in the next few years, according to the Home Builders Federation (HBF). It blames a probable 122,000 decline in annual new home starts on a series of policy initiatives. They point to proposed changes to the national planning framework that could account for an annual fall in new homes of 77,000, with nutrient-neutrality requirements by Natural England cutting another 37,000 to 41,000 homes. Water-neutrality requirements might chip in a fall of another 1,500 to 1,900 and something called Recreational Impact Zones reduce the tally by a further 1,200 to 2,100.

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According to the HBF and its consultants at Lichfields, this drop in 122,000 houses will result in 378,000 fewer jobs being supported, including 4,000 graduate and apprenticeship positions. There will also be a fall of about £20bn in economic activity.

Housebuilding is being held back by Nimbyism

I can hear Nimbys muttering that of course homebuilders want to build more homes. But countless studies strongly suggest that declining home starts will dent economic growth. In 2010, for instance, Oxford Economics, commissioned by Savills, concluded that every 100,000 new homes built would create 228,000 direct construction jobs and a further 228,000 jobs on the supply side.

The direct benefit from the production of 100,000 new homes per annum would be to increase tax revenues by at least £2.3bn a year, rising to £3.1bn a year within a few years. This level of increased housing output could add 1% of growth to the economy (by the end of the second year).

International comparisons are also useful. A few years ago the HBF’s US counterpart, the National Association of Home Builders, produced a report entitled The Local Economic Impact of Home Building.

The estimated one-year impact of building 100 single-family homes in a typical local area included $28.7m in local income, $3.6m in taxes and other revenue for local governments, and 394 local jobs. In addition the annually recurring effects of constructing 100 single family homes in a typical local area amounted to $4.1m in local income, $1m in taxes and other revenue for local governments, and 69 local jobs.

The US also offers a useful analysis of the consequences of building affordable and social housing. A US report for the Center for Housing Policy found that building 100 affordable homes generates $11.7m in local income, 161 jobs and $2.2m in taxes and government revenue. Similarly, a report from Shelter Scotland found that “every £100m invested in affordable housing supply via both public and private finance generates £210m of economic output in the wider economy and sustains 1,270 jobs”.

Housebuilding will lets cities grow

The message is unequivocal. Building more new homes creates economic activity as well as giving people somewhere to live. The economic effects are obvious: jobs are created both directly in construction and indirectly by improving local economies, and there are benefits from greater consumer spending and improved tax-raising powers for local authorities.

Moreover, there is ample evidence that if you let successful cities become more successful, they become more productive, which in turn boosts national productivity. In simple terms, more homes (especially affordable ones) in London, Manchester and Birmingham will attract more skilled workers to them, which will boost the city’s productivity and make the whole country richer. Strangle those cities with overly restrictive planning rules, and we all lose.

As a recent report by the Policy Exchange think tank observed, “high housing costs in the UK’s most productive cities are eating into putative gains in [national] productivity. Manchester and Birmingham, the two cities with the greatest productivity potential outside of London in the UK, also have some of the greatest restrictions on development in the form of green belt. Improvements in productivity are being capitalised in higher house prices.”

This review also cited another report by the Centre for Cities estimating that Manchester and Birmingham are respectively £15bn and £11bn behind their productive potential.

So, even if you think that we don’t need to build more new homes everywhere – and Yimbys like me think we do – you need to build more homes in the most productive areas of the UK if you want to boost economic growth.

And if you want to raise economic growth in the short term, by employing more workers and boosting local spending, you need to build more new homes – lots of them and probably more than a few near you. Or you can accept lower national GDP growth, poorer public services and more societal strife. Your choice.