Wednesday, May 2, 2012

What's happening in the UK

People are wondering what's happening in the UK. Persistent core inflation above the BOE target alongside a stagnating-to-declining GDP point to a supply-side crunch, but, unlike the oil crises of 1970s, there is no obvious culprit.

This is a repost of what I said in the comments on Modeled Behavior.

I have a supply shock story to tell. Housing. And it’s the exact opposite of the story you have in there – which is true for Spain but not true at all for UK.

My basic intuituion is based on personal experience/anectotal evidence of a total dearth of new home building in anything that would be considered a decent area of London (i.e., excepting Canary Wharf). Housing stock here is shockingly old, shockingly poor in condition, and (double) shockingly expensive. It is really quite something to see small, old buildings or apartments going for muliple millions of dollars – the quality vs price combination here makes even this former New Yorker blanche.

In the US, the mid naughts were characterized by at least a decent sized boom in residential construction. It has since been dwarfed by the slump, but never mind. In Spain (or so I hear), the construction boom was quite a bit bigger than the US.

In the UK, by contrast, the boom NEVER HAPPENED (graph shamelessly stolen from elsewhere):

Since 2000, there’s been a total failure of the new housing build to accomodate the population growth, and housing construction has been on a downward trajectory since before 1990! (Obviously, you’d prefer to look at household formation rather than pupulation added, but basic picture still stands). Have a look also at house price statistics: there has been a dip, yes, but much less pronounced than in the US of A, and most of the losses have already been recoved in nominal terms, with London already above the 2007 nominal peak.

Now, I do not know what the cause of this is. In London, I blame historic preservation rules. This is a pet-peeve of M. Yglesias, and rightly so – for even the somewhat far flung parts of London have basically zero new development, and “conservation areas” are spead out like buboes on a corpse dying of plague. Even outside of the “conservation areas”, all buildings are about 80-120 years old, look absolutely identical, and you can’t even replace the windows without approval and without windows looking not too dissimilar to what you’re replacing.

Whatever the cause, the consequence is easy to imagine: higher and rising per square foot rents. Which, since the commercial sector also needs the space, not only subtract from disposable incomes directly, but also result in a tax through higher than necessary retail prices and/or death of so-called “high–street retail”.

To whom does the surplus go then? Obviously, landowners. And since landlors employ very few people, it never has the chance to filter down through wages. In fact, in most cases the surplus is probably never even realized – it just sits there as paper capital gains. It’s a rentier society.

Onwards to solutions then. Easy-peasy. Supply-side problems have been solved by conservative politicians years ago and these solutions are really popular in Europe now! Generally, the process involves deregulation and the cutting of red tape. In this specific instance, you just want to abolish height restrictions in most areas (especially around existing transit infrastructure) and also reduce the number of historic preservation areas. Then you sit back and watch the construction boom unfold. Ideally, you follow up with the Keynesian-stimulus in the form of additional mass transit infrastructure development.

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