UPDATE: a new article in CapX updates these estimates for the latest research, with graphs

If you live in the UK, you are getting by at three quarters of your full strength. So is everyone else, but most people don’t know yet.

The UK as a whole is running at three quarters of its potential, because of the shortage of homes. To put that in perspective, that’s more damage to the economy than anything since the Black Death.

As Matt Rognlie, a young economist at MIT, has pointed out, housing is the biggest cause of inequality. Half of the UK is worse off than 14 years ago because of housing costs.¹

But that is not all. The shortage of homes in the UK is now so bad that it hurts the economy by 25-30%.

Heard of the UK’s ‘productivity puzzle’? There’s less of a puzzle than you might think. There’s good evidence that low UK productivity is mainly down to lack of housing near the best job opportunities. That means everyone in this country is 25-30% worse off than we would be if we had a proper housing supply.

That makes us less competitive against other countries, like China and the US. It’s also a great reason for us all to get together and fix the problem. It doesn’t have to be about us vs. them, or one group against another. We can fix the problem and make the whole country better off.

What's the evidence?

In 2015 two talented professors, Enrico Moretti at Berkeley and Chang-Tai Hsieh at Chicago Booth, got together to measure the effect of shortage of housing on US productivity. They concluded that lack of housing had impaired the US economy by between 9.5% and 13.5%.

How? Mainly by stopping people getting the best jobs that they want. Lack of housing also causes stressful insecurity and long commutes. Expensive offices and factories damage businesses and growth as well, of course.

Is the UK any better? Not by a long way. 

The value of land under US houses is about $10 trillion,² or 12.5% of US total net wealth. That gives some measure of the artificial shortage of homes, because many more great homes should fit into a square mile than you'll find in sprawling Palo Alto or London’s zone 5. Think of the beautiful terraces of Kensington & Chelsea, or central Paris. If homes in London as a whole were more like one of those places, land for housing would be much cheaper.

The same number for the UK is £3.7 trillion,³ or 40% of UK net wealth: more than three times as bad as the US proportion. If we take the total market value of UK housing from Savills rather than the ONS, the number is more like £5 trillion.

That probably means that the damage to the UK economy and GDP is somewhere around three times as bad. It may not be 39.5%, but 25-30% is a reasonable estimate.

That’s an incredible amount of self-inflicted damage, every year. 30% of GDP is about £600 billion, more than central government spends in a year. Of course, it’s a rough estimate until someone does a proper UK study.

Has anyone done a proper study? We sent a Freedom of Information request to HM Treasury, asking for their estimate of the impact of the housing crisis on UK GDP. Despite being supposedly focused on the housing shortage, they answered that they had no idea.

What gets measured, gets improved. If we recognize how much damage the lack of homes is causing to the UK as a whole, and to our competitiveness against other nations, perhaps we can finally all get together to build enough homes.

Footnotes:

1 Resolution Foundation, The Housing Headwind, Figure 21

2 See, for example, William Larson, New Estimates of Value of Land of the United States, Bureau of Economic Analysis, 2015, and the studies cited in Table 6.

3 UK Office for National Statistics, Blue Book data series for 2015, CGLK minus MJF8. The actual number may be higher because permissions on land not under dwellings are counted separately. Value of land under buildings and other structures was £453 billion. The value of land currently used for agriculture (including the value of planning permissions on greenfield land) is currently combined within AN.115 and will be disclosed separately for the first time in autumn 2017.