High house prices damage businesses and the economy

It's not just first-time buyers who are hurt by high prices, but a more flexible approach to housing policy can ease the pressure

The urgency of dealing with the UK's economic struggles is one of the biggest headaches for policy makers, as so many of the enablers of economic growth – improved skills levels, investment in infrastructure, stronger innovation networks – will take time to affect the economy. Yet there is one policy area where consensus is growing that effective interventions have the potential to generate jobs and growth in both the short and longer term: housing.

Housing currently employs around a quarter of a million people in Britain and contributed almost £18bn to the economy in 2010. Government research suggests that every 100,000 new houses built could boost GDP by 1%. Jobs are another immediate benefit; estimates suggest that 1.5 jobs are created for every home built, while £1 spent on housing creates £2.09 in direct value for the economy.

Longer term, as the Barker Review of Housing Supply in 2004 made clear, tackling the shortage of housing can prevent instability in the wider economy because of the impact a place to live has on businesses, labour markets and individuals. An insufficient supply of housing can restrict labour market mobility, raise business costs and exacerbate inequality – constraining economic growth.

The specific ways in which housing impacts on the economic performance of a city depends on the individual city context. In strong city economies, such as in London, Cambridge and Bristol, factors affecting economic growth, including skills levels, innovation and business startups already tend to be stronger.

In these economies, housing shortages and high house prices can put a brake on economic growth, placing increasing pressure on existing infrastructure, raising business costs, exacerbating skill shortages, and preventing people from moving to a successful city.

This is bad for the individual, bad for businesses and, as a result, bad for the local and national economy.

Vodafone recently reported that it was struggling to attract middle managers to London because of high housing costs, while the CBI's recent London Business Survey found that businesses perceived high house prices to be one of London's biggest weaknesses.

In weaker city economies, such as Hull, Middlesbrough and Hastings, housing shortages and high house prices are less likely to be the fundamental barriers to economic growth, as often skills, the quality of local jobs and connectivity to other places are more immediately pressing.

In these cities, economic priorities may be more about investing in education, better public transport and wider quality of place improvements, as well as upgrading the existing housing stock.

In cities with high purchasing and rental affordability ratios, such as York and Brighton, policy should focus on attempting to stimulate a greater amount of housebuilding, as this is where demand for buying and renting housing is highest. This will support economic growth within these cities by limiting the extent to which people are priced out of the job opportunities that are within their economies. This is good for the businesses of these cities and good for the people who live there or want to do so.

In cities where housing is relatively more affordable to buy or rent, focusing primarily on increasing the supply of housing (except where there are clear shortages of certain types of housing) is unlikely to help that city economy. Instead it could put further downward pressure on house prices, further hurting current home owners.

Policies to deal with issues of vacant housing and poor quality housing stock are likely to be more beneficial for these cities as they can improve the quality of life of local residents, help make areas more attractive to businesses and potentially generate jobs in the form of retrofitting and refurbishment.

The rather obvious, but often overlooked message, from Cities Outlook 2013 is that the importance of housing to the local economy varies from place to place. This means national housing policy needs to be much more flexible and cities need to be given much more freedom to respond to their particular circumstances if they are to make the most of housing's potential to deliver a much needed economic boost to the country.

Andrew Carter is an economist and deputy chief executive at Centre for Cities

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