Britain’s productivity has been battered by the scarcity of affordable homes in cities
Londoners are feeling the squeeze. The Bank of England has forecast the biggest annual fall in living standards for at least three decades: energy costs are surging, and rents are going up by 5.5 per cent.
The high cost of housing leads to a worse quality of life in familiar ways, through lower disposable incomes, overcrowding, low rates of home-ownership, long commutes and poor quality homes. But that just scratches the surface. By making it harder for entrepreneurs to start and scale businesses, expensive housing holds back the fundamental driver of increasing living standards: economic growth.
Decades of failing to build enough homes has shrunk London’s talent pool by pricing out young people and pushing them towards less productive jobs. Think of a biology graduate from a top university. She could move to London and work in a biotech company, earning about £45,000, or she could move to Blackpool and work in something lower-paid, earning about £35,000. But in Blackpool she would have a larger home, a shorter commute, and after tax and housing costs would still come out about £1,000 better off.
The high cost of housing in London would also make her less productive. If she chose to live in Blackpool she would miss out on potential colleagues. There would be fewer scientists for her to collaborate with, fewer lab technicians, and less administrative support. We can see this effect in the data. Doubling the size of a city makes each person between 2 and 11 per cent more productive. Researchers in smaller cities create fewer patents, lower quality patents, and fewer unorthodox innovations, as well as inspiring fewer people to start businesses. By pricing people out of London, we miss out on valuable discoveries which could benefit us all.
Entrepreneurs are punished too. After paying higher staffing costs for less productive work, they are then punished again with high office rents. Peter Francis, the co-founder of FluidStack, which rents out data centres, says that they hire remotely when they can, to save on costs, but that it comes at the expense of teams working together less and therefore damages their productivity. And Elle Sharman, the founder of Swan, an algorithmic matchmaking app, says that she would like to build her business in London but that it’s difficult to justify that choice when housing is often three times cheaper in other European cities.
As housing becomes more expensive in Britain, we lose out on entrepreneurs who either choose to move abroad or choose not to start businesses at all – meaning we have fewer new businesses, fewer of the jobs they create, and less economic growth.
It’s not all doom and gloom. The foundations of the housing crisis are hooked up to low productivity, true. But that also means there is a path forward. The planning system is rife with opportunities to open this up, such as creating greater flexibility to switch properties between commercial and residential uses, building on low-quality agricultural land near train stations, and the Michael Gove-endorsed idea of allowing suburban streets to vote to densify.
By making housing cheaper, we can raise London living standards and boost economic growth. It would bring in entrepreneurs, and support the ones already here, bringing us many more innovations and making us more productive.