The cost of homes

It is not surprising the cost of homes is so high, given the large increases in demand from new household formation, and the attempts to ration or limit supply by the planning system and the actions of the main housebuilders. It is also the case that pumping money into the system at low interest rates makes higher mortgages affordable for more people, so home prices like  bonds and shares have risen thanks to QE and low official interest rates.

To contain prices we need to cut demand and raise supply to better balance. Markets would do this for us but we have instead migration policies, housebuilding standards and planning policies that give government crucial roles.  The government via Councils and Housing Associations is also a major developer itself.All the time interest rates remain low we should expect mortgages at higher multiples of earnings to  be affordable.

In a managed system the government could reduce migration numbers as it has promised to do. It can continue with efforts to increase the number of homes built. It can also ask whether its standards and specifications are the right ones to encourage more building. A combination of UK government standards and wish to produce traditional looking buildings by the industry means a lot of work takes place on site. The UK has not taken up factory made sections and components on the same scale as in some other countries. It means the task of building is prone to delays for  bad weather. It requires a lot of on site supervision  to ensure decent quality, matters which would be partly taken care of by precision machinery in a factory prefabricating more of the home. The structure of the house building industry with its heavy regulation and high financing demands mean that most of the housing is supplied by a few large companies. They say they are constrained by a lack of skilled people and the need to maintain and supervise high standards from building more homes more quickly against all the planning permissions already granted.

Tomorrow I will look at the latest proposed government intervention into this government steered sector with their plan to use planning gains to offer discounts to some people on buying a new first home.

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Planning for a green future

Many of us want a green policy, but definitions of what constitutes a good green policy vary. To me a good green policy protects the beauty of the English landscape. It encourages fresh air and clean water, prevents litter and facilitates good recycling or disposal of waste. We should not prevent all new development, but should seek to preserve much of the natural environment and the farms we see around us. The single most important green policy we can follow is to limit migration, as a rising population of course requires us to build on more green fields.

Since 1945 government and Council led planning has become more and more intrusive, trying to limit the volume of development, and having a heavy influence over where it should go and what it should look like. Substituting the judgement of civil servants for that of private landowners, homeowners and investors has not produced a notable improvement in the beauty and utility of development over say the Georgian terraces of Bath or the Victorian villas of London, nor has it arrested the steady erosion of the countryside around every main town and city. It leaves the market short of homes, helping prices of them upwards to choke off some people’s reasonable ambition to own a home of their own.

It has managed both to create artificial scarcity of development land, and to encourage concentration of development. In my own county of Berkshire large acres of West Berkshire are protected from most development by being registered as an Area of Outstanding Natural Beauty, whilst much of Maidenhead and Windsor constituencies are protected by Green belt designations. This leaves my own central Berkshire area prone to high levels of development as it does not benefit from any green space special protection.

We need to ask ourselves some basic questions about our current system of planning. How does it manage to let homebuyers and conservationists down at the same time? Why does it require high density of development and such large mortgages to buy? Why does so much development end up in London and the South East? I will explore further in future blogs.

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The resignation of AKK

The recent resignation of the Leader of the CDU in Germany, AKK, received little attention in the UK media compared say to the daily stories about the Democrat opposition in the USA.  We should consider why the lead party in the German governing coalition has just lost its new Leader, who was meant to be taking over from Mrs Merkel as Chancellor candidate or as Chancellor before the next election. Germany is an important country and economy, and her current troubles will have an impact on our economy  just as US politics has an impact on it.

The tribulations of AKK got worse late last October  with the Thuringia State election. We are told far more about the Democrat caucus in Iowa than such Lander elections in Germany. In that election Mrs Merkel’s CDU party fell to third place with just 21.7% of the vote, losing 13  of its 34 seats in the Parliament. The AFD came second with 23.4% of the vote, adding 11 seats to its existing 11. Its leader is a very contentious figure with views about Germany’s past  that all mainstream parties find unacceptable.   Mrs Merkel’s main coalition partner, the SPD (Social Democrats) sank to just 8.2% of the vote, losing 4 of their 12 seats. Die Linke, the left wing challenger party stayed top with 31% and 29 seats.

In this state election the combined forces of CDU and SPD (Traditional centre right and centre left dominant parties, Conservative and Labour in UK terms) polled just 29.9% of the vote. Two radical parties of left and right polled 54.4% between them. In the hung Parliament created in a recent vote CDU members helped the AFD throw out the Die Linke left radical  Minister President  and replace him with the Leader of the  Free Democrats who got just 5% of the vote. This broke the Merkel rule that CDU members should not support the AFD, and led AKK to take the hit and resign, for the bad result and above all for the voting decision taken in the new Thuringia Parliament. Public protest soon led to the resignation of the new Minister President. The Parliament is currently unwilling to hold new elections which Mrs Merkel and some others want and has yet to appoint a new Minister President.

This tells us there is great unhappiness in Germany about current policy and the stance of the present government. It means there is a lack of leadership in the CDU who have been leading government for much of the time in recent years. Mrs Merkel clings to her pro EU green strategy, offering no support to her struggling car industry. The economy has plunged from good performance to little or no growth interspersed with the odd negative quarter.  There is a big argument going on about how to spend the surplus on the budget within the coalition, with some CDU hawks still unhappy about the whole idea of fiscal reflation.

It is still not clear what will happen about who should govern Thuringia. Many Germans are alarmed at what has happened there.

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UK GDP growth slowed to zero in last quarter of 2019

As expected the twin squeezes on the UK from monetary and fiscal policy along with a weak world background produced no growth in the fourth quarter of 2019.

For the year as a whole the UK managed a creditable 1.4% growth, a bit higher than I expected given the policy background and a testimony to the underlying strength of the economy. This means the UK outgrew the Eurozone again last year. This happened despite the world car manufacturing recession and the impact of higher taxes on UK homes and cars.

Given the weakening world background the UK needs positive action from the authorities to support the uplift in confidence generated by the result of the election.

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Interruptions to supply chains?

After years of being wrongly told UK supply chains will be disrupted when we leave the EU, today there is surprisingly little discussion of the impact of the corona virus on world output.

  The Chinese  had to extend their New Year holiday production shut downs this year. Yesterday there was some return to work, but there must still be many closed factories, and  factories with reduced workforces. Some cities  continue with restrictions on travel and activity, and some people in China are isolating themselves at home for 14 days after contact with someone who had the virus.

The South Korean car companies have announced periods of closure as they are short of Chinese components. It is highly likely other companies and countries face shortages which may entail closing their plants for a period.

Meanwhile the worries about the virus have led to a big decline in international travel, the loss of tourism business in China and other parts of Asia, some loss of luxury goods sales which accompany travel by the rich and other knock on effects from the epidemic.

The Chinese economy is the second largest in the world and was meant to grow at 6% this year, meaning it was forecast to provide the single largest boost to world growth of any economy. In the first quarter of 2020 it is very unlikely the Chinese economy will be able to achieve anything like this growth rate. The oil price is down 20% from its January peak as markets worry about lost Chinese consumption and orders.

All this implies the western economies need a bigger monetary and fiscal boost to offset these negative trends from China. It also acts as a reminder that dependence on components from far away can be an additional worry or weakness in manufacturing.

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Campaigning against carbon dioxide

The UK has many campaigners against carbon dioxide who worry about levels of man made gas being put into the atmosphere. I suggest today to them that the UK has been one of the most successful countries at getting its CO2 emissions down. They should now divert their energies to cutting CO 2 in places putting out much more and not cutting in the way the UK has.

They should start with China. China adds around  around 30 times more CO2 to the atmosphere each year  than the UK. It also puts out considerably more CO2  per head. At around 30% of world new CO2 output it is surely the place to start, as its output is still increasing.

If that is too difficult then surely they could turn their talents to changing the EU. After our departure they account for around 8 times our output with a higher CO2  output per head. They still mine and burn a lot of coal, which we have stopped doing,

Germany in particular needs attention. At more than double our CO2 output there could be quick wins. They might also like to campaign about the German motor industry which is still based around fossil fuels for most of its output.

Clearly it is much easier and cheaper to cut CO2 output in a country like China where there are quick wins and easy changes the UK has already made. It should also be welcome to the EU if we offer them advice on how we got to much lower levels per head than them, as their whole new economic and regulatory policy is based around CO2 reduction.

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Catching criminals

The new government is allocating more money to the police and recruiting more police personnel. At the same time figures have emerged showing a current low level of clear up of many reported crimes. I would be interested in your views on what the police priorities should be, as they set about deploying the additional police that become available to them.

Some say there is currently insufficient attention to burglary, breaking and entering and car theft. Others counter that social media hate crime can lead to crimes of violence, and that on line fraud is now a more serious source of theft than break ins. Given that the police cannot be everywhere and have  to prioritise their energy and time, what would be a good  balance?

How much attention should be given to traffic offences?  How can the police prevent domestic violence without getting dragged into many family disputes that will not end in violence?  Can we get better at spending  the big sums the state as a whole spends on troubled families? Then  there could be  less need for police intervention as social services and welfare have found ways to  get people through their problems that could otherwise spark anti social behaviour and worse.

Nationally there is considerable concern about knife crime, and a clear wish to see convicted terrorists kept away from harming the public more. There is also a strong wish to police our  borders better once fully out of the EU so we do not admit additional  criminals in the first place.

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The price of green policies

Yesterday I heard a short discussion on the media about the rising cost of renewables on the typical electricity bill. Some think it unfair that  low income consumers have to pay the renewable surcharge alongside better off consumers. Others think it right as we are all users of power, and the cost has risen thanks to the renewable surcharge. Those who want to take the surcharge off lower income consumers either want the whole charge put onto general taxation as a subsidy to the power industry, or want means testing of the bills with reductions for low incomes.

This raises the bigger question of how much are people prepared to pay to go green. In Chile there were riots over higher charges that led to the last global climate change conference having to move to a different country to avoid the protests. In France the gilets jaune movement started as a protest over high fuel taxes imposed for green policy reasons. In the UK it was popular politics to suspend or cancel  planned fuel tax increases.

As governments consider new tough targets for the next fifteen years they start to have more reality. They do mean according to their advocates the end of all diesel and petrol cars, the wholesale replacement of all conventional heating systems in people’s homes, the complete electrification of the railways and the total greening of the electricity generation system within a few years. Given the increasing reliance on electrical power it will also require a substantial increase in generating capacity.

I would be interested to hear views on how much of these  big investment and spending programmes should be paid for by the users and consumers, and how much from  higher taxes on those same consumers. The polling points to a tension between the numbers who think we should do all these things, and  the numbers who think they should help pay for it. This also has a bearing on the pace of change people want.

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Average incomes and growth rates

I do find it extraordinary that people write in to complain about me citing World Bank figures for GDP and Incomes per head for the EU, UK and USA. They complain I am attacking the EU because it shows  the EU with the lowest figures of the three.  I am merely stating the facts as set out by an international body these correspondents are usually keen to praise. I have no reason to doubt their past statistics, though I do not always agree with their forecasts.

As we prepare for full departure from the EU it is most important we look at what works. What does the USA get right to promote prosperity, freedom and happiness for the greatest number, and what does the EU get right? What do we wish to change, because we are currently following the EU model, and what do we wish to keep because it is good?

One of the big differences which will be contentious with some is the different approach to energy. The USA is increasing its output of oil and gas from onshore deposits. The EU is against further exploitation of oil and gas deposits and shale reservoirs at home, but is wedded to importing more gas from Russia. It is busy constructing a new large pipeline to increase its dependency on Russian gas. If you wish to promote higher incomes and more jobs at home you need to accept more domestically produced gas and oil. If you wish to be greener you need to reduce reliance on  Russian gas and find alternatives that meet your green requirements.

The USA has increased its oil output by more than fifty percent, taking it up to 13 million barrels a day this year. This big expansion in recent years has been an important boost to incomes and jobs. Meanwhile  Germany imports 90million tonnes of oil a year, and burns its way through 66 million tonnes of coal a year to keep the wheels of its car factories and other industrial activity turning. Burning so much coal is not a good idea in  the leading industrial economy in  the EU which claims it is a world leader in  removing fossil fuels.  The EU is a large user of coal but  is of course dwarfed by China which consumes 4 billion tonnes of coal a year. None of these industrial economies is yet able to rein in their use of fossil fuels in the way the Green movement would like.

The UK needs to move back to energy self sufficiency, without coal in  the mix. This may well require more UK gas to replace imports as well as further renewable electrical power.

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Why is income per head so much higher in the USA than the EU?

If you read the World Bank figures for per capita GDP in 2018, the last annual figures available, you will see that the USA has the highest figure for GDP per head of any of the larger countries, and is ranked 8th in the world. The EU comes in well below its levels, some 42% lower in GDP per head.

The table is always  led by a few smaller rich countries with special advantages like oil and gas reserves or a high concentration of rich people or their bank accounts. The US at $62,641 is well ahead of the EU at $36,532.

The UK is high by EU standards at $ 42,491. Only Germany amongst the larger countries is higher , with France, Italy and Spain below the UK.

The gap between the USA and the EU has been growing in recent years, and clearly grew again in 2019. The USA has lower unemployment, higher in work incomes, lower tax rates, more successful technology companies and more small businesses than the EU as a whole.

Much of the media spend their time criticising the USA and features of its economic model. Their personal dislike of Mr Trump spills over into a series of campaigns against US policies and conduct they think could be criticised. They rarely or never do the same to policies and conduct of the EU.

In the interests of fair and neutral reporting they should from time to time ask what the US gets right, and what the EU gets wrong. The large gap between the GDP per head and employment results between the US and EU implies some of the US policies of promoting growth make sense and are worthy of study. The persistently high unemployment in much of the Eurozone and the slow pace of growth in countries like Italy should be matters of concern.

As the UK sets out  its own policies to promote greater prosperity we need to learn from both the best in the world and from the mistakes around the world. It is clear from the figures the US has a better tax system and climate to promote innovation and small business than much of the EU manages.

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  • About John Redwood


    John Redwood won a free place at Kent College, Canterbury, and graduated from Magdalen College Oxford. He is a Distinguished fellow of All Souls, Oxford. A businessman by background, he has set up an investment management business, was both executive and non executive chairman of a quoted industrial PLC, and chaired a manufacturing company with factories in Birmingham, Chicago, India and China. He is the MP for Wokingham, first elected in 1987.

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