Executive summary

The housing shortage in our cities, the North-South divide, and rising wealth inequality are three of the greatest challenges facing Britain today. Public debate has until now thought about these problems as separate issues. But addressing them requires understanding the connections between all three, and how political choices are deepening these inequalities.

As the housing crisis in Britain’s most prosperous cities has grown, so has the wealth of their homeowners. While local demand for housing is driven by the strength of the local economy, supply, in contrast, does not respond to demand or economic performance. The housing shortages caused by these planning failures push up house prices in growing cities. This drives housing equity growth for a few existing homeowners, fuels increasing housing costs for renters and first-time buyers, widens regional inequality, and destabilises the national economy and the financial system.

This report explores the relationship between urban economies and housing wealth in England and Wales, and finds that:

  • Homeowners in cities in the Greater South East have seen much larger gains in housing wealth than other homeowners. While average housing equity per house in cities in the rest of England and Wales has increased by £23,000 from 2013 to 2018, in the urban Greater South East it grew by £103,000. In Burnley, average housing equity increased by £5,000, compared to £122,000 in London. Total housing equity across the rest of England and Wales increased by £374 billion from 2013 to 2018, while in the Greater South East it increased by £842 billion.
  • As housing wealth for homeowners in the Greater South East grows, so do rents for private renters. The inability of housing supply to respond to demand in prosperous cities drives their increasing house prices, and makes homeowners wealthier at the expense of renters. Homeowners in cities in the Greater South East are pulling away not just from homeowners in the rest of the country but also from their neighbours in private renting. As a result, cities with higher average housing wealth have lower rates of home ownership.
  • The planning system makes inequality worse and threatens financial stability. While demand for housing and mortgage lending are linked to the strength of the local economy, the supply of new homes is not. Our planning system’s rationing of land creates housing shortages in these cities with the strongest economies. This political choice inflates the value of houses and so gifts increases in housing wealth to these cities’ homeowners, deepens inequality and the North-South divide and means that looser monetary policy struggles to finance the supply of new homes when lending becomes cheaper.

Addressing Britain’s growing housing wealth inequality therefore requires:

  • Planning reform to allow housing supply to respond to local demand and end housing shortages in cities. The planning system should shift from a discretionary, permission-based system towards a flexible zoning system that allows most development by right, as in Japan or parts of the USA. In principle, once a local plan is in place, the planning system should allow people to build new homes unless the local authority explicitly says ‘no’, rather than forbidding any development until the local authority grants permission. By linking the supply of new homes to local demand, growth in housing wealth would stabilise over the longer term. Allowing more development by right would also reduce the ability of ‘Nimby’ campaigns to block new homes and increase the wealth of local homeowners.
  • Government promotion of housing wealth should cease, and increases to housing wealth should be taxed. Decades of policies that have aimed to increase home ownership have failed on their own terms. As a share of private housing, home ownership fell in every city in England and Wales from 1981 to 2011. Policies such as Help to Buy, or allowing millennials to dip into their pension pots to put down a deposit, do not increase home ownership because they do not reconnect local housing supply with housing demand. Instead, they subsidise homeowners by pumping up demand. Government should end these programmes and more effectively tax increases in housing wealth to reduce inequality. This would include abolishing Help to Buy, reforming council tax from its current 1991 valuations in England, abolishing the exemption for private residences in capital gains tax, and reforming stamp duty.
  • Government should explore policies to encourage saving in other asset classes. If inequality in housing wealth is successfully reduced by supplying more homes in cities with high demand, this will require growth in housing wealth in these cities to slow and for their appeal as an investment to decline. At the macroeconomic level, planning reform may also require a shift in saving behaviour by households from residential real estate to other types of assets, such as equities, bonds, or pensions. This would ensure saving by households generates more equal returns across the country than the current approach of unequal house price growth.