Social housing in Central London makes everyone worse off, including the tenants

We can do much better

Imagine that you have won the lottery. A vast prize is yours for the claiming; a life-changing sum, ready to be deployed as you see fit. Now imagine that as you reach out for the cheque, the lottery official suddenly pulls it back. There is a catch: you have to spend the prize on housing. In fact, you have to spend it all on one particular house. You can’t sell it or rent it out, you have to live in it. And you don’t get to choose which house.

If this sounds completely insane, it’s because it is. It’s also how Britain runs social housing. Every year, a fraction of the population wins the lottery for subsidised public housing. Every year, the state spends a vast sum in foregone income, housing benefits, and maintenance on their homes. And every year, it does so so inefficiently that it not only fails to make them as well off as it should, it also makes the country as a whole poorer — and probably less equal.

The best example of this failure is in London. London is the most productive part of the UK. Each hour worked in the capital city produces 33% more than the average hour worked across the country. At the same time, London is in the grips of a housing crisis, with rents growing 17% in the last year. With housing scarce and a high premium on location, many young professionals are looking to relocate; living outside the city and commuting in, or working elsewhere.

At the same time, London is unusually dense in social housing. Across the country, some 17% of English households still rent social properties. In London, this figure reaches an average of 29% in the inner city and 38% in Islington, where the average flat changes hands for £629,000, and the average terraced house for £1.5 million. The value of social housing, for those lucky enough to obtain it, is immense; in 2019, the implied subsidy received on a one bedroom flat in Westminster was worth £15,000 per year.

This is, economically speaking, an appallingy inefficient way to help the poor. Housing in London is scarce, and we would like to allocate it in a way which reflects its best use. One way of measuring this is to note that people pay significant amounts in rent in order to live where they work. If they cannot find housing near the jobs which would pay them the most, they will often choose to live and work elsewhere, and earn less. 

When this happens, we are letting housing scarcity push people away from the jobs which best boost our economy. The economists Hsieh and Moretti have suggested that reducing supply restraints on new housing in just three cities – New York, San Jose, and San Francisco – would have increased US GDP by roughly 9%, and average wages by $8,775. 

Defenders of the status quo argue that these homes are needed to provide for critical workers, like cleaners and bus drivers. But I think this is slightly confused for two reasons. The first is that these social homes are largely not used for workers; some 46% of households in social housing in London are economically inactive (nobody in them is working or looking for work). Another 5% have nobody currently working, but somebody looking for work. So it’s pretty likely that those critical workers already live in the private rented sector, which is both larger and has far more working households.

The second is that these workers can commute in. There are plenty of people working in Central London commuting in from Zone 3 or further out. If they don’t want to do that, then those jobs will go unfilled. And if they go unfilled, the wages offered will rise until somebody takes them, or the jobs will go as they weren’t actually that valuable in the first place. There is no particularly good reason why state-owned housing should be kept in place to offer a subsidy-in-kind for low-wage labour in the city centre.

And, given the choice of how to use the resources they are given, they might well prefer to commute in. We started off by talking about how much social housing costs. Going back to that data, in 2019/20 the market rent for a one bed flat in the lower quartile of properties in Westminster was £395 per week. The average rent for a one-bed council flat was a little under £113. The state is effectively spending £14,680, every year, to keep tenants in this property. At the same time, those tenants are earning at most £37,500. So the tax-free subsidy implicit in their housing is worth pretty much exactly half their average income — and considerably more for larger properties.

It is not hard to see that this money might make a much greater difference to the quality of a person’s life if they were not bound to use it in eight square miles of London. At one point, it would have paid the rent on a one bedroom flat in Manchester, next to the canal, near to the train station, and still left them with £6,300 in spare cash each year. They do not have that option under the current system.

Insisting on a small quantity of extremely expensive social housing in the centre of London means we can’t have larger quantities of housing elsewhere, or indeed spend that money on cash transfers to people outside of London. It doesn’t seem particularly right that people with the same incomes and needs in London and Liverpool will receive what amount to significantly different payments from the state.

Taking housing out of the private sector to subsidise low wage labour is better than not having built it at all, but not that much better. We could generate a considerable economic boost by letting the current social tenants choose to take their entitlements elsewhere, freeing those homes for private tenants who need to work nearby. That would make both groups better off at the same time. That seems like a huge win to me.

Photo courtesy of Simon on Flickr, used under a creative commons licence.