Wealth Inequality Starts at Home

Housing wealth inequality is a key driver in the reduction of social mobility.

Every child deserves a chance of economic success, no matter what their background. In England inheritance has become an ever-growing share of national income since the 1970s. It is these inheritances that are to blame for increasing wealth inequality between those with richer and poorer parents. We know there are substantial inequalities in the distribution of housing wealth in Britain. Often related to social class an income.

Sadly, stringent restrictions on new housing supply effectively limit the number of workers who can access the opportunities to create this wealth.

This article explores to what extent attempts to reduce housing wealth inequality can tackle these issues and help win Labour soft Tory votes?

Neighbourhood factors and wealth distribution make or break upward mobility

We know from studies in the United States that if a child moves to a wealthier neighbourhood, it increases the likelihood that the child would go to college. It also increases earnings on average by over 30% by the time they reached their mid-20s.  We do not know exactly what the causal factor is in these studies, whether it be going to better schools or engaging with families with higher socio-economic status. But what is clear is that keeping people in places where earnings and job opportunities are not as good hampers social mobility and exacerbates wealth inequality.

Living in England means parental wealth is distributed extremely unequally. One fifth of people born in the 1980s have parents with wealth ‘per-heir’ of less than £10,000. Yet a quarter of people have per-heir parental wealth of £300,000 or more, while one in ten have £530,000 or more. Education and region are strong predictors of parental wealth. Children of Londoners have parents with over twice as much wealth, on average, as those with parents living in the North East such as my own.

Land use regulation is linked to house price increases, restricts the movement of labour, and is a causal factor of rising wealth inequality

It goes without saying policies that successfully redistribute these inheritances would have large effects on inequality and social mobility for later-born generations. The OECD recognises that land use determines health, environmental, social and economic outcomes. Arguing that rising inequality in recent decades is explained by “rising land and property prices”.

Even small changes in valuations of land and property can have major consequences on the distribution of wealth.  Meanwhile we know increases in land and property prices tend to benefit older and wealthier households. This often comes at the expense of younger and poorer households.

For most of the 20^th century workers moved to areas where new industry and opportunities were emerging, with farmers and the like moving from rural settings to cities. In the Great Migration of the United States some six million African-American workers left the South for factory jobs in cities like Chicago.

Yet when housing supply is highly restrictively regulated in certain areas, house prices are higher and population growth is smaller relative to the level of demand. Professor Edward Glaeser of Harvard University and Professor Joseph Gyourko of Wharton Business school make this argument. It is this tight regulation of land markets, often in a country’s most productive places, that leads labour to locate in places where wages and prices are lower.

NIMBYism and stringent restrictions on building new housing holds back the economy, harms workers, and hampers social mobility

In turn reducing a country’s overall economic output in the process. In arguably the single most influential article ever published on housing regulation, Chang-Tai Hsieh and Enrico Moretti’s “Housing Constraints and Spatial Misallocation”  determines such these restrictions that have held by the US economy by over 36% of Gross Domestic Product between 1964 and 2009.

The rise of the property-rights revolution that is “Not In My Back Yard” has reduced the construction of new homes tremendously. In particular where the economy has been strongest and most productive. This is not just an American phenomenon. In England we know the impact of supply constraints have a substantive impact on house prices. A fact we cannot choose to ignore.

The Social Mobility Commission released it’s “State of the nation 2021: Social mobility and the pandemic report” earlier this year in July 2021. It acknowledges that recent trends have shown wealthier families increasing levels of second home ownership and an apparent increase in intergenerational wealth transmission.

Its own findings highlight “as inheritance of these houses comes into play, we will see stark rises in inequalities”. The increasing sizes of inheritances received by those from wealthier backgrounds sets to limit the prospects of upward mobility for those from poorer backgrounds.

Labour needs to ask itself: does it care more about the preservation of housing wealth or the affordability of housing

As Michael Gove starts his new role as the Secretary of State for Levelling Up, Housing and Communities we must look back to his views on the matter. For example, he acknowledges in his 2013 Keith Joseph Memorial Lecture that “access to home ownership has become the preserve of those with family wealth”.  In England, with reference to superstar cities like London, we know that two-thirds of house price versus rent increases between 1997 and 2018 can be explained by labour demand shocks and supply constraints.

A strong labour market is one a full employment and where employers must compete for workers. This makes an area more desirable to potential migrants and increases one’s willingness to pay for housing in an area. If the Labour Party is to be the party for labour, it must understand its role alongside supply constraints.

This means finding ways to allow labour to go to move to where the jobs are. We currently limit the number of workers who have access to such high productivity. But this is why we must build houses there to allow more workers to create wealth of their own.

Labour voters should care more about housing affordability than protecting housing wealth

Interestingly, Labour Party voters feature as an instrument in research methods to identify planning restrictiveness. On average, voters of the Labour Party have below-average incomes and housing wealth. Thus, it is expected that we should care less about the protection of housing wealth. Instead more about the affordability of housing.

Campaigners are fighting for planning reform to make housing more affordable

Sadly, in England we have seen the housing wealth preservers successfully lobby Government into submission. This has come much to the horror of campaigners for affordable house prices. Director of Priced Out, Anya Martin, said:

“We are horrified that Government is u-turning on planning reforms.”

“Renters have faced decades of rising costs because of our failure to build enough homes, and our planning system is at the heart of this failure.”

Priced Out finds itself alongside the National Federation of Builders. Who also have cried out they won’t forgive Conservative backbenchers for derailing the planning proposals. To note, smaller builders used to deliver 40% of homes during the 1980s, but now that figure is just 12%. This is in large part blamed on the current systems barriers to entry.

While some on the left deem the reforms a “ferocious attack on democracy”, they find themselves standing shoulder to shoulder with the wealth preservation lobby of some of the most affluent areas of the country.

Maidenhead, where the house price to earnings ratio is 12.7x, see its MP Theresa May having led the Tory revolt against planning reforms. Theresa Villiers MP for Chipping Barnet, where the household income needed to buy is £140,000, railed against the alleged reduction of democratic involvement in the planning system.

Both of whom see the ability to veto new homes in their local areas as the holy grail. Sadly, ignoring the fact local plans are politically led community consulted processes in themselves.

Labour needs to think about how they can win Tory safe seats like the Isle of Wight

Other Tory backbench MPs, such as Isle of Wight’s Bob Seely, have vociferously made the case against the “planning revolutionaries”. He represents an area with one of the worst levels of child poverty in the South East. Boasting below average incomes and weak productivity.

Average disposable household income on the Isle of Wight languishes below the UK average at £18,366 (-13% lower). The constituency has 2,149 households on its social housing waiting list. You would think with such demographics it would present itself as a target Labour seat for Keir Starmer.

Yet the Isle of Wight boasts a Tory majority of over 21,000 votes. Labour, being the party of tackling wealth inequality, needs to think about how people like Bob are effectively challenged. Last time Labour ever came close to winning Bob’s seat was in 1945. The year the Attlee government put housebuilding at the heart of its agenda.

These questions come at a time where Labour recognises the need to win Tory voters. Director of Progressive Britain, Nathan Yeowell, says “Labour must be ruthless in going after soft Tory voters if it wants a swift return to national government”. Perhaps revised planning reform is Labour’s chance to show just how ruthless it can be. After all the Tories lost their majority of the council in the Isle of Wight in May this year.

Backbench Tory MPs block homes to preserve wealth off the backs of working people

The case of Bob Seely epitomizes how wealth preservers hamper housebuilding and damage equality of opportunity for his constituents. The wealth preservation lobby on the Isle of Wight are challenging the housing targets set for it by Government, with Bob Seely at the helm.

There are concerns about how the island will handle the additional 400 new homes per year. Most of which arising from the latest housing need calculation. This comes on top of the 640 calculated using the meagre standard method. Shockingly, the Isle of Wight has a price-to-earnings ratio of over 8x the average income. But this bears no relevance to the Tory preservation lobby, no doubt as they directly benefit.

Construction provides jobs, wages, and keeps income in the community. It improves the local economy as workers employed on each project have wages to pass onto other local businesses. The Isle of Wight is crying out for such opportunities. But those hell bent on preserving wealth continue to deny them the opportunity.

But the issue goes much further than the island itself. For example, the ONS states that those living in neighbouring Central Hampshire have an average annual disposal income of  £26,302 (+24.6% higher than the UK average).

For those looking across the water for opportunities from the Isle of Wight the outlook is bleak. New Forest District Council, next to the Isle of Wight, is only delivering half as many homes as it needs. In effect pricing out poor islanders who may wish to move to this more productive part of the country.

Backing meaningful planning reform means creating more opportunities for workers. Only then will wealth become redistributed more evenly.

Changes to land use regulations can form part of the biggest redistribution of wealth under a Labour government

Historically, local economic booms matched with local building booms. Prior to 1946 building was lightly regulated and housing was allowed to be built in areas of high demand. For example, there were 80,000 new build homes created in London in a single year of 1930 alone. Over 2.5x the net number of new homes delivered in 2017/18. A year that marked a decade long high, mostly by the private sector subsidised by government.

We know extensive restrictions on land use and building leads to higher house prices, rather than more homes and workers. If Labour is to be once again the party of the worker, it must deliver more homes. People used to move from poor places to richer places. However, due to restrictive land use regulations this pattern is on the decline.

We must allow the population to seek work in wealthier places. These are places where demand is strong and productivity is high. In doing so we will avoid unequal mobility and poverty traps created by a lack of new housing.

We must counter the NIMBY property-rights revolution to improve prosperity for all – and say ‘Yes In My Back Yard’

For constituencies like Bob’s to prosper, we must tackle the misallocation of labour. This means allowing workers to cross the Solent to the New Forest West and building more homes. While wealth inequality starts at home, it ends with allowing others to access creating that wealth of their own.

Thus, Labour needs to present the country with a vision for prosperity. It must do this by challenging the NIMBY property-rights revolution. One steeped in a world of draconian regulation, high prices, and ever more entrenching wealth inequality. In allowing more families to build wealth through the property owning democracy, it can create one that will become less unequal.

Labour must focus on improving opportunities for the workforce through land regulation. By redistributing wealth more fairly through building more homes in high demand areas it can achieve this. After all we know that data on wages shows big cities do bring prosperity to their wider areas.

The problem is they just aren’t generating enough of it.

By moving to “Yes In My Back Yard” (YIMBY) Labour can tackle wealth inequality and become once again the party of aspiration. Equipped with this vision it will can attract soft Tory voters, while at the same time putting labour back at the core of its policy-making.