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Only Capitalism can Solve the London Housing Crisis
Patrik Schumacher, London 2018, for the Adam Smith Institute
https://www.adamsmith.org/capitalismcansolvethehousingcrisis/

Abstract:
Capitalism was and is the great prosperity engine behind all the material freedoms of modern life. Tragically capitalism is not allowed to work its magic with what matters most to us, namely our dwellings and cities. Urban development and housing provision have been unduly politicised and thereby paralyzed. We should be experiencing an urban Renaissance as crucial productivity boosting component of our knowledge-and network society. Instead planning restrictions and imposed standards block the adequate supply of urban residences leading to prohibitive prices. Paradoxically, the affordability system contributes to rather than alleviates the affordability crisis.

The ‘housing crisis’ is basically a housing affordability crisis which manifest itself in the form of extraordinary housing prices and rents after three decades of nearly uninterrupted price increases. A much larger part of income is now being spent on housing than in previous times. Whereas 20 years ago the house price to earnings ratio in London was about 4:1 it has now reached 10:1, and the mean rent-to-income ratio has climbed from 1:5 to 1:3 in the last 15 years. This situation implies that resources keep flowing to land owners and home owners, and the population is divided in owners who keep receiving windfalls and aspiring owners whose attempt to board this train is made harder and harder as this distortion progresses. The political attempt to ameliorate all this via so called “affordable housing” has further exacerbated the problem.

What triggered these developments? The root cause lies in the socio-economic transformations that have been engendered by the convergence of computation and telecommunication. This new tech-induced, internet-empowered era implies a dynamisation of the economy around R&D, marketing and financing activities delivering faster innovation cycles in line with the new, digitally empowered technological paradigm of flexible specialisation. This communication intensive new economy thrives best in large, dense urban clusters. In contrast, most of the 20th century was marked by a steady suburbanisation trend, compatible with the mechanical mass manufacturing of that era. London was shrinking until 1980. Since then suburbanisation reversed into a revived urban concentration. London became a potent growth pole.

This explains the new demand on urban accommodation, but cannot itself explain the explosion of land and accommodation prices. In fact, materially a more compact city has cost advantages over a more spread out city. (The latter was indeed subsidized via government infrastructure provisions.) In theory, we should eventually see falling overall costs of accommodation, once transitional, market-led adjustment processes have been allowed to do their work.

The house price development we continue to witness constitutes a preventable distortion rather than an inevitable, rational adaptive process that could be explained by the urban concentration process. The dramatic price increases must instead be attributed to the political interference in the urban development process that prevents the appropriate supply response to meet large increases in demand due to the new societal dynamics of the knowledge economy

The low urban density of London, in comparison with Paris for instance, implies that there is plenty of space for growth that could and would be developed if market forces were allowed to operate more freely.

The lack of development imposes a steadily increasing, politically engineered wealth inequality. Zoning restrictions redistribute wealth and income to homeowners as documented by Brink Lindsey and Steven Teles1. This restriction of development also implies an overall relative societal impoverishment: In this distorted market most London city dwellers consume less residential space, in less central, i.e. less desired, locations, than they would otherwise choose to consume, thereby making these Londoners’ life poorer. Further, the synergetic, productivity enhancing urban concentration process is slowed down, i.e. London, the global prosperity engine, is artificially curtailed as many potential workers are discouraged due to the extraordinary costs of living, choosing instead less productive jobs in more provincial locations. This spatial misallocation of labour2 is a cause of Britain’s productivity slowdown and hurts the overall UK GDP.

The answer to all this is clear: The extraordinary price increases have to stop. This much is obvious to all. That more houses must be built to achieve this is also clear to most. What is never spelled out – as it would be immediately divisive and politically toxic – is that house prices should indeed be falling, thus (slowly) reversing the imbalances and windfalls. A rapid or even precipitous fall in house prices, however, would be dangerous to the financial system and would jeopardise many people’s retirement plans.

This points us to another problem with the UK situation. The artificial house price development – and perhaps the inflation experience of the 1970s -   has tempted too many into a one-sided, non-diversified reliance on home ownership as saving and retirement vehicle. This is not only risky, but has another disadvantage: it hampers locational adaptation and labour mobility. This unfortunate bias in the allocation of personal savings is further promoted by the fact that shares are burdened with Capital Gains Tax while homes are exempt. Saving and housing must be decoupled. They should follow their independent logics. The government should thus stop promoting home ownership.  

It will be difficult to manage the transition out of these distortions into a more rational, safe and prosperous pattern. However, the general direction of travel can, in my view, be unambiguously stated: The politically imposed distortions must be gradually reversed, i.e. government interference in the urban development process in general, as well as in housing in particular, must be pulled back, at all levels of government.

The thesis put forward here argues that the so called ‘housing crisis’ which plagues London as well as other growing cities around the world can only get worse the more politicians are trying to help via yet more state intervention. In contrast to the prevailing analyses and recipes, this essay argues that the current malaise cries out for free market solutions, indeed for a capitalist revolution. Since urban development is currently operating under the impositions of a quasi-socialist regime, a decisive shift towards an unencumbered free market system would indeed be revolutionary. The solution to the housing crisis lies in the denationalisation and de-politicisation of development rights in general and in the radical liberalisation of housing in particular.

What is the root cause of the housing crisis? Why are we suffering a housing shortage while nobody has to worry about a banana shortage, a bicycle crisis, or an auto-mobile shortage? (By the way, in socialist countries all the above are endemic.) The explanation is that the housing market, in contrast to the bicycle market, is highly politicized, i.e. it suffers from massive state interference, which prevents this market from functioning.  Homes are much more vital and existential than bicycles. All the more important is it to fix the housing market. We need to break these fetters and set the housing market free.  In fact, we need to set the whole real estate market free, and allow all urban development decisions to be determined by economic rather than political criteria.
Market-responsive entrepreneurs have to replace the blind bureaucratic allocation of land resources and consumer choice has to replace the state-enforced rationing of housing resources. This is mandated both by considerations of justice and by considerations of efficiency that bear on general prosperity. 

Housing prosperity -  arguments concerning efficiency:

The housing affordability crisis is due to supply restrictions. There are far too many restrictions on land use. Land use regulation in the UK takes the form of absolute growth constraints via greenbelts as well as density and height restrictions. In addition the planning system prescribes and fixes designated land use categories for all land parcels. Population growth and the tendency of urban concentration due to the new economy pushes up land prices, especially in the economic growth pole London, because the politically imposed restrictions prevent an adequate supply response. Prices are further inflated because the non-transparent planning process, with its wide, unpredictable political discretion, discourages, delays and often altogether prohibits re-development on urban land that is in principle within the permissible limits.

All this can be attributed to politically backed nimbyism, a form of protectionism that privileges current owners of residential land and property. It implies an overpricing and undersupply of residences in comparison to what the market would deliver.
By far the larger part of the house price increases of recent decades is attributable to the increase of land prices. Fifty years ago total UK land values amounted to around 50% of GDP, now they amount to 200% of GDP. More land supply and more construction would bring land prices and property prices down. This is basic economics.
Recent examples of ‘successful’ nimbyism in London include the rejection of the redevelopment of an ASDA and its car park into nearly 2,000 new homes on the Isle of Dogs, and the discouragement of the redevelopment of the Bishopsgate Goods Yard in Hackney. Local councils were opposed to the Bishopsgate plans believing they would have a “severely detrimental effect on the character of Shoreditch and the nearby residents and businesses”. The GLA planners' report also recommended refusal. The site is a closed off, derelict 11 acre area in immediate neighbourhood of the high value Liverpool Street business cluster. The primarily residential scheme also proposed offices and retail spaces. All this was proposed on an empty site with no immediate neighbours. The developer proposed 12 buildings across nine plots ranging from 177.6m (47 storeys) to 24m (7 storeys), mostly apartments, including studio flats that could sell for about £700,000, and one bedroom flats for about £1 million, an enormous value locked up and blocked. This value prospect was paradoxically one of the reasons why the councils rejected the proposal, considering these homes to be “well beyond the reach of the people that need them”. If these politicians indeed know what “their people” need, a questionable assumption, then they exercise nimbyism here. The prosperity of London, the UK, and indeed the world, would benefit from attracting and integrating workers whose productivity would allow them to afford the prices asked for here. The production thus enhanced and incomes thus earned would also increase the council’s ability to provide better for its current people. Milieu protection and anti-gentrification are recipes for stagnation and impoverishment. In a globalized world standing still means falling behind.
Delay or outright rejection of development is the most obvious cost of political interference. However, land use zoning, i.e. restrictions on the land use types are also very costly. High and rising relative prices of residential land in comparison to non-residential land prices demonstrate that land dedicated to residential construction is made artificially scarce by the local planning agencies. The prevention of free land allocation and of use conversions to preferred land uses has led to the build-up of severe land value distortions that burden house prices. The land values of equivalent sites in the same location that would be equal in value if the market were allowed to work, often diverge massively depending on the imposed land use category. Residential land values in London reach up to a four-fold value multiple in comparison to equivalent plots with office only permits. This large effect is observed despite the fact that office space in London is, in comparison to other major European cities, also burdened by undersupply and thus relative overpricing due to overall planning restrictions.3

Since heavy industry has moved out of the city, there are no inherent incompatibilities between various city uses. Nothing can thus justify land use impositions and their eradication would benefit the overall value and utilisation of the city.
The Coalition government’s 2013 initiative instituting ‘Permitted Development Rights’ (PDR), i.e. a blanket permission to convert existing office buildings into residential buildings, bypassing the local permit process, was a step in right direction. Unfortunately most London boroughs made extensive use of an opt-out clause, so that this initiative has so far been stunted, thus freezing the current misallocation of land resources.

The freedom of mixing land-uses is crucial for the vitality of the city. Only a creative trial and error process guided by price signals can discover and optimize, at each individual site, the most value-enhancing use-mixes that best synergize with the particular urban adjacencies of that site. The planning bureaucracy lacks the requisite knowledge, as well as agility and the incentive to optimize.
It is precisely these use synergies that motivate us to agglomerate in cities in the first place. When economists talk about agglomeration economies as drivers of city growth they have exactly such network effects or synergies in mind.

Height and density restrictions are the next impediment we should look at. Here externalities like rights of light and traffic pressures have to be considered, but I am convinced that a free market would discover much more viable trade-offs here.

To the extent that collective decision making is called for to regulate development rights in the light of externalities, I suggest that an organized association of property owners should set regulations with voting rights being distributed in accordance with the relative value of the respective holdings, in analogy to shareholder rights in stock companies. Such a privately organized planning system – in analogy to many successful industry self-regulation initiatives -  can be expected to maximize total social value, in contrast to our current political processes. 
A related idea has recently been proposed by John Myers as key proposal of his YIMBY campaign. The proposal involves allowing individual streets to vote on giving themselves permitted development rights, to build upwards to a maximum of six storeys and take up more of their plots.4

Any arbitrary political use or density restrictions imply a loss of prosperity, in the final analysis not so much for the land owners, but for all potential end-users who would have chosen to utilize the site. It is absolutely crucial to grasp this point. The land owners benefit from a windfall only once, temporarily, if and when political restrictions are lifted. As utilization goes up, so does, initially, the land value. However, the land value component for each apartment goes down. But, with a general liberalisation, all land values will eventually fall as more land enters the competitive market. Current land values are hugely enhanced by the permissions they receive, if they receive them. This aspect will fall away when permissions are no longer required, i.e. this aspect of land values will collapse like the value of taxi medallions (licences) after competition has been opened up. Within an established laissez faire system, after the capitalist revolution, the land owners can only earn an appreciation if the district keeps growing and prospering and their locations thus gain a relative advantage over competing districts and locations, without being able to rely on any monopoly status granted via the planning authorities’ restriction of market entry.

Developers and their investors can only profit to the extent that they anticipate needs and desires, innovate their product offering and efficiently manage delivery and operations. There is nothing wrong with profits. They can only we earned where real use values are produced for competitive prices. The fallacious vilification of profits is perhaps the most incapacitating intellectual Achilles heels of the outmoded left-liberal consensus of the educated elites who show concern and engagement with problems like London’s housing crisis. The slogan that resources should be allocated according to needs rather than profits relies on a perversely false dichotomy, as it is precisely and only the profit and loss system that offers, if it is allowed to function, a fair, objective, truly democratic, and incorruptible mechanism for steering resources towards real, individually expressed and confirmed needs, backed up by purchasing power and thus desert on the basis of rendered services

Profits imply that resources are combined and utilized in ways that create a relative net benefit, while losses imply a waste of resources in comparison with profitable ventures. In competitive markets, which would emerge if the government withdraws from the scene, profits are earned in step with the innovativeness of the product. They only ever constitute a small part of the overall value added. Yet, they are crucial because they motivate developers. There is no guarantee that profits are earned at all in development. The profit and loss system disciplines developers to produce homes that are desired by tenants or buyers for prices they can afford and are willing to pay. This is no trivial achievement which requires the solicitation of savings to be invested and a lot of tenacious disciplined management which will only be provided if incentivized by the prospect of earning a profit for both developers and investors/savers.

The profit motive disciplines entrepreneurs to concentrate on people’s real needs and desires, in contrast to the entrepreneurs’ proud do-good missionary zeal to change the world.  While this zeal, which animates most entrepreneurs, contributes to overall societal creativeness, it is the profit and loss principle that contains the ‘democratic’ principle here, as it curbs run-away hobby-horse enthusiasm and ensures that investments serve the public’s effective (rather than imagined) interests. Again, profits only emerge together with consumer surplus and constitute only a small part of the overall added value which successful entrepreneurs effectively gift to society.

Besides general land-use and density restrictions, the imposition of restrictive housing standards is yet another counterproductive political impediment to housing prosperity. Urban entrepreneurs and their architects have no room for innovation at all in the housing sector. Planners impose land uses, overall quantum, and in the case of residential uses, they impose unit mixes, i.e. how many studio flats, 1 bedroom flats, 2 bedroom flats, 3 bedroom flats etc. are to be built, how many units can be accessed via a lift lobby, they impose minimum unit sizes for each category, minimum room sizes for all rooms, as well as facilities like bathrooms, washing machines, balconies etc. The masterplan usually prescribes building heights and building outlines which need to be strictly adhered to. Facades are subject to restrictions in terms of the amount of permitted glazing areas, and the architectural articulation and material expression is also subject to planners’ approval. There is hardly anything left to be decided by the entrepreneur and his architect. Competition via creative product innovations is thus being blocked. Developers solely compete with respect to who is best at negotiating deals with the planning authorities who have considerable discretionary powers to strike deals. Insider knowledge about local planners and councillors delivers the key competitive edge here. Unfortunately in the current system it is in these ‘political’ negotiations where profits are made or lost, especially with respect to the negotiated imposition of affordable housing quotas. Resources are thus diverted into these negotiations which, in the parlance of public choice economics, must be classified as ‘rent-seeking’ efforts. The beneficiaries are special interests protected or privileged by the politicians and their planners. However, the overall resulting misallocation of time, labour, land, and capital resources imposes a dead weight loss on total social production.

In the current market situation, the most problematic of these impositions are the restriction of the number of small units allowed per development, and the imposed minimum unit sizes, especially for the smallest units.
Currently studio flats below 38sqm are not permitted. Yet, units half that size, built at an earlier time, are rare and thus at the moment overprized, hotly desired commodities, for rent or for sale. Lifting this prohibition would allow a whole new (lower) income group, which is now excluded, to enter the market. This move would both boost overall unit numbers and affordability. That this obvious move is not seen or indeed resisted by the very same left-leaning politicians and commentators who otherwise proclaim to represent the interests of lower income groups can perhaps either be put down to an ideological position where a world without state paternalism cannot be imagined other than as utter chaos, or it is part and parcel of the instinctual attempt to protect the (real or imagined) interests of the politically decisive median voter, to the exclusion of all other segments.

The maths of lifting these restrictions is promising: Consider a large residential development project, e.g. the currently completed Elephant Park in London. In a private conversation the developer’s project manager suggested that they  could have doubled the overall quantum on his site and still have a great, marketable product. Let’s assume, as should be highly likely, that a lifting of the unit mix prescriptions would lead to many more studio flats, probably to a development exclusively dedicated to studio flats (due to years of undersupply). This could deliver at least another doubling of unit numbers. Finally we know that studio apartments could be sold or rented at 50% of their current size. Thus we arrive at an 8 fold increase in residential units, serving a market of young professionals that is vital for London’s economy. As there are no rational, pragmatic arguments that stand against such a scenarios, especially since many large sites (like Elephant Park) can be  redeveloped dense without infringing on any existing rights of light, the debate about standards becomes quickly emotional and rhetorical with phrases like “rabbit hutches” and “slums” standing in for arguments. The question who exactly is being protected by these standards remains unanswered. It obviously can’t be the prospective tenants or home owners who are now prevented from enjoying an offer they would chose if available. Many people who don’t understand how markets work seem afraid that the liberalisation of standards implies that people are then “forced” to live in “rabbit hutches”. Markets never work via force, but only always via being forced to adjust to consumer preferences. Those who are now making the hard choice between paying 80% of their income on a central flat versus commuting from afar, will in the liberalized future appreciate new options and perhaps choose to pay only 60% for a smaller but more central flat. For many young professionals who are out and about networking 24/7, a small, clean, private hotel-room sized central patch serves their needs perfectly well. They don’t need paternalist politicians with outmoded standards to protect them. Real protection for all those who cannot draw on subsidies but rely on purchases in the market can only come from a maximal liberalisation of the market, i.e. from market competition among suppliers.

I suspect there is another unspoken reason why the liberalisation (or reduction) of these obviously hurtful minimum standards in the low income private sector segment are being politically resisted: If freely chosen and privately financed market solutions develop a whole segment with much lower space standards, then the legitimacy of the current standards for subsidized social housing provision will be undermined. State provision requires standards and if housing giveaways are larger than what some of those who finance these giveaways via their taxable income are willing to afford for themselves, then the system’s legitimacy is indeed in deep trouble. Social tensions and conflicts will result. Then social housing standards would also have to be reduced, at least in central locations, a politically risky proposition. I am raising this point not to discourage the liberalisation of standards. Hard political choices and societal adjustments will have to be made to solve the housing crisis. I am making the point to indicate one more problem of the social housing rationing system: it seems to stand in the way of the necessary liberalisation of standards.

These arbitrary housing standards are a scandal that compromises all our cities and lives by blocking the discovery process of the market and by taking away vital choice. These infringements on free choice make all of those who would otherwise purchase or rent products that are smaller or otherwise violate the ludicrously detailed housing standards, poorer.

That the housing situation is a huge priority for many of us, is brought home by the fact that most of us are willing to pay a very large part of our total income on our homes, up to 80% in many cases of young professionals for whom centrality of location is vital.
This restrictive state interference, taking away many options that would otherwise allow the market to tailor and optimize our residential conditions in accordance with our individual life requirements and desires, is a huge deal, a real let down and existential impoverishment. 

There are further detrimental types of state intervention in the housing market: Rent controls and other “protections” politicians sell to tenants. Rent controls and other “protections” are no solution. Quit the opposite: they lead to wasteful maintenance patterns and withdraw supply from the market. The negative effects of rent controls have been observed and measured for decades but as Sam Dumitriu of the Adam Smith Institute points out in a recent article5: despite a the near-unanimous opposition to rent control from economists, politicians persist in proposing rent control policies.

Rent controls lead to the misallocation of residences, as it immobilizes tenants in places they would otherwise exchange for better suited places, i.e. they remain locked up in their unsuited current places that would otherwise be freed up for better suited newcomers. This also hampers labour mobility which is an important factor contributing to society’s economic success.

Outright rent control is only the most conspicuous interference in the rental housing market. However, there are many more impediments that have been imposed with the good intention of protecting tenants from ‘greedy’ landlords. Apart from contemplating the fact that landlords are no more greedy than car, bicycle or banana merchants, we should realize that the best long term protection for current and future tenants lies in the competitiveness of the market for rental housing. In a free market landlords have to compete as much for tenants as tenants for apartments. To call for rent freezes or for laws making long tenancy terms mandatory, or for laws protecting tenants from quick eviction when failing to pay their rent etc. only seems to protect tenants. Yes, current tenants can be temporarily protected. That’s what is immediately visible. But the analysis has to be pushed a few steps further to see the losers and that their losses outweigh the temporary gains of the ‘winners’. Ramping up those restrictions implies that plans for additional rental properties will be aborted and supply stops growing and eventually even shrinks, as houses will eventually be withdrawn from the rental market.

Rolling back these restrictions would probably bring quite a lot of supply that is currently held back and sits empty into the market, implying an increase of supply and a lowering of rents. Landlords should be free to offer and compete with tenancy terms, catering for various customers with various priorities. Long tenancy terms, for instance, tend to exclude anybody without long term secure employment, whereas flexibility in terms of tenancy terms would give people with less stability a better chance to rent the flats that suits them best. The rental market will thrive - for the benefit of both tenants and landlords (which often represent the interests of pensioners) - once full freedom of contract is granted here. The state should mind its business, namely the enforcement of these contracts. Rent control and state-imposed tenant protections only reduce supply and thus ultimately drive prices up.

As mentioned above, rent control immobilizes people, i.e. hampers labour mobility and thus reduces total social productivity. Social housing, i.e. rationed housing – because the allocation process is so slow and uncertain -  also reduces labour mobility.
Further, the rationing of homes via the affordability system implies an even more fundamental misallocation of residences than rent control.  Any rationing forgoes the market rationality that always allocates resources to those who - from the standpoint of society’s total social production - best utilize them.

This is a crucial point to grasp. Central locations should be allocated to those whose productive lives are most enhanced by being thus positioned, i.e. those who operate at the centre of our network society, joining breakfast network events before work, as well as business dinners, drinks with colleagues, conferences, exhibition openings, professional lectures and other evening networking events after work. It should be obvious that, from the standpoint of society as a whole, such workers should not be wasting their time in extensive daily commutes, while for other categories of workers on a nine-to-five routine the commute does not distract from the worker’s productivity.

In a free market, workers would compete for locations. More productive workers that contribute more to the total social product will be able to out-compete less productive workers, especially if the former are willing to spend a larger part of their income on a central location because they (and only they themselves) know it enhances their career, productivity and income. So two factors – the individuals’ productivity and the importance of central residential location for the respective individuals’ productivity – interact in determining the allocation of residences to workers in such a way that this scarce resource of (central) residences is most efficiently allocated, in the interest of society’s overall prosperity. Any interference with this market allocation process implies a relative reduction in overall prosperity.

Despite this insight of economic science into the efficiency of market resource allocations, known for over 200 years, political interference in the market process remains endemic in many arenas, especially in the housing sector where rationing has, to a considerable extent, supplanted market allocation. The whole system of so called “affordable housing” constitutes a massive interference with market processes that costs our society dearly, and is one of the contributing causes of the whole affordability crisis it is intended to alleviate. It does so only very superficially, while in the final analysis, i.e. if one thinks through the chain of economic effects beyond the first trivial conspicuous but deceptive fact that some people receive houses at artificially suppressed prices, it makes housing on average less affordable.

Sadiq Khan seems intent of ramping up “affordable housing”, i.e. housing rationed according to political prerogatives, to 50% of all new housing provision, thereby making the remainder  - which has to cover the subsidies  - all the more unaffordable. No wonder that the income eligibility threshold is ramped up continuously also. A vicious interventionist spiral.

By subsidizing the residences of privately employed “key workers” we only allow their salaries to be lowered, thus benefitting those who use their services. This might often be people who could, would and should pay more for these services. By subsidizing public sector “key workers” we are further privileging a pressure group that seems already comparatively privileged. This is not only inefficient, but also unfair.

Housing justice – arguments concerning fairness:

We urgently need a capitalist revolution, not only for the sake of prosperity, but also for the sake of justice, and everybody’s personal flourishing, dignity and self-respect.
What is just about taking housing opportunities away from those who contribute more to the social product to those who contribute less?

I am not talking about subjective effort but about objective contributions as concretely valued by those who are indeed using those contributions, rather than by politicians stipulating ‘key worker’. We can argue forever in abstract how various contributions ought to be valued. A real, concrete valuation via acts of exchange rather than via non-committal pronouncements is exactly what the market process delivers, distributing its rewards in the very same process.

That somebody’s rewards and living conditions correlate with his or her contribution to society is common sense justice. Left intellectual ideas about a ‘decent’ income and living conditions as a universal basic right that must be guaranteed by redistribution are going against the grain of the majority’s common sense of justice (which left intellectuals usually sneer at as populist).

Egalitarian ideas that disrespect differences in contribution violate our common sense of justice. This much even Marx concedes implicitly with his exploitation theory that claims that workers’ wages do not represent the full value of the workers’ contribution to the product.
This common sense morality has very deep roots and matured during the classical liberal age, an age which also – not coincidentally - delivered the historically unprecedented leap in productivity and prosperity which ushered in our modern times.

The current affordable housing system redistributes mostly from both the top and from the bottom of the income distribution to the decisive mean voter. This is often perceived as unfair and would surely be much more so perceived and balked at if it was more immediate and visible. Who pays how much tax, whose apartment is subsidized, and who receives which state benefits, is confidential and largely invisible in everyday life. This invisibility is indeed protected by planning rules prohibiting that the façade of the affordable units are different and thus recognisable and by prohibiting separation of entrances, i.e. so called “poor doors”.  If it were more visible the re-distribution system would risk upsetting the smooth functioning of social life. That payments come from the abstract state assuages the felt unfairness only partially. The pervasive suspicion that various groups are preferred and privileged by the affordable housing allocation is a continuous source of strife and frustration between different ethnic groups within our urban communities.
In our everyday social life reciprocity and the correlation of reward and contribution cannot be visibly violated for too long. One-sided relationships cannot and will not be sustained ad infinitum. They violate our sense of justice, and would be unsustainably inefficient.

How then, without subsidies, will those with lower incomes be housed? By urban entrepreneurs who will tailor economic products for this market segment, if the government gets out of the way. If McDonalds or KFC can deliver delicious eating out experiences, and easyJet can deliver air travel to this income group, then a Taylor Wimpey should be able to deliver decent, truly affordable housing, but only if government withdraws and lets this market get to work. An example is the “Collective” which uses a regulatory loophole to offer a very innovative, affordable and attractive rental “co-living” product in London far away from the imposed standards. The situation would be much better still, if the price-driving land-use constrains would be lifted. There is no need to infantilize people via paternalistic subsidies, especially once entrepreneurial initiative is unleashed.

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