Source: Economics Observatory —
Where we live – and how much that costs us – affect our ability to work, to find suitable jobs and to access good schools. House prices also influence whether money is invested in property or in developing businesses. All this means that the housing market has a big impact on national productivity.
Workers’ productivity, globally, has been growing slowly in this millennium. In the UK, low levels of productivity have been a pressing policy challenge for at least the past decade and a half (Gal and Egeland, 2018).
Research on the reasons for this poor performance has often failed to look at how people’s housing costs, locations and living conditions might affect their productivity – for example, through their proximity to jobs that match their skills.
Across the economy as a whole, housing prices can influence productivity levels by encouraging or discouraging investments in technology, innovation and new businesses.
The sustained failure to explore the economic consequences of housing systems and outcomes arises from the complex nature of housing, housing markets and their inherently ‘local’ dimension.
For example, the UK government’s paper on ‘levelling up’ analysed regional economic change and, separately, suggested important housing policy investments (Department for Levelling Up, Housing and Communities, DLUHC, 2022). But at no point did it explore how housing outcomes affect regional/metropolitan differences in productivity.
What can we learn from thinking about housing and productivity together?
Housing is a ‘multi-attribute’ capital asset that is spatially fixed, complex to build and makes up significant proportions of households’ spending and investment. The housing system is made up of multiple elements, including designing, financing, building, maintaining and exchanging homes.
In advanced economies, housing typically absorbs 20-25% of household incomes. It has also become both the largest asset held by households and the largest component of household debt.
Housing is a major economic system – at neighbourhood, metropolitan, regional and national scales – and its functioning and outcomes shape productivity and capital allocation in the overall economy. Looking at housing activities, attribute outcomes (including rents and prices) and overall resource allocation on housing can help us to understand the effects that these have on productivity (Maclennan et al, 2021).
The logic of the approach is that households choose a set of attributes – including dwelling size, structure, quality, neighbourhood amenities and location relative to household activity sites (such as workplaces or schools) – that have an associated price and asset characteristics.
Existing research has done too little to establish how these factors shape household capabilities to accumulate and use different forms of capital, including social and human capital (people’s education, skills and networks of relationships) as well as housing wealth.
These linkages between housing attributes, household capabilities and the growth drivers of human capital, business capital and creative/innovative systems constitute the complex interface between housing and productivity.
On a more aggregated scale, the housing market is a resource allocation system that matches households to housing, and investors to housing investments. It also shifts resources between housing and other economic sectors, and may do so more or less effectively.
A case can be made that in many of the advanced economies, housing and economic policies have provided incentives to raise house prices, rather than fostering innovative technologies and human capital.
Although governments generally fail to address such questions about housing programmes, recent studies in the UK (CBI, Confederation of British Industry, 2020), Canada (Toronto Board of Trade-Woodgreen, 2021) and Australia (Maclennan et al, 2021), and by the OECD (2021), suggest that business, trade unions and housing lobbies now recognise how housing outcomes can limit productivity improvements.
How does housing affect productivity levels?
One significant way in which housing can affect productivity relates to access (or lack of access) to high-productivity places (Maclennan et al, 2021). The key issue is that there is a shortage of affordable housing in central urban areas and that high house prices (and rents) limit the ability of workers to move to productive places where high-wage jobs are concentrated and distributed (Hsieh and Moretti, 2019). Economic analysis of this problem has primarily been done by US scholars (Glaeser and Gyourko, 2018), and followed by researchers in countries like Australia and Canada (Jenner and Tulip, 2020).
This trend erodes the benefits of being able to get workers with the right skills into appropriate vacancies (labour matching) and limits the learning effects that underpin agglomeration economies (whereby employees and firms co-locate).
While multiple explanations of the current lack of available housing are strongly contested, the consequences of shortages and of high land and housing prices are more widely agreed.
In most advanced economies, renters are more likely to move – they exhibit higher rates of residential mobility– than those in other types of housing. Workers who are unhindered by the costs of buying or selling property are more likely to maximise their productivity levels by moving to wherever the best work opportunities are available.
Studies confirm that for a wide range of income groups, market access to rental housing facilitates labour mobility across, as well as within, different housing markets. It also promotes effective adjustments to economic shocks such as pandemics or financial crises (Whelan and Parkinson, 2017).
But it has been reported that the propensity of those living in the private rented sector to move has fallen by more than half in the last two decades in the UK (Judge, 2019).
In recent years, renter mobility means that it has been easier for skilled workers/renters – especially those working online – to leave metropolitan areas when the high rents made it unaffordable to stay. This has especially been the case since the start of the Covid-19 pandemic.
