Why Housing Costs More Now Than in the Victorian Era

In the Victorian era a working person in England paid under a quarter of his or her income on housing. Today that figure is more like half and many working people can not afford housing at all without state assistance. As a proportion of income housing costs more than in the Victorian era and is becoming ever more expensive. Yet just about everything else gets cheaper. Why is housing different?

Consider the total amount that is spent on housing every year. While exact figures are hard to come by it will certainly be considerable. Consider what the average working person pays each year for housing. 40% of income is common and many will pay much more. It will almost certainly be more than food or transport or entertainment and in many cases will be more than all other expenses combined. Now multiply that by the number of working people. Many pensioners will own their homes outright but many will still be paying rent or a mortgage. The cost of housing will be a major portion of the economy of any advanced country. Now ask yourself, where does all that money go?

A certain amount will go into building new housing stock and repaying the capital outlay on existing stock. Yet most houses for sale were built long ago. The cost of materials and labour for building the house is long since paid for. In many cases all the people who were involved in the construction of the house are long dead yet the cost is greater than a similar new build. Repairs and maintenance will cost a certain amount each year but even if we discarded these costs it would hardly affect the total.

In fact, the cost of housing bears little relation to the work that went into providing it: rent, by definition, is income that is unearned, i.e. income without labour. Housing costs are largely determined by supply and demand, both of land and credit. The supply of land is obviously essentially fixed while the supply of credit is controlled by banks and governments and has no fixed natural limits. Banks can create new money through loans. Since most houses are purchased through bank loans this means banks can create large amounts of new money solely for housing. With more total money in the economy and with the increase going towards housing, the relative cost of housing rises compared to other goods.

Quite simply, most of the money we pay for housing goes into the pockets of landlords, lawyers and financiers who in most cases have done nothing to actually build the houses we live in.

I stated above that the supply of land is fixed. This isn't entirely true. While it's very rare that new land is actually created many factors can bring unused land onto the market, thus increasing the supply. However, in most countries governments restrict supply through planning systems. This would be fair enough if governments then either limited demand or effected price controls. Instead, markets are left to determine price based on artificially restricted supply and increasing demand. This gives the worst of all worlds and inevitably results in increased housing costs, which as we have seen are basically a transfer of wealth from those who produce it to those who don't.