Illustration by James Fryer of a people looking up a ladder
© James Frye

Sewage dripped, rats scuttled, diseases spread like wildfire and children died by the dozen. Old Nichol could be any of a thousand cities today; in fact it was Victorian London’s most notorious slum.

During the industrial revolution some people made fortunes in Britain’s fast-growing cities — but many others suffered. Old Nichol has since become a symbol of the extreme inequality that booming economic growth can produce.

Today, as technology and finance drive globalisation and fuel the emergence of megacities, urban planners face the same dilemma that confronted Victorian London — how to avoid a city’s economic success beginning to eat away at itself.

Larger cities benefit from economic advantages which fuel their further growth. Companies in large cities are more productive than those in smaller ones, while more diverse areas also boost economic growth, according to a report published last year by the University of Westminster and funded by the Dolphin Square Foundation, the affordable housing provider. This also means higher wages and higher housing costs for the people working in those companies, the report found.

On average, wage growth outpaces the growth in housing costs, but for some low-income workers, particularly those in the public sector, that is not the case, the report said. These much-needed workers risk being “squeezed out”, it warned.

Some of the world’s biggest and most successful urban areas are facing a housing affordability crisis as growing numbers of people pour in. City dwellers around the world pay $650bn a year more in housing costs than they can afford, research by the McKinsey Global Institute found last year.

Spiralling living costs and poor housing conditions are pushing much-needed workers out of these cities — and inequality is rising.

A dazzling array of policy options has emerged in recent years as employers and city authorities worldwide attempt to stem the tide — none is a complete answer in itself; all have pros and cons. But today’s affordability-challenged city-dwellers should beware the cautionary tale of Old Nichol. Its vermin-infested insanitary conditions, overcrowding and soaring death rate provoked an outcry against slum landlordism when fictionalised in Arthur Morrison’s novel A Child of the Jago. Something had to be done, the Victorian public felt.

Old Nichol was demolished in 1891, and the Metropolitan Board of Works built the Boundary Estate over it — the world’s first public housing project. But Old Nichol’s former inhabitants did not benefit. When the estate was rebuilt the original residents did not return; they could not afford the new rents. Instead they were replaced with a more respectable calibre of tenants — policemen, clerks and nurses.

Today the estate lies in the heart of buzzing Shoreditch, one of London’s most exciting districts, surrounded by artisan coffee shops and glossy apartment blocks. Just a stone’s throw away is a pricey fashion boutique named after Morrison’s novel.

And his original “children of the Jago” simply moved further east — to new slums in London’s eastern docklands.

Modern affordability policy measures:

1) Demand controls

Housing demand is fuelled by banks’ willingness to lend. Controlling lending can short-circuit damaging price spirals.

Hong Kong and South Korea both use restrictions on debt-to-income ratios while Canada, Israel, New Zealand and Norway use loan-to-value controls. Britain, under Bank of England governor Mark Carney, introduced similar measures in last year’s Mortgage Market Review. Australia is considering doing the same. Such measures can prove unpopular among aspiring homeowners. In Norway, pressure from young people who cannot get on to the housing ladder has sparked a heated debate.

This illustrates the downside of demand controls — they exclude many people from home ownership, making them reliant on rented housing instead. That can be a hard sell politically in countries where for generations mass home ownership has been the norm.

2) Supply controls

The supply of new housing is partly determined by the availability and cost of land. A plot becomes available to build on when planning authorities give permission for a change of use — usually from farmland but sometimes from industrial or commercial uses.

Affordability graphic

In markets with squeezed housing affordability that permission often significantly increases the value of the land — which then feeds through into the selling price of the homes built on it. In parts of Britain two-thirds of the cost of a home is due to the price the developer paid for the land. But it is possible for the state to effectively pocket that uplift in the land’s value — and use the cash to fund more housebuilding.

The sums involved can be huge — in the UK, development land with permission to build homes on it is on average worth more than 260 times what it would be as farmland, a parliamentary report published in 2006 found.

South Korea, Singapore, Hong Kong and Taiwan all use national land banks to acquire land for residential development, improve it and then sell it on to developers. Since it was established in 1962, national land bank the Korea Land & Housing Corporation has delivered 2.2m new homes. But many other free-market-minded governments do not favour the level of state control that a state land bank entails.

3) Remove the market

The most obvious reaction to a market failure is to remove the market. As in the example of Old Nichol, the state can step in. In Singapore, for example, 80 per cent of the population live in homes built by a government body, the Housing and Development Board (HDB).

It was set up in 1960 in a bid to clear up the city-state’s pervasive slums, and later turned into an all-purpose housebuilder and landlord. The vast majority of Singaporean households own their homes leasehold, with the HDB as the freeholder. The HDB also finances home buyers at preferential rates.

The HDB will only sell to Singaporean citizens, not foreigners. Maximum income ceilings also apply.

This popularises housing, preventing it from turning into an investment asset class which investors can pour cash into. Home ownership in Singapore is widespread, savings rates are high and the housing system has been credited as one of the factors in the country’s transformation from a third-world economy to a global powerhouse.

On the downside, such control gives the government a lot of power. For example, until 1991 the HDB would not sell to single people aged under 35, as part of the government’s attempts to promote marriage.

The market restrictions can also prevent people from building up an asset to fall back on in hard financial times, or in retirement. In many other countries, homes have replaced pensions as many people’s source of financial security.

4) Remove spatial restrictions

London’s greenbelt — a ring of legally protected countryside circling the city — has long been blamed for its spiralling house prices, as housebuilding has failed to keep up with population growth. London’s diametric opposite is the Texan city of Houston. It does not have zoning, meaning any type of building can be built anywhere.

The result is some of the world’s most affordable housing in an economically successful major city — and mile after mile of suburban sprawl. Houston is twice the size of New York City, with a quarter of its population.

This sprawling land use can be wasteful, both in terms of space and the environment. It means building on a greater area of surrounding countryside, and the larger distances involved push people into their cars, creating a city dominated by roads and motor vehicles.

The fundamental tension between population growth and environmental resources is the biggest challenge for 21st-century urban planners. Despite this, Houston voters rejected motions to introduce zoning in 1948, 1962 and 1993. But the days of no-zoning may be about to end. Houston’s population of 2m is set to swell by a further 1m in the next 20 years. Last year the city government decided to prepare for this growth by starting work on its first comprehensive urban plan. A public consultation will take place this year.

5) Encourage renting

Germany is the world’s most famous nation of renters — but not its biggest. About 42.4m households rent their homes in the US, compared with 21.2m in Germany. Renting is often regarded as a more egalitarian form of housing, as it counteracts individuals’ desire to own a rapidly appreciating asset, which risks inflating a price bubble.

The scale of the US rental market is such that a colossal commercial sector has emerged, building and operating huge rental-only housing complexes. Many of these businesses are publicly listed. Unlike Germany, however, many renters in the US still aspire to own their homes. The lack of a comprehensive welfare system means that property assets play an important role in the accumulation of wealth for working-class Americans.

Inequality graphic

Germans’ lack of interest in home ownership is easily explained: renting is cheap and secure. Germany has some of the tightest rent controls in the developed world — only the Netherlands and Sweden are stricter, according to the OECD — while tenancy law and the court system gives them strong security of tenure.

It is very hard for landlords to sell rented apartments to an owner-occupier, meaning that rented housing is ringfenced and landlords are prevented from trading properties for capital gain. This militates against amateur landlords — who dominate the British rented sector — and encourages large-scale professional companies.

Meanwhile, Germany also does little to promote ownership. There are no tax breaks for mortgage payments, banks are cautious in their lending — long-term fixed rates are the norm — and property prices rise slowly.

This means home ownership is not seen as the lucrative route to rapid riches that it is in the UK and US.

6) Build elsewhere

A symbol of US postwar suburbia, Levittown on Long Island was purpose-built between 1947 and 1951 by family building company Levitt & Sons. It used speedy, cheap building methods to create homes that returning GIs could afford.

The Levitts owe part of their suburb’s early popularity to the proximity of New York City. Lower-income families who could only afford to rent an apartment in the city found that the Levitts’ cost-trimming made home ownership affordable for them. The Levitts had realised what many governments since then have also come to discover — making housing affordable is much easier when the land needed for new homes is cheaper. That means moving people further out of the city.

What came to be known as “bedroom communities” can be cheap, spacious and modern — but they impose a long and sometimes onerous commute on residents. And they risk hollowing much of the life out of a city — something that some parts of central London are currently battling against.

7) Subsidise ownership

If all else fails, pay people to buy homes. That is what Britain is doing.

Part-own, part-rent schemes have been in use in the UK for two decades, but the government recently expanded its home ownership subsidies with the Help To Buy programme. It offers equity loans and mortgage guarantees to those who cannot afford to get on the housing ladder by themselves.

Britain is not alone. Hong Kong has just reintroduced its Home Ownership Scheme, which sells newly built flats to locals at below the market price. Upon its relaunch in December nearly 50,000 people queued for just 2,000 properties.

The most famous and pervasive examples — Fannie Mae and Freddie Mac in the US — are still in business, despite being blamed by some economists for playing a role in the housing debt boom that led to the global financial crisis.

Such schemes give a very effective boost to the households they help, but by injecting extra demand into the market they risk pushing up prices for everyone else.

Kate Allen is the FT’s property correspondent

Illustration by James Fryer

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