How housebuilding helped the economy recover: Britain in the 1930s

Friday, April 19th, 2013


New development created a third of the increase in GDP between 1932 and 1934. Could we repeat the experience today?

In the early 1930s Britain recovered impressively from a double-dip recession which ended in 1932. In every year from 1933 to 1936, before rearmament could have made any difference, growth exceeded 4% per year. Growth was not driven by fiscal stimulus; indeed it blossomed at a time of fiscal consolidation. So what was the magic formula?

The main ingredient was the "cheap-money policy". From the middle of 1932, short-term interest rates were reduced close to zero and monetary policy was expansionary enough to stop prices falling and sustain mild inflation in pursuit of a target, set by the chancellor, Neville Chamberlain, to return prices to the 1929 level. The approach was similar in many respects to "Abenomics" in today's Japan.

How did the cheap-money policy stimulate the real economy? A very important channel was through development of new housing. The number of houses built by the private sector rose from 133,000 in 1931-32 to 293,000 in 1934-35 and 279,000 in 1935-36. Many of these dwellings are the famous 1930s semi-detacheds which proliferated around London and more generally across southern England.

These figures are way ahead of any other year since the second world war. The building of these houses directly contributed an additional £55m to economic activity by 1934, and multiplier effects from increased employment probably raised the total impact to £80m – or a third of the increase in GDP between 1932 and 1934.

House building reacted to the reduction in interest rates and also to the recognition by developers that construction costs had bottomed out; both of these stimuli resulted from the cheap money policy.

House building was responsive in the 1930s for two reasons. First, the supply of mortgage finance grew rapidly and became more affordable in an economy in which there had been no financial crisis that curtailed lending. Building society mortgage debt rose from £316m with 720,000 borrowers in 1930 to £636m with 1,392,000 borrowers in 1937 when about 18% of non-agricultural working-class households were buying or owned their own homes.

In these years, deposits fell in some cases to 5% and repayment terms were extended from around 20 to 25 or even 30 years, reducing weekly outgoings by 15%.

Second, houses were affordable to an increasing number of potential buyers: 85% of new houses sold for less than £750 (£45,000 in today's money). Terraced houses in the London area could be bought for £395 in the mid-1930s when average earnings were about £165 per year. Houses were cheap because the supply of land for housing was very elastic, which in turn meant that there was no incentive for developers to sit on large land banks. Underpinning the availability of land for house-building was an almost complete absence of land-use planning restrictions which applied to only about 75,000 acres in 1932; the draconian provisions of the 1947 Town and Country Planning Act were still to come.

Could we repeat the 1930s experience today? It would be very difficult since both mortgage availability and planning rules are very different. Nevertheless, given that we build far fewer houses than are needed to cope with the number of extra households each year, it is desirable to increase the supply of new houses.

A 1930s-style house building boom would not only be a great boost to economic recovery but would also address real social need. The directions for reforms which could re-create 1930s conditions are clear enough but, sadly, politically too difficult.

Nicholas Crafts is professor of economics at the University of Warwick

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