What János Kornai can teach us about housing affordability

A brilliant new report by Ant Breach

You might not have heard of the Hungarian economist János Kornai, author of the Economics of Shortage, a 1980 study of the pathologies of Soviet central planning. But as Ant Breach shows in a brilliant new report for the Centre for Cities, Kornai’s analysis of shortages under central planning perfectly explains the problem of housing affordability in the UK, with findings that are equally applicable to Australia.

In particular, Breach shows how discretionary planning systems such as those in the UK and Australia disconnect the supply of housing from demand, creating a range of perverse incentives than explain phenomena such as land banking, poor quality builds and misallocation of the housing stock. Durable goods that are in shortage acquire asset-like properties, increasing the demand for them. He also demonstrates why for supply to equal actual demand, there must be a surplus of unused homes. ‘Empty homes’ are not a sign housing surplus.

Once the institutional basis for the housing affordability problem is understood, all the other supposed causes of high house prices pale into insigificance. High house prices are not caused by low interest rates, features of the tax system, immigration or foreign buyers. Shortages are built into the system.

The solution to the housing affordability problem in the UK and Australia is to remove the discretionary element from the planning system. Complying developments need to be automatically approved. While Breach’s recommendations are specific to the UK, they are also highly relevant to Australia.

If you don’t have time to read Breach’s excellent report, there is a Powerpoint version here.


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