Guest blog by Shalom Imonode, who completed a summer placement at CPP through the Social Mobility Foundation.

Economists are beginning to acknowledge the role of the housing affordability crisis in exacerbating the twin challenges of stagnant productivity growth and regional disparities. This piece explores how these two issues are magnified by the nation's poor economic infrastructure which includes housing supply and transport networks.

The UK's regional disparities surpass those of many comparable nations, with labour productivity remaining a crucial driver of the UK's regional divides. OECD data on output per hour worked highlights productivity in London surpassing the national average by 33.2% in 2021 whereas the North East lags significantly, being 17.4% below the national average. Productivity in the UK is stifled by many things, but often overlooked is the issue of housing affordability. The average home in the UK now costs nearly nine times the average income, and the average private renter now spends 24% of their income on rent, rising to 40% in London. With more of their incomes taken up by housing costs, this reduces households’ discretionary spending, constraining demand in other areas of the economy and reducing the UK’s capacity to innovate and drive-up investment into other productive elements of our economy.

The effect of high housing costs on growth goes beyond mere GDP statistics; it dampens our productivity potential by limiting the geographic mobility of the labour market, bearing significant influence over where workers choose to live and work. High housing costs disincentivise highly skilled workers from moving to higher productivity areas, meaning that many often stay working in less productive jobs, because higher housing costs would offset the gains of a higher wage packet. At the same time, high housing costs push down on lower earners living in our most productive places, particularly key workers and those working in the foundational economy, who are increasingly being displaced by higher housing costs driven by rising demand from higher-income workers moving inwards. The unaffordability of housing in our most productive areas is also beginning to force productive workers to move away to less productive areas. In the last decade, London has consistently had a negative balance regarding net domestic migration, as more people leave the capital for other places in the UK. This is driven, for the most part, by high housing costs offsetting their wage premium.

However, this has enormous repercussions in the long run as individuals who move to less productive areas are likely to face limited job opportunities as less productive places often lack dynamic industries that would provide better career opportunities. This diminished skill pool disincentivises businesses from investing in these areas; instead, they favour urban centres with established skill pools and higher growth potential. The resulting concentration of investment and opportunities in urban hubs causes further housing market pressures, driving more people out, thus perpetuating a cycle of regional inequality.

An argument can be made that the inflow of people from high-productive urban areas to low-productive rural areas could actually have positive results. This is because as experienced and productive workers choose to move away from the capital, they bring their skills, expertise, and innovative ideas with them, which can act as a catalyst for regional growth. But in the UK, this is not the case, because lower housing costs are not enough to reduce the productivity gap, due to subpar transport systems in many regions. Robust transport networks are important for growth as they expedite the movement of labour, goods, and ideas. But many cities in the UK lack decent transport systems. France’s second, third, and fourth cities have 8 Metro lines between them, and the UK’s equivalents have none. Many of the UK’s smaller cities also have poor road infrastructure. As a result, as the UK’s cities and towns get bigger, we do not experience much in the way of productivity gains. The biggest non-capital cities, Manchester and Birmingham, are significantly less productive than almost all similar-sized cities in Europe and are even less productive than much smaller cities in the UK such as Oxford, and Bristol. This absence of transport infrastructure impedes the ability of businesses to secure the necessary investments for growth, and as a result, the flow of investment remains concentrated mainly in London, and it is known that transport infrastructure investment is skewed towards London. A substantial investment strategy is needed to transform transport networks in non-London cities and their surrounding regions. OECD research indicates that a 10% rise in a city's road accessibility performance will lead to a 1.2% average productivity increase. This approach would help address barriers that hinder these areas from benefiting from expansion.

Low productivity growth and regional inequality are manifestations of broader challenges in the UK economy, particularly our scarce housing stock and weak transport systems. Several policy solutions can kickstart productivity across the UK. Addressing the chronic housing shortage, particularly in London, must take centre stage. Comprehensive reform of the planning system is crucial to ensure the availability of housing whilst also stimulating economic activity through increased construction and associated sectors. An expansion of social housing is also imperative to supply more affordable housing for lower-income households. We must expand and improve our transport networks. Lastly, we must prioritise lifelong up-skilling programmes that can bridge skill gaps, enhance workforce adaptability, and drive economic growth in regions that have historically lagged behind. By bolstering workers' ability to acquire new skills throughout their careers, we can mitigate the productivity gap while fostering inclusive growth.