Scarcity by Design: How the Planning System Turns Global Gluts into Local Pain

Columns are the author’s own opinion and do not necessarily reflect the views of Onward.

The United Kingdom is grappling with a housing crisis that has become one of the major economic and social challenges of our time. It is usually depicted as a domestic problem caused by slow planning approvals, local resistance, supply bottlenecks, or poor incentives for development. At the same time, global economic imbalances are treated as an entirely separate debate, tied up with concerns about Chinese overcapacity, German export surpluses, and America’s rising debt. Yet the evidence increasingly shows that Britain’s housing pressures and the world’s macroeconomic distortions are not separate stories. They are part of the same system.

This brief draws on the work of Michael Pettis and Matthew Klein, whose analysis offers a highly relevant framework for centre right policymakers.[1] They argue that global trade and capital imbalances are not accidents of international competition but the result of domestic political choices within surplus economies. When countries suppress wages, reduce labour’s share of income, and channel economic rewards upwards, their households cannot consume enough of the goods they produce. The resulting excess production and excess savings must be exported abroad. The consequence is a world in which the burden of adjustment falls on deficit economies and their households.[2]

These ideas align closely with the centre-right tradition when understood through the lens of British thinkers such as J. A. Hobson.

[3] Hobson argued that under-consumption caused by inequality forces nations to export capital and creates instability at home and abroad. His response was not to condemn markets but to insist that healthy markets require broad-based domestic purchasing power. This view is increasingly relevant today. In surplus economies like China and Germany, domestic households do not receive enough income to absorb national output. The imbalance is then forced onto countries like the UK which have open capital markets, strong legal protections for investors, and in Britain’s case a planning regime that makes land an extraordinarily scarce and attractive asset.

The UK has become a shock absorber for global imbalances.[4] The mechanism differs from the United States. America absorbs foreign savings through consumer credit and deep financial markets. Britain absorbs them primarily through property. London in particular has emerged as a global safe haven for surplus capital because it offers political stability, a respected legal system, and a severely supply-constrained housing market.[5] When global savings meet British scarcity, the outcome is rising property prices rather than rising construction, and higher rents rather than higher wages.[6]

Understanding how this system functions is essential for designing a reform agenda that strengthens Britain’s social fabric and supports the next generation of centre-right economic policy. To begin, surplus economies generate pressures that the UK cannot ignore. China provides the clearest example. Chinese households receive a historically low share of national income, and a financial system that has historically charged them negative real interest rates on their savings.[7] These mechanisms transfer resources from families to state actors and large firms.

For decades China could rely on extraordinary investment rates because the country had underbuilt its infrastructure and industrial base. During this phase, investment could grow rapidly without overshooting. But once China reached the point where further investment produced diminishing returns, household consumption remained too weak to sustain growth.[8] The result was excess savings and production that could only be exported.[9]

Germany demonstrates a similar pattern. Labour market reforms in the early 2000s institutionalised wage restraint, shifting the distribution of income away from workers and toward exporting firms.[10] Domestic demand weakened and Germany’s current account surplus rose to some of the highest levels in the world.[11] Since the creation of the euro, other European economies have had limited ability to adjust.[12] Without independent currencies they could not devalue. They were forced to suppress domestic demand further, creating a structural imbalance that Germany exported across the continent.

The UK’s domestic structures determine how these global imbalances are absorbed. Britain has unusually deep and open capital markets relative to its size. The City of London is one of the world’s premier destinations for global savings. Yet unlike the United States, the UK does not transform these savings primarily into productive investment or high levels of household borrowing.

Instead, the defining feature of the British system is its tight planning constraints.[13] Land use regulation sharply restricts new building in the places where people most want to live. This scarcity is not an incidental feature but a structural one. It means that global capital inflows do not lead to a meaningful increase supply but instead inflate land values due to a severely constrained land market.

Essentially, when foreign capital bids up the top rung of the market, the demand signal resets land values across adjoining areas, and because supply cannot expand, the entire ladder reprices upward from that new benchmark.[14]

In turn, over several decades real house prices in Britain have far outpaced real wages.[15] Home ownership rates have fallen for younger generations. Rents have risen relative to incomes. The consequence is that British households are forced to devote growing portions of their income to housing rather than to investment, family formation, or improving their living standards. Economic mobility weakens, particularly outside core urban areas with high incomes.[16] Families attempting to move closer to opportunity find themselves priced out. Entire regions are held back by a combination of underinvestment and unaffordable housing in the places where jobs cluster.

This is not simply the result of just extremely poor domestic planning policy, nor is it purely a function of global forces. It is the interaction of both. Domestic scarcity magnifies the effect of global surpluses. In parts of the country where planning is most restrictive, such as London and the South East, statistical modelling shows that foreign capital inflows are strongly associated with rising house prices even after controlling for mortgage rates, income growth, and population changes.[17] The transmission mechanism is straightforward. When land supply is fixed, any increase in demand, whether domestic or foreign, is expressed through prices. Britain’s system therefore transforms global distortions into domestic asset inflation.

For a centre right audience, the most important insight is that this dynamic undermines the conditions for a healthy market economy. Rising land values do not reflect entrepreneurial activity or improvements in productivity. They reflect scarcity rents generated by administrative barriers to supply. These rents benefit incumbent property owners but impose increasing burdens on younger households, renters, and workers seeking mobility.[18] They also discourage productive investment, since returns to land outcompete returns to business creation. In macroeconomic terms, they act like a tax on labour and a subsidy to static wealth.

The system channels gains toward income-producing assets whose value rises not from output or investment, but from scarcity that restricts others from creating similar assets. Scarcity, not productivity, drives the majority of these gains.

The question for policymakers is how to break this cycle. Britain cannot directly force surplus nations to change their internal distribution of income, although it can support multilateral efforts to encourage wage growth and domestic demand in countries like Germany and China. What Britain can do is strengthen its own economic resilience. This means reforming the planning system so that global capital inflows do not automatically turn into higher land prices. It means ensuring that new supply can respond to demand in a way that supports families, workers, and growing cities. It means making Britain a place where investment flows into productive activity rather than being absorbed by the artificially restricted land market.

A credible reform agenda must also include strengthening the earning power of British households. When wages grow and productivity rises, families are less dependent on debt and less exposed to asset inflation. Wage growth also supports domestic consumption, reducing reliance on external demand and borrowing.[19] This aligns with Hobson’s insight that capitalism is most stable when ordinary households have the income needed to consume what society produces. Rather than seeing higher wages as inflationary, policymakers should see household purchasing power as a foundation for long term economic stability.

The final argument is that Britain can no longer treat housing and global macroeconomics as separate spheres. The structure of the global economy ensures that surplus nations will continue exporting savings.[20] Britain’s institutional choices determine how those savings affect its society. If domestic scarcity remains unaddressed, global pressures will continue to inflate housing costs, deepen inequality, and slow growth.[21] If institutions are modernised, Britain can reclaim control over its economic destiny and build a system that rewards work, supports families, and strengthens the foundations of national prosperity.

This is the moment for a centre-right reform agenda that recognises the link between global dynamics and domestic living standards. Britain must not remain the world’s shock absorber. It should become a country in which global capital flows support productive investment, in which hard work translates into secure housing and rising prosperity, and in which the economy is shaped around the needs of families and communities rather than rent seeking and scarcity. The policies that achieve this would not only address the housing crisis but would form the backbone of a renewed economic offer for the next generation of centre-right leadership.

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[1] Pettis, Michael, and Matthew C. Klein. Trade Wars Are Class Wars: How Rising Inequality Distorts the Global Economy and Threatens International Peace. New Haven: Yale University Press, 2020.

[2] International Monetary Fund. World Economic Outlook Database. 2024 Edition. Washington, DC: IMF, 2024. https://www.imf.org/en/Publications/WEO/weo-database/2024. 

[3] Hobson, J. A. Imperialism: A Study. London: James Nisbet & Co., 1902.

[4] Foreign Direct Investment Involving UK Companies, 2023. Newport: ONS, 2024 https://www.ons.gov.uk/economy/nationalaccounts/balanceofpayments/datasets/foreigndirectinvestmentinvolvingukcompaniesbyukcountryandregiondirectionalinward

[5] De Vivo, Filippo. “Foreign Capital and the London Property Market.” Bank of England Quarterly Bulletin 54, no. 2 (2014): 115–124.

[6] Institute for Fiscal Studies (IFS). The Determinants of Local Housing Supply in England. IFS Working Paper W24/35, 2024. https://ifs.org.uk/publications/the-determinants-of-local-housing-supply-in-england. 

[7] State Administration of Foreign Exchange (SAFE). “Balance of Payments of China, Q3 2025.” Press Release, November 2025. https://www.safe.gov.cn/en/2025/1107/2358.html. 

[8] Trading Economics. “China Current Account.”

[9] Mercator Institute for China Studies (MERICS). Chinese Investment Rebounds Despite Growing Frictions: Chinese FDI in Europe, 2024 Update. Berlin: MERICS, 2024. https://merics.org/en/report/chinese-investment-rebounds-despite-growing-frictions-chinese-fdi-europe-2024-update. 

[10] Tilford, Simon. “Germany’s Inappropriate Surplus.” Centre for European Reform, 2016.

[11]  “Germany Current Account to GDP.” https://tradingeconomics.com/germany/current-account-to-gdp

[12] Blyth, Mark, and Matthias Matthijs. “The Future of the Euro.” Foreign Affairs 91, no. 3 (2012): 52–64.

[13] Hilber, Christian A. L., and Wouter Vermeulen. “The Impact of Supply Constraints on House Prices in England.” Economic Journal 126, no. 591 (2016): 358–405.

[14] Cheshire, Paul, Christian Hilber, and Ioannis Kaplanis. “Land Use Regulation and Productivity—Land Matters: Evidence from a UK Supermarket Chain.” Journal of Economic Geography 15, no. 1 (2015): 43–73.

[15] Cribb, Jonathan, Tom Wernham, and Xiaowei Xu. Housing Costs and Income Inequality in the UK. London: Institute for Fiscal Studies, 2023.

[16] Housing Purchase Affordability, UK: 2024. FYE 2024.

[17] Ciminelli, Desislava. “Foreign Investment and Housing Prices in the UK.” OECD Economics Department Working Papers, no. 1624 (2020).

[18] Hausmann, Ricardo, and Dani Rodrik. “Economic Development as Self-Discovery.” Journal of Development Economics 72, no. 2 (2003): 603–633.

[19] Goodhart, Charles, and Manoj Pradhan. The Great Demographic Reversal. London: Palgrave Macmillan, 2020.

[20] Office for National Statistics (ONS). Balance of Payments, April to June 2025. Newport: ONS, 2025. https://www.ons.gov.uk/economy/nationalaccounts/balanceofpayments/bulletins/balanceofpayments/apriltojune2025. 

[21] “Germany’s International Investment Position at the End of 2024.” Press Release, March 2025. https://www.bundesbank.de/en/press/press-releases/germany-s-international-investment-position-at-the-end-of-2024–967106