Let workers use their pensions to buy a house - It's the best way out of Britain's housing crisis

They earn £1,750 a month net. They have a family and pay £1,200 a month to rent a small three-bedroom house. They are clearly poor and will remain so.

Imagine 2001, when houses were much cheaper - three-bedroom homes in Chatham sold for £47,000 in today’s money. I know this particular house well - I grew up next door. Assuming my minimum wage worker could save - or borrow - a £5,000 deposit from family members, the monthly mortgage payment would be just £230 a month, a saving of almost £1,000 a month compared with today’s rent.

In contrast, three-bedroom houses today start at £215,000, whereas a person on the minimum wage can only borrow £115,000, or around 4.5 times their annual income. For someone in that position, saving £100,000 for a deposit is implausible, to say the least.

We need to recreate the conditions seen in 2001 so that everyone in steady work can buy a house. Even a London minimum wage worker must be able to buy in Chatham.

As a society, we need to return to 2001-like housing conditions. In the short run, housing supply is broadly fixed, so increases in demand from a larger population will generally lead to a sharp increase in prices and rents. There are serious and adverse consequences to high levels of immigration without high levels of housebuilding.

We need to build far more houses. The National Housing and Planning Advice Unit estimates that if we build 750,000 houses a year, house prices will fall about 3% in real terms.

Doing this via the current planning system would be hard. It would be better to use permitted development rights. The Coalition Government allowed office blocks to be converted into flats and the current Labour Government has implemented a similar policy for areas surrounding rail stations. However, we should go further.

Three particular approaches seem most likely to succeed. The first is to allow mansion blocks of the sort that exist in Paris, Barcelona and in much of central London. These are typically six to ten storeys tall, with high ceilings and reasonable natural light. They are very dense and will, to some extent, overlook each other. They generally do not offer parking or have balconies. These should be allowed in all city centres - which means zones 1 and 2 in London, as well as in regional cities.

At the same time, like the Victorians, we should care about aesthetics, but give much less weight to current fashions, such as dual aspect, balconies, and avoiding internal corridors. All these significantly drive up costs.

The second approach is to allow ‘Islington-style’ terraces to be built on pretty much all land that has already been built on. If a developer wants to buy up a detached or semi-detached house and replace it with terraces, they should be allowed to do so, unless the house to be demolished is in a conservation area or is listed.

The third approach is to allow all existing buildings to go up a storey. Although this will not increase the number of dwellings, allowing people to trade up without moving house is useful.

Owning one house is the perfect hedge against rising rents when you retire. So we should follow New Zealand, Singapore, and Switzerland by allowing working-aged people to use their accumulated pension savings to buy a house. This should cover both paying a deposit and making overpayments on the mortgage. If we did that, buying and paying off a mortgage at a very early age would be tax-advantageous and would become commonplace, no matter your income.

This is an extract of an essay from new book, ‘Liberalism liberated,’ published by Bright Blue.

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Dr Tim Leunig is Chief Economist at Nesta, the Innovation Agency, Director of Economics at PublicFirst Consulting, and a Visiting Professor in Practice at the LSE School of Public Policy. He spent a decade as a senior civil servant, including serving as economic adviser to two Chancellors.

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