Another dysfunctional market – housing

The Economist, Dame Kate Barker suggested in 2004 that the UK was not building enough houses. This idea seems to have been accepted ever since. Even our own Charles Adams recently claimed as much.

But I suggest that this is not the case.

First, as far as I can see – and I’m ready to be contradicted – new houses seems to mean always newly built houses. New dwellings do not seem to be captured in the new housing figures but they are in the figures for net additional dwellings, which I’ve never heard quoted, or even so much as considered in discussions of housing. These figures include for example, the refurbished housing in Toxteth or the repurposed Royal William Yard in Plymouth, not new, but both decent stocks of housing in anyone’s book.

Second, we appear already to have more homes than households:

Households: by household type in 1996, 2006 and 2016

UK

Millions

One

person households

One family household: couple*

One family household: lone parent

Two or more unrelated adults

Multi-family households

All households

1996

6.6

13.9

2.3

0.7

0.2

23.7

2006

7.3

14.5

2.6

0.8

0.2

25.4

2016

7.7

15.5

2.7

0.9

0.3

27.1

Source: Labour Force Survey, Office for National Statistics

 

Yet on 22 January 2015 ONS Digital asserts:
“The UK housing market comprises 27.8 million residential properties

There is at least a year’s difference between those two figures – and we are told the number of households is constantly increasing. One would expect there to be many more households by 2016 than there were “residential properties”. Yet in fact there are 700,000 fewer.

I suppose these could all be holiday homes and as there seem to be no national figures I cannot disprove that, but since there are only 15,500 in the prime holiday area of the South West I think it unlikely.

(Source of graphic Ian Mulheirn)

Indeed, whilst the South West shows a larger quantity of empty property than most other regions they too have vacant properties. And the graphic shows at the same time that the number of empty properties has in 14 years actually increased everywhere.

Of course it could also be that there are swathes of overcrowded homes whose residents are itching to leave but are dissuaded by the costs.

But that does not indicate a shortage of housing, it indicates rising costs. On the basis that there is more property than households being created to occupy them, rising costs appear to be occurring independently of demand. That would suggest we have another incidence where the market isn’t working as we would expect. What could be the causes of these rising costs?

First, it is common practice for developers to develop their building land rather slowly. Developers do not want to ‘overburden’ the market as they want to keep prices up. Otherwise put, too many local houses would drive prices down. This is hardly an indication of an overwhelming clamour of prospective buyers.

Perhaps developers are conscious, too, that just building more houses is a dangerous route to go down, as Spain and Ireland can attest. Even so, London’s stock of new unsold homes is at a record high.

Second, the alternative to an under supply of houses to purchase is an over supply of money with which to buy them.

The table below is basic but it shows the value of the building cost to have quadrupled over the period from the 1950s whereas the sales price has risen 100 fold. It shows that the take off really got started when the banks were ‘liberated’ in the 1980s.


And it is currently reckoned 85 % of bank lending is to the property sector. The Positive Money/BoE figures below show the annual change in £billions in bank lending:

So the housing market is clearly vital for the banks and it is something the banks are keen to lend on because it always gives them the security of an immovable asset. They have every incentive to enable their customers to afford the mortgage and whilst mortgage advances of seven times annual income were available only before the financial crash, there are regularly new current products which push at affordability constraints. The recent lengthy period of low interest rates and the re-introduced help to buy scheme (in effect really a help to sell scheme) have also helped to keep prices up.

Third, there are solid incentives to avoid renting : 6 months security of tenure is no security at all for a start. Then, most studies seem to show that renting or buying entail fairly similar costs – though this it is difficult to prove – but if we accept that we are paying out a similar amount we would all prefer to have something to actually show for it at the end of the long payment period.

Fourth, there are solid incentives to buy. Although it is a place to live, a house is seen by many as an asset and as a method of saving. For example, for retirement, you can downsize and spend the difference on a happier one. There is also a clear disparity of reward between savers and mortgagors or house investors. Savers have almost always lost through inflation, mortgagors have almost always gained though it. But of course you won’t gain if you are not part of it. And, finally for any gains there is no capital gains tax.

So there are four lots of obvious causes of house price inflation. Yet without the borrowed money to pay for property virtually none of us would have any prospect of being part of this market.

It seems clear that the basis of any solution to that part of the housing crisis that is ever rising selling prices, is not concreting over the countryside in order to provide reasonably priced housing for our children.

But simply the restraint and repurposing of bank credit.

Which, at least, ought to be very much easier.

 

 

Comments

  1. Charles Adams -

    Interesting. As you know I like data and the data showing that the proportional of vacant property is rising is surprising/shocking. I remember also reading that the number of people with more than one dwelling is also rising, so clearly it is not so much a supply problem as a distributional problem both intra- and inter-regional.

    Plymouth looks very pleasant!

  2. Ms Christine Bergin -

    I suspect that the problem is that the ‘available’ housing is not where the jobs or investment are.. Another hitch would be that some property is owned only for investment purposes Notable instances of this can be found all over London with extravagant dwellings rotting in splendor.

  3. Peter May -

    Agree that there’s been lots of buy to invest in London – though that seems to be gradually coming unstuck – but the figures show that there is vacant property in all the regions.Some councils are quite active in ensuring empty homes don’t stay that way (but whether they still have the resources I doubt.)
    It may also be that some vacant housing is either not of the right type (you won’t rent a mansion if your’e looking for a bedsit) or perhaps so remote that you can’t get to work.That’s where investment in the right regional infrastructure would help. Another job the government has fallen down on…

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