House prices, affordability and housing problems - it’s a supply problem, stupid!

Summary

A lack of supply is the root of all evil in the housing world according to the dominant housing discourse.

Consequently the supply side supporters assert that we don’t build enough houses.

Government annual targets of 300,000 are not being met.

Some argue to that meet an estimated backlog – even more houses are needed each year.

It is stated that in the 1960s the level of house building was far higher.

 

Comments such as:

"Britain has a housing shortage. That fact is not contentious. Or at least, it shouldn’t be.B"

 [Morton and Dunkley, 2023, CPS].

 

“Since 2000, UK house price growth has significantly outpaced the rise in average earnings. The average house in 2021 cost more than 73 times the average weekly wage whereas in 1970 the average house price was 35.8 times higher.”

 [Morton and Dunkley, 2023, CPS].

 

“This country doesn’t have enough homes. That’s not a personal opinion or a political calculation. It’s a simple statement of fact.”

 [DCLG, February 2017, Fixing our broken housing market].

 

Yet the lack of supply story is often based on flawed data and unsubstantiated assertions.

See there is lots of empty land out there!!!

Why does the supply issue dominate?

Its simple – it sounds like common sense. For those with limited knowledge of economics, its obvious – more supply results in lower prices!  We have what could be termed the ‘Kuenssberg effect' when commentators with no understanding of an issue make pronouncements. ‘Think tanks’ produce evidence and are often quoted by the media and politicians. But who are the think tanks? Centre for Cities is a pro-development organisation.  Many think tanks are free market proponents masquerading as neutral research organisations. Talking about a lack of supply makes good political headlines it sounds good and gives the impression that the politician is going to do something.

  

What are the problems?

A number of problems in housing are attributed to the lack of supply including high and increasing prices, rising rents, a fall in home ownership and high numbers of households in need. In 2017 Sajid Javid stated - “This country doesn’t have enough homes. That’s not a personal opinion or a political calculation. It’s a simple statement of fact. For decades, the pace of house building has been sluggish at best. As a result, the number of new homes has not kept pace with our growing population. And that, in turn, has created a market that fails to work for far too many people. Soaring prices and rising rents caused by a shortage of the right homes in the right places has slammed the door of the housing market in the face of a whole generation.”

 [DCLG, February2017, Fixing our broken housing market.]

 

• “Between 1970 and 2021, house prices rose from £4,741 to £267,388. In real terms, that represented a 207% increase.

• The rising cost of housing is also shown in rents. Whereas private renters spent 10% of their income on housing from the 1960s to the 1980s, rising to 15% in London, the share of income spent on rent has risen to 30% in recent years, and almost 40% in London.

• Home ownership has also become harder to achieve, especially for the young, due to the state of the housing market. The UK is now fourth from bottom among European countries in terms of home ownership rates. This has reversed nearly a century of clear progress toward greater ownership.”

 [Morton and Dunkley, 2023, CPS].

 

“Overall restrictiveness of supply relative to demand, in the absence of such environmental gains, does not increase welfare but does increase the price of housing relative to incomes, so reduces welfare, and has, as we have seen, unintended adverse consequences; for example on the length of commuting”

 [Cheshire, Paul (2018)]

 

“High house prices have driven down home ownership.”

 [Morton and Dunkley, 2023, CPS].

 

But there are other explanations for these facets of the housing crisis, including the role of houses as assets; changes in lending rules following the Great Financial Crash; a more ‘flexible’ labour market; and a weaker welfare system. These will be explored in another blog.

 

 

So how many more houses?

A Centre for Cities report states we have a backlog of 4.3 million homes.  This analysis is based on data showing population growth and housing growth for various European countries. They conclude that insufficient houses have been built in the UK compared to these other countries.

 

Comparing UK house-building rates in terms of the gross % change in relation to total stock it is stated “The UK ranks towards the bottom of this list, seeing only 1.9 per cent growth in the number of homes every year, much less than France with 2.3 per cent annual growth in housing stock, and West Germany and the Netherlands on 3 per cent growth in housing stock every year.”  [Watling, S, Breach, A, February 2023]

But analysis of the report reveals it is based on flawed assumptions and if actual dwelling figures and households for these countries are compared to those of UK nations, there is no real difference in share of dwellings in excess of households.  Some supporters of the ‘we must build more houses’ consider that England should emulate France in increasing the house building rate. Yet analysis of French housing data reveals they have a surplus – of empty and unused dwellings.

 

Housebuilding levels are lower than in the 1960s

Many reports compare house building in the past with more recent years. A CPS report stated “In the 1960s we built 3.6 million homes, while in the 2000s and 2010s we built around 1.5 million homes a decade. If we want to rebuild our economy after the pandemic, and create a better society, we need to get building.” [Morton and Dunkley, 2023, CPS].  Newspapers frequently use a chart showing how rates have changed over time emphasising the lower rates now compared to the 1960s. 

 

Yet what is ignored is that gross building levels reflected catching up after WW2 and the replacement of homes that were demolished in early regeneration projects, which is not the situation today.

 

We need 300,000 every year!

There is according to many commentators, government, the media, housing organisations and various think tanks, a need to build 300,000 houses each year. The BBC regularly quote the figure, invariably when housing is in the news. It’s a consensus, an article of faith, everyone agrees!

It’s a figure almost never questioned, accepted as Sajid Javid stated in relation to housing policy in 2017, lack of supply “It’s a simple statement of fact.”

 

Yet despite being repeated ad infinitum, there is no evidence to support the figure. It appears to have emerged in October 2017 with a comment by Sajid Javid, since when it has taken over as the goal. Prior to that in February 2017, Sajid Javid quoted a figure of between 225,000 and 275,000.

 

Ian Mulheirn states that although different groups come up with similar figures on housing targets it appears there is broad agreement across a range of sources. But the figures originate in a single source. Using the House of Lords paper from 2016 as an example, he states “It cites two academics at Sheffield Hallam, who report that there is a “broad consensus” that we need between 240,000 and 300,000 per year, in turn citing: KPMG and Shelter (2015), which says ‘around 250,000’— citing Holmans (2013); Lyons (2014), which says 243,000 — citing Holmans (2013) and Holmans (2013), which says 243,000 per year are needed between 2011 and 2031."

 [Mulheirn, I., 2018].

 

Household projections support the need for more house building

Household projections are frequently used to support housing targets. The 2008 projections from the Department for Communities and Local Government gave a figure of 280,000 extra households per year. Their 2014 forecast was for 235,000 per year, while the 2016 figure was 260,000 per year.

 

However the housing targets have suffered from a fundamental flaw – the household projections upon which such targets are based have been incorrect. “High housing targets have been derived from various estimates of household growth. These have “repeatedly exaggerated official estimates of growth in the number of households in the UK." [Mulheirn, I., Is there really a housing shortage? 2017]. 

 

But, and it’s a big but, the actual growth in households has been far lower. In 2017, Mulheirn estimated that household numbers had increased by 152,000 per year since 2008, while comparison of the 2021 census with the 2011 census indicated a growth of 141,000 households each year in England.

 

There are real housing issues, real problems that require addressing. Yet none of them would be resolved by building all the additional houses deemed necessary by the 300,000 figure. That is because the cause of these problems is not one of a lack of supply, but a series of policy measures which have created the conditions responsible.

 

 

References

Cheshire, Paul (2018) Broken market or broken policy? The unintended consequences of restrictive planning. National Institute Economic Review, 245 (1).

 

DCLG, February 2017, Fixing our broken housing market.

 

Morton and Dunkley, 2023, The Case for Housebuilding, Centre for Policy Studies.

 

Mulheirn, I., Is there really a housing shortage? 2017. 

https://medium.com/@ian.mulheirn/part-1-is-there-really-a-housing-shortage

 

Mulheirn, I,. Jan 22, 2018, Fixing our broken housing crystal ball.

https://medium.com/@ian.mulheirn/fixing-our-broken-housing-crystal-ball-6d6405963e0

 

Watling, S, Breach, A, February 2023, Centre for Cities, The house building crisis, The UK's 4 million missing homes.