Are we wrong on Housing supply?

We’re having the usual tranche of housing policy ideas centred on the traditional dogma that we face a shortage of supply relative to demand. Namely that if we are to tackle the affordable housing issue, we’re going to have build our way out of it. Yet are the planners, the NIMBYs, second homers, the land bankers, private landlords, land taxes, foreign investors and estate agents to blame?

Demand, supply and prices appear to be simple economics. The first problem is obviously that houses are not just homes but also assets. ?Some, like Ian Mulheirn, have long argued house pricing is better understood against investment criteria. But he also notes that the stock of dwellings has grown consistently faster than the number of households for at least the past last two decades. Over 1996-2018, the growth in stock represented 168,000 net additional houses per year [MHCLG] but household growth over the same period was 147,000 net additional households pa [LFS]. The population has increased by 14.6% but housing space by 25.7% or average number of bedrooms by 19.5%.

Rubbish, I hear, but we have been using new build stats rather than net additions and relying on over projections assuming average household sizes would continue to shrink below 2.3. Whilst it must be true that as people get richer, they demand more housing, they do face pricing hurdles.

What largely determines house pricing has been explored on Bank Underground; an interesting site for the Bank of England research staff. In ‘Houses are assets not goods’, their model found that changes in the risk?free real rate are a crucial driver of changes in house prices — the model predicted that a 1% sustained increase in index?linked gilt yields could ultimately result in a fall in real house prices of just under 20%. The approx. 5.5 % decrease in the yield on inflation proof UK government debt between 1985 and 2018 may have caused roughly a doubling of average UK real house prices across the period. That, combined with income rise, accounted for nearly all the observed rise – and not supply constraint. They also tested supply increases and found that if, over 1985-2018, the supply had doubled, prices would only have been 9% lower than the actual 158% rise.

The negative real interest rates and massive quantitative easing (QE) has led to enormous fiscal liquidity which has inevitably led to significant inflation. But now, as Jamie Dimon (CEO, JP Morgan Chase) points out, we face the spectre of an economic hurricane. The Federal Reserve raised rates and began its QT (quantitative tightening) on the 1st June running initially at a rate of $95 billion per month but this unprecedented action is running in concert with the struggling post-Covid supply chain and the disrupted commodity markets caused by the Ukraine invasion.

The predicted rate rises to circa 5% will inevitably constrain or reduce real house pricing. But, against that, property has been the traditional hedge against inflation although it stands, as many see it alongside equities, as a generally overpriced commodity already. The forthcoming ‘structural fiscal re-adjustment’ could be challenging.

20190820b-CaCHE-Housing-Supply-FINAL.pdf (housingevidence.ac.uk)

?Bank of England Staff Working Paper No. 837