This is an economist analysing the housing market

Dear Lord Above:

So what can we do about it? Well, ultimately we want housing to be cheaper relative to income. We also want this to happen while banks are lending sensibly. Keeping interest rates low will benefit those who have houses, but do little to help those who don\’t. There is therefore only one thing that will square these objectives, and unfortunately it\’s the one thing that no one wants to face up to as a conclusion: instead of working out clever ways of financing houses, just build more houses. Let me know if you see that happening.

Weep for the country with such facile, shallow, economic analysis being forced upon it.

\”Just build more houses\” is twattishness to a high degree. How do we build more houses would at least be an interesting question.

And here simple, traditional, (neo-classical even, none of your modern neo-liberal rubbish) economics will provide clues to the answer.

The desired new housing is almost all in the South of the country. We know this because as John Prescott pointed out with his Pathfinder programme, the solution to the woes of the Northern housing market was to knock 400,000 houses down.

OK. Now, if we build more houses down in the South can people afford them at the current price levels? No, not really, that\’s what the piece itself is complaining about.

Hmm, so, perhaps we need to build lots more houses, prices will come down and thus people will be able to afford them?

OK, what is the major limitation on building lots more houses in the South? In fact, what is the major cost of building a house in the South?

No, it\’s not actually the cost of building the house. We can put up a nice 3 bedder for £100,000 using traditional building techniques. Start using modular ones and we can whack up something really rather nice for under £50k (and less for a sparse 2 bedder).

So why isn\’t the market being flooded by houses at these sorts of prices? We would, after all, in a free market, expect prices to be somewhere around the marginal cost of production, no?

Because we\’re not in a free market. The largest cost, by far, of a house in the South is not the house, nor even the land upon which it is built. It\’s the piece of paper that allows you to build on that piece of land.

I could go out today and buy a nice piece of a field, an acre (want a nice garden of course, room for a veggie patch, need clear views of the sun etc to make the Passivhaus concept work and so on) for £8,000 or so. I could build my house for that £100k. So why doesn\’t a nice 3 bedder on an acre cost £108,000? Because the market value of being able to build a house (or more accurately, houses) on an acre in the South is around £500,000.  Perhaps a million, dependent upon precise location.

And that\’s caused purely by the shortage of chittys that allow you to build upon land. An entirely artificial shortage caused by our planning system. Thus, if we break the artificial shortage caused by the planning system we bring down the cost of the chittys, the explosion of housebuilding brings down the price of housing and we get what we want: a land with homes fit for heroes.

With nice gardens.

This has actually been pointed out before. By people who decided not to do facile, shallow, economic analysis, but rather thought they should look at the problem in some depth. You know, like economists are supposed to do?

15 comments on “This is an economist analysing the housing market

  1. Johnny: No-one is promising to destroy the value of anything. All we’re concerned about is reducing the price, which presently does seem monstrously out of kilter with anything reasonable.

    I prefer the Leunig-CentreForum solution of local land auctions, but frankly I’m less sold on any given solution than on convincing people that there is a problem crying out for some creative thinking.

  2. Tim: a bit perplexed by your rant here.

    It’s a bit like criticising someone who looks at the economic data and says “debt is too high” for not coming up with details of specific cuts and tax rises for reducing it. Antonioni correctly identifies the problem (and johnny bonk’s response reiterates it), and that was the point of his article.

    Perhaps he’ll write another one about his views on how to get more housing built, or perhaps he won’t, but it’s a bit off criticising him for not doing something that he wasn’t commissioned or intending to do…

    (come to that, the ASI report is just as fatuous as Antonioni’s piece, in that it doesn’t propose a solution to the problem of fuckwits moaning that they’ll have the value of their things destroyed…)

  3. I know samples of one are notoriously bad, but given my own experience as a latter end baby boomer I would say that jonny is correct – the problem is political.

    We were brought up to believe that property is the best investment and at least 3 of our friends who are approaching retirement have their pension fund tied up in their house and are starting to think about trading down to release the equity.

    Add this to the fact that older people are more likely to vote and you start to see why politicians are always going on about trying to raise house prices, or at least stop the decline.

  4. I found your criticism odd too.

    “Build more houses” implictly means “ease planning laws”.

    Tim adds: No, it doesn’t. Vide all those stating that this means we must “invest” more in “social housing”. Having decided to increase housebuilding we still face the question of how. And there will always be those who say the answer is to tax and spend more, just as there are occasionally those who say that the answer is to repeal some of the regulations we already have and let the market do its work.

  5. Of course the best way to make housing cheaper in the south would be to only help poor workers live there.
    People who are long term unemployed/pro single mums should not be given housing which workers can not afford.
    There are plenty of empty houses in other parts of the UK. We could give the local council the rent we save so they can lower council tax or something.
    (Of course some parasites in London – and I know one – would go back to the home country if forced to move to somewhere colder but that would be a benefit)

  6. Tim, I think you are looking for an area of disagreement with the article just for the sake of it. Building more houses vis-a-vis recent UK building trends to most people would imply reforming the whole planning system.

    We do need more social housing because there will always be some people who are not mortgateable. Social housing need not mean public money building said housing. Moreover, it certainly does not inherently require local councils to manage the stock as fiefdoms. With the right incentives there is nothing to stop institutions such as pension funds and insurance companies providing the capital to build the social housing. They could then appoint factors to manage the stock on their behalf and gain a long-term dependable sterling yield for their members. Institutions buying and managing in the private rental market is the big thing lacking in the UK market compared to other countries. As a consequence, we’ve got a buy-to-let cottage industry that has caused more problems than it has solved.

    I don’t think it is quite as simple as drawing a line across the country and saying we need more housing here and less there. Edinburgh is seeing more £1 million+ sales than anywhere outside of London. All over there is a lack of family housing and too much town centre apartment type dwellings. The planing system is definitely to blame for that outcome.

    Housing is always going to vary in price in different places even with no planning laws at all. Location is in the price just as much as the marginal cost of producing the housing.

  7. Freeing the housing market via the methods as suggested by that Adam Smith Institute book you mention would increase available supply somewhat. There is always, however, going to be a price differential between what it costs to build in the Southeast/London and say, Wales. That is, actually, a sign that the market is working. The prices are signals: encourage more high-rise developments, or encourage firms/others to move to other, less densely populated areas, and so on.

    Some folk have complained that private landlords/councils “hoard” land; I see little evidence that this happens in a functioning market, although with local governments, this does seem to happen. In West London, for instance, I know of several places where councils hang on to land that is worth squillions but will not release it, usually for some sort of dumbass political reasons.

    It goes without saying that anyone who claims LVT will help resolve the issue should be taken out of the back entrance, followed by a large bear.

  8. Tim, you can’t build more houses (in the amounts required) without easing planning laws, and I don’t see why the article should be interpreted as meaning ‘build more social housing’.

    I think this is an example of how you sometimes get confused between monetary values and real values.

  9. “We do need more social housing because there will always be some people who are not mortgateable.”

    That some people are not creditworthy only implies that we should have rented housing. It doesn’t imply that we need “social” i.e. subsidized housing.

  10. I’ve read (Daily Mail?) that Travellers are defacto exempt from the planning laws– that they can put up a building over a holiday weekend and the local authorities are loath to do anything about it. Is this true?

  11. While I agree that it should be easier to get planning permission (although and housing costs should come down I have a question, what about infrastructure?

    also I would add building a 2 bedroom semi isnt the answer, really we need apartment buildings done properly with infrastructure links, parks etc and in urban areas as they are simply more efficient in pretty much every way. Also suburban living is a apparently downward trend, people are moving back to urban centres particularly the younger people for whom cities are aspirational places not suburbs.

    I do think we should go more manhatten and less swindon.

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