Crisis, what crisis?

What is the cause of the housing crisis? Most people in our sector would answer: a lack of supply. It seems obvious, doesn’t it?

Our failure to build enough homes for the past four decades is the cause of homelessness, of rough sleeping, of high rents and high house prices, and of a widespread increase in human misery. Build enough new homes and, by the immutable laws of supply and demand, prices and rents will fall, and everyone will have a decent, affordable place to live.

Of course, it’s not as simple as that, and in recent years a growing number of commentators have argued that supply on its own is not the answer: that there is, in fact, no shortage of homes and that the cost of housing has not increased significantly in real terms.

Economist Andrew Lilico, who has written for Policy Exchange and the Institute for Economic Affairs in the past, leads the charge on this, and has even called the housing crisis a “myth”, although I would challenge him to walk around central London and explain that to the hundreds of people sleeping rough!

For these people, interest rates are the key. Historically low rates have led people to consume more housing than they would if rates were higher. “When interest rates return to 4-5%, allthis issue will vanish like April snow,” says Lilico. It’s a little like the argument that building new roads just creates more traffic and is self-defeating. Of course, this is broadly true if motoring costs remain low and governments refuse to invest in decent public transport.

The latest report arguing that supply is not the problem comes from the Tony Blair Institute and its executive director, Iain Mulheirn. He states that interest rates have fallen from an average of 8% in the 1990s to around 2% now and that this is the primary cause of high house prices. Mulheirn also uses “official data” to show that there are more homes than households, and that this surplus has increased from 660,000 homes in 1996 to more than 1.1 million now.

I think someone who’s worked in housing for even a short time would recognise the three key flaws in this argument: the increase in second homes; the number of empty homes, and the fact that households form when housing is available and not the other way around, i.e. there are millions of concealed households across the country waiting for a place of their own. This “no housing crisis” thesis also tends to ignore the fact that there are also huge regional imbalances, with severe under-supply and an affordability crisis in London and the south east, in particular.

 

In terms of absolute supply, Mulheirn argues that the government’s target of 300,000 homes a year will do little to bring down prices and rents.

He writes: “… the available academic evidence suggests that no plausible rate of supply would significantly reverse the price growth of the past two decades…a 1% increase in the stock of houses tends to lead to a decline in rents and prices of between 1.5% and 2%, all else equal. This implies that even building 300,000 houses per year in England would only cut house prices by something in the order of 10% over the course of 20 years.”

I have a lot of time for Blair (oh, for the stability and progressive policies of his administration right now!) and, to be fair to Mulheirn, his report is nuanced and he does argue the case for more social housing. But I think the danger of reports like this is that the nuance disappears beneath the headline, and a report that says “supply is not the problem” will be taken up and used by nimby campaigners and those opposed to housebuilding in general. This example from the Hands off Thaxted campaign quoting Lilico, is a case in point.

In addition, the ‘more bed spaces than people’ argument defies reality. Many people consume more housing than they require. I will wager that almost every senior executive working in our sector has more bedrooms than they need. That is how the free market works, but, short of Soviet-style commissars going around billeting people in empty bedrooms, this is just a fact of life that we have to accept.

However, I do have some sympathy with the argument that just piling more private sector homes into the market will fail to reduce prices and rents significantly. The answer is obvious: let those who want to enjoy the benefits and pitfalls of the market to do so, and to invest in genuine social housing for those who don’t.

The government’s own figures on public attitudes to housebuilding show that 26% of renters do not want to buy – and for many of them a social housing home would be an ideal home. Building 100,000 social rented homes a year would produce a million homes within a decade and this, by removing people from the market who don’t want to be there, would have much more impact upon prices and rents than a zealous emphasis upon private housebuilding.

In the real world, of course, private housebuilding is more or less the only game in town, and our sector will have to live off the crumbs falling from that particular table for some time to come. But as a sector we should be rigorous in challenging reports that say supply is not the problem. It is.

(This blog was first published by the Housing Quality Network on 10th September 2019)

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