Building more houses won't solve anything

This piece first appeared in last week’s Spectator.

Britain does not have a housing shortage. We have a problem with the cost not the availability of homes. This can’t be solved by building more houses, because it is not caused by an insufficiency of houses.

I’m no economist. My understanding of the dismal science is rudimentary. I may be shot down in flames as an ignoramus. But here goes. Residential property has become a kind of currency, prized more for value than utility; and its role as a financial asset is messing with its ability to perform the function of actually housing people. Straining to increase the supply of housing will no more restrain price than straining to increase gold production would make much difference to the price of gold. Supply being constrained, and appetite sharpened not by need but by acquisitiveness, even the most strenuous attempts to boost production will not bring prices within the reach of an increasingly large part of the population.

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Jonathan Sacerdoti

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To pursue my argument, I ask you to take an imaginative leap into a Magritte-like dreamworld. Just pretend.

Imagine everyone needed to have an umbrella. Don’t ask why: they just did. To lack this item was universally acknowledged as serious deprivation. To possess it was a fundamental human need. And imagine it was not possible to import umbrellas: they had to be made here; and they were difficult to make, and took ages. Even if we doubled production, the national umbrella stock would only be increasing by about 1.5 per cent per annum.

Imagine that there was no physical shortage of umbrellas — yet curiously this did not dull the demand. Why not? Because we’d grown confident that an umbrella’s value could only rise because the market was assured and supply was restricted: a one-way bet, so in a million individual decisions, we collectively took it. We aspired to umbrellas as rural Africans aspire to cattle: not to eat or milk, but as a sign of wealth, and tradeable.

Thus the purchase of an umbrella became a kind of investment, prized for its value as much as its utility. People with money might buy more; or trade up their umbrellas for classier and more expensive models. Umbrellas became a way of saving — for old age; for future resale in hopes of a capital gain; or for a rainy day in both senses of the word. Those with cash to spare (or credit available) vied to outbid others. Prices rose.

The rising umbrella price began to leave more people out of reach of ownership. But you could always hire umbrellas, so the demand to rent increased. Owners of second or even third umbrellas could make good money from renting out; so people with sufficient funds started purchasing extra umbrellas with the sole purpose of offering them for rent. This new source of demand pushed the price of umbrellas even higher — and rental prices increased apace as umbrella owners took a return on their investment.

A curious situation arose. Although there were in fact nearly enough umbrellas to go round, owners were bidding up the prices of each other’s umbrellas in order to increase their holdings in this commodity; rental costs were increasing in line with umbrella prices; and sections of society, especially younger people, saw a receding prospect of ever owning one. This caused popular discontent. A small increase in the number of the ‘umbrella–less’ and a larger increase in the number of those struggling with umbrella costs gave rise to a sense almost of emergency. There was (people told their politicians) an ‘umbrella crisis’.

Politicians responded with ‘help-to-buy’ schemes for first-time umbrella buyers; vowed to increase production of new umbrellas; and had modest success. But they were never going to be able to flood the market, not least because the new umbrellas made attractive investments for the better-off, who snapped them up.

The root of the problem was that unless umbrella supply could leap well ahead of umbrella demand, umbrella purchase would always look like a sound investment, savers would vie to buy, and prices kept rising. And so it came about that a country with almost enough umbrellas for everyone talked itself into near panic about what they started calling an umbrella crisis. And there was indeed a problem: but a problem of price inflation largely unrelated to scarcity of supply. As I write, the politicians are talking about penalising owners of second umbrellas or unused umbrellas; or banning non–resident foreigners from owning umbrellas as investments.

Enough about umbrellas. You get the argument. But why do I suggest we do not face an acute shortage of houses as population grows and average household size decreases? Because I’ve heard no convincing rebuttal of Ian Mulheirn’s argument that we’re overestimating by 30-40 per cent the number of new dwellings we shall need, year on year, in the years ahead.

Ian Mulheirn is director of consulting at Oxford Economics and a former Treasury economist. You will find his posts easily online. Most striking among his arguments is a mistake he has identified in official predictions for the increase/decrease in household formation. The smaller the households, the more dwellings required, and households have been getting smaller over decades. But Whitehall has projected forward this reduction without adjusting for more recent levelling off. Ministers have relied, too, on old estimates for population growth, which have recently been revised downwards, yielding a million fewer people than projected by 2031. Current projections take no account of that.

All told, Mulheirn estimated last week that we’ll need 170,000 new homes per annum in the years ahead, not the 300,000 the Chancellor estimates — and fewer, not more, than we’re building at the moment.

Good news? In a way, not. A shortage of homes suggests its own solution: build more homes. We know how to do that. But a distorted pricing structure that skews the housing market to the needs of investors, turns homes into savings vehicles and excludes millions from aspiration and security… does anyone know a free-market answer to that? I don’t.