Anthony Browne

Why building more houses won’t bring prices down

Does the law of supply and demand apply to housing? In other words, will building more houses and flats bring down prices? There is a growing economic consensus that the surprising, and rather counterintuitive, answer is: not to any significant extent. It is a conclusion that has revolutionary implications for housing policy, and what we need to do to help people realise their dream of owning their own home.

Ian Mulheirn, chief economist at the Tony Blair Institute, concluded in a recent paper for the UK Collaborative Centre for Housing Evidence: 

‘The large body of literature on the responsiveness of house prices to supply indicates that even building 300,000 houses per year for 20 years would do little to reverse the price growth of the recent past. Such a strategy therefore does not offer an effective solution to the problem of high prices.’ 

The idea that building more houses can make them more affordable is underpinned by a basic, and disprovable, fallacy

It is not a maverick view. The Financial Times asked 88 leading economists if increasing housebuilding would lead to a fall in prices. The responses were far from positive.

In fact, it is estimated that building 300,000 houses a year for 20 years would only lead to a reduction in prices of between seven per cent and 13 per cent, all other things being equal. But other things aren’t equal, and other things drown out that effect. UK house prices have risen by 160 per cent in the last twenty years, so even if we embark on two decades of sustained high level housebuilding, it would have little real impact on affordability for first time buyers.

There are two main reasons that the simple idea that building more houses will make them more affordable doesn’t hold true.

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