Comment: Building more houses won’t bring down prices
By Daniel Valentine
Housing is of great significance. A safe, settled home is the cornerstone of personal autonomy and family life. It has unique economic and social consequences in a way most other products don’t because a) housing is in limited supply b) people cannot consume housing separately, but do it collectively in "communities" and c) family life, on which the future of the nation depends, requires a certain standard of housing to prosper.
On Saturday the Bow Group published a report that proposes restrictions on the investment purchases of UK homes in order to restrain price inflation. The report demonstrates how reform of housing demand is both essential and possible. It rejects the conventional wisdom of the property lobby that low interest rates, government subsidies for lenders and buyers, and planning deregulation will solve the housing affordability crisis. In the face of almost unlimited demand from both domestic and overseas investors, who see housing as a safe haven for their money, building more houses will have no downward effect on prices.
The current phenomenon of house price inflation began in 1997 and ran for a decade, until 2007. The answer to the mystery lies in the period 1996-1997. There are only three factors that explain this phenomenon:
(1) the growth of owner-occupation demand caused by population growth (chiefly due the huge increase in immigration after 1994)
(2) the growth of investment demand because of the availability of “buy-to-let” (from 1996) and
(3) the emergence of a 'nouveax riche' global elite in search of second homes and investment properties (but tightly focussed on a handful of elite cities worldwide of which London is by far the leader) following the opening up of formerly closed economies such as Russia (from 1992) and China (from 1997) in the 1990s.
These three factors have led to a vast growth in the competition for houses in London and SE England, with price escalation as the inevitable result, and British youth as the principal victims. Many people not already on the housing ladder must be wondering if they'll ever get onto it.
The solution is not extra supply. Extra supply feeds house price inflation, by reassuring investors that house price inflation will continue. The property lobby says that price is a function of supply, and that increasing supply will eventually cut prices. The opposite has actually proven to be the case with those houses classified as investment grade.
When the growth in housing supply fell dramatically in 2007, did prices rise? No, they actually fell sharply. This is because investment markets operate differently to user markets. Investors are attracted to rising prices, whilst users are deterred. So the more prices rise, the greater the number of investors who will be drawn in. Investors welcome extra supply because it keeps the bubble going. Two decades of price rises in UK residential property has produced a belief that UK property is a "safe bet".
The rising market is pulling in a greater diversity of investors, including middle class amateur investors from all over the world. Many of these are already priced out of central London so are looking further afield, at more distant parts of London and regional cities. Institutional investors are also increasing their stakes in residential property, further inflating the market through the bidding wars that result.
Growth in housing supply also creates other problems – the classic problems of over-population, which are compounded in a welfare state which is configured to a specific and stable population. The UK’s population has grown by seven million in the twenty years from 1994 to 2014, from 58 million to 65 million. The housing stock in the same period has grown by 3.3 million from 20.1 million to 23.4 million.
This unprecedented and unplanned population growth has led to public services being shared amongst a much larger population. The rapid loss of land to housing has failed to check house price growth, which means the UK is being hit by a triple whammy due to uncontrolled population growth: the permanent loss of land for recreation, public services and agriculture; extra pressure on public services caused by the UK’s swollen population; and the escalation of house prices.
House price inflation is causing immense social problems; overcrowding, homelessness, residential segregation, the elimination of parks and social spaces, tenancy insecurity et al. and yet the government has only served to inflate the market further through the persistence of bizarrely low interest rates (a free market would set much higher rates) and government subsidies to both lenders and borrowers.
The Bow Group report suggests 25 solutions that will help restrain investment demand, each of which is already in use by one or more national governments. The UK is almost unique in its refusal to limit investment demand, and simple solutions are available which will take the heat out of the property market. The sooner a correction occurs, the less painful it will be.
Without this regulation, the prognosis is very bleak. Prices will continue to rise as more private and institutional investors enter the market. Foreign investment demand will expand to all parts of London, and to regional cities such as Birmingham and Manchester. These cities have long been affected by domestic "buy to let" landlords chasing young professional and students. But the buy-to-let landlords will face increasing competition from institutional investors buying whole apartment blocks and foreign investors buying second homes and investment properties. Owner occupiers will increasingly struggle to compete with investment buyers, and will either have to endure life-long tenancies or emigration from the SE of England.
This report hopes to start a conversation within the Conservative universe about housing. I think the time is right. There have been over 700 reader comments on Patrick Collison’s review of the report and more than 90% of them are supportive of the basic idea of it; that house prices have been artificially inflated by investment demand and government policy.
There is an immense public anger over house prices but the government is failing to listen. Conservatives are under suspicion; suspicion that their talk about "working people" is a branding exercise rather than a genuine belief, suspicion that they personally benefit as homeowners and private landlords, and suspicion that their housing policy is crafted by the property lobby.
There is an extraordinary amount of cynicism about the Conservative approach to housing, and it’s essential that the party shows they recognise the problem and are dedicated to extending home ownership to all who want it, in whichever decade they were born. Government exists to solve problems; especially ones of their own making. Is it asking too much for British citizens to have a chance of owning a house in their own country?
Conservatives have faith in markets and capitalism, but when a market is failing as badly as the UK housing market, reform is needed. This isn't rocket science, and it isn't socialism, it's just common sense.
Daniel Valentine lectures at Regent’s University London. He can be contacted via firstname.lastname@example.org
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