Is it a fallacy that simply building more homes will in itself resolve the house pricing crisis?

[plaguedbyfoibles]

I've come across conflicting views and literature on this.

https://www.spectator.co.uk/article/why ... rices-down, written by the Conservative MP for South Cambridgeshire Anthony Browne (who sits on the House of Commons Treasury select committee), suggests that credit availability is more of a driving factor, as he points out that, while mortgage rates have dropped by 75% since 1996, the number of mortgages issued to first time buyers halved after the 2007 crash, a view supported by https://citywire.co.uk/investment-trust ... ds-insider and http://news.bbc.co.uk/1/hi/business/7343104.stm (and I suppose it makes economic sense that, if mortgage rates were low, you wouldn't want to be maintaining issuance at the same levels as before).

Currently, I am reading Home Truths: The UK's Chronic Housing Shortage – how it Happened, why it Matters and the Way to Solve it by Liam Halligan, who suggests the issue is more to do with an oligopoly of large developers who increased their market share after the credit crunch wiped out a lot of SME housebuilders, and who now use their market dominance to constrain the supply of new housing to artificially keep prices high and to only act on planning permissions at times of convenience to them (as opposed to those SME housebuilders who need immediate cashflow).

Halligan feels that the government has not done enough in the way of supply side reforms, being critical of Help to Buy in particular (which he describes as allowing the large developers to gorge on taxpayers' cash).

He also suggests that the most radical reform that can be made is to repeal the 1961 Land Compensation Act, which ended the practice of land value capture (LVC) by way of allowing any uplift in land value that arose from the granting of planning permission to accrue entirely to the landowners and the large property developers, as he suggests that LVC was a large contributing factor to the post-war housing boom, by allowing land to be built on at reasonable cost - curbing speculative demand for land as a result - and allowing local councils / communities to use the gains from land value capture to invest in nearby infrastructure, such as schools and hospitals.

Halligan also points out the increased reliance of those in subsidised housing on private landlords, which I suppose was exacerbated by Thatcher's flagship Right to Buy scheme, in that they did not replace any lost social housing stock, while a select committee report published a few years ago suggests that up to 40% of ex-council homes that had been purchased via the scheme were now in the hands of private landlords.

It's also been pointed out that there is a significant culture of renovation / extension work on homes in the UK, allowing homeowners to constantly add value to their properties, and providing them a cheaper means of increasing the extent of their property, as opposed to relocating to a larger house.

I am sure building more homes will have an effect, but I am not sure what other factors are at play in driving house prices up.

Disclaimer: I am neither an economist nor have I formally studied economics, just have an interest.

[AsleepInYorkshire]

I've come across conflicting views and literature on this.
Currently, I am reading Home Truths: The UK's Chronic Housing Shortage – how it Happened, why it Matters and the Way to Solve it by Liam Halligan, who suggests the issue is more to do with an oligopoly of large developers who increased their market share after the credit crunch wiped out a lot of SME housebuilders, and who now use their market dominance to constrain the supply of new housing to artificially keep prices high and to only act on planning permissions at times of convenience to them (as opposed to those SME housebuilders who need immediate cashflow).

I'm not sure the answer is as straight forward as that. In the 1980's small builders were responsible for 40% of all new homes. Since then a number of recessions, increased issues getting land through the planning process and, believe it or not, a lack of finance has reduce that to 12%. Whilst the 2007 crash may have accentuated the problem I'm not sure it's the cause of the problem. Large housing companies backed by substantial amounts of shareholders cash effectively created land price inflation as these companies fought over land. A self-fulfilling demise of the industry where the only real losers were shareholders. If I recall correctly Barratt's were effectively broke and were kept afloat by their bankers after the crash.

Halligan feels that the government has not done enough in the way of supply side reforms, being critical of Help to Buy in particular (which he describes as allowing the large developers to gorge on taxpayers' cash).

Government have also set up Homes England to help SME's finance entry into the market. Often HE will take up an equity position within an SME. They are supplying new money to the industry.

He also suggests that the most radical reform that can be made is to repeal the 1961 Land Compensation Act, which ended the practice of land value capture (LVC) by way of allowing any uplift in land value that arose from the granting of planning permission to accrue entirely to the landowners and the large property developers, as he suggests that LVC was a large contributing factor to the post-war housing boom, by allowing land to be built on at reasonable cost - curbing speculative demand for land as a result - and allowing local councils / communities to use the gains from land value capture to invest in nearby infrastructure, such as schools and hospitals.

This confuses me greatly. Most new building sites are "taxed" and have to pay for the development of new schools and infrastructure. It's also possible for any developer be they small or large to offer the land-seller a deal which secures the land at a future market price. Which includes walk away options. I have never in 41 years of work within construction both residential and civils witnessed directly or heard indirectly of any national builder sitting on land that is "oven ready" for build commencement.

Halligan also points out the increased reliance of those in subsidised housing on private landlords, which I suppose was exacerbated by Thatcher's flagship Right to Buy scheme, in that they did not replace any lost social housing stock, while a select committee report published a few years ago suggests that up to 40% of ex-council homes that had been purchased via the scheme were now in the hands of private landlords.

I think the only relevant part here is that social housing wasn't replaced when sold. However, the amount of social housing being constructed recently has placed a massive burden on the industry. Skills shortages across the board are driving wages up and production down.

It's also been pointed out that there is a significant culture of renovation / extension work on homes in the UK, allowing homeowners to constantly add value to their properties, and providing them a cheaper means of increasing the extent of their property, as opposed to relocating to a larger house.

The cost base for extending an existing home is far more expensive than moving. Indeed new build doesn't attract VAT, but existing homes extensions and renovations do. There really isn't a comparison as bulk buying will not really apply which will add another 40-50% to the costs and the works will likely involve structural alterations which will cost money but not additional space for that cost to the project.

I am sure building more homes will have an effect, but I am not sure what other factors are at play in driving house prices up.

1. A lack of skills in the industry. After the crash training all but stopped. There's a huge gap in management skills today. But let's be honest given a choice between laying bricks with all the physical demands or working in an air conditioned office looking at a computer screen most would opt for the latter. Bricklaying as a trade hasn't really changed in centuries. It's still a back breaking job and there are no radiators on a scaffold.
2. Land prices have a major impact on house prices. Many land owners do not need to sell land in a recession. They can wait it out and get best buck for their land when times improve. Larger builders partly overcome this by strategic long term strategies. But these can be costly and often are 5-10 years from build phase.
3. Brexit has caused some inflation. So too have the Chinese/US trade wars.
4. House price rises should begin to decrease as the recent headwinds are removed and absorbed by the builders and the buyers.

Disclaimer: I am a Quantity Surveyor with 41 years experience. At age 28 I was looking after a commercial department for a national house-builder with a [current] turnover of about £150m. I witnessed at least 2 vicious recessions during my tenure and saw skills within the industry simply thrown away as the market turned down. The crash of 2007 left many out of work and a substantial number did not return to the industry. Add that to no training of new entrants into the industry and the recent rapid rise in the number of "other" construction works (HS2) and £5bn for social housing and all of a sudden new house builders have to deal with significant rising costs which they have to pass on.

[Alaric]

The cost base for extending an existing home is far more expensive than moving. Indeed new build doesn't attract VAT, but existing homes extensions and renovations do.

what about the effect where seemingly property is worth more dead than alive? You find a 1950s or 1960 bungalow on a reasonably sized plot being demolished and replaced by a new house taking up as much of the plot as possible. Typically this in in the Home Counties where small towns and villages have expanded as far into the surrounding farmland as allowed by green belt policies, so infill is the only permitted development.

Bungalows on a sizeable plot indicate that at some time in the past, land had been dirt cheap. Housing previously owned by local authorities with generous gardens and open spaces is another give away.

[AsleepInYorkshire]

The cost base for extending an existing home is far more expensive than moving. Indeed new build doesn't attract VAT, but existing homes extensions and renovations do.

what about the effect where seemingly property is worth more dead than alive? You find a 1950s or 1960 bungalow on a reasonably sized plot being demolished and replaced by a new house taking up as much of the plot as possible. Typically this in in the Home Counties where small towns and villages have expanded as far into the surrounding farmland as allowed by green belt policies, so infill is the only permitted development.

Bungalows on a sizeable plot indicate that at some time in the past, land had been dirt cheap. Housing previously owned by local authorities with generous gardens and open spaces is another give away.

Hmmm ... I think you've raised a very interesting point. I'd suggest with all humility that it isn't the property that has changed in value, but the land it's built upon. Build density wasn't a problem 70 years ago. In addition as we have expanded those areas that were once not sought after have now changed their appeal.

AiY

[Alaric]

I'd suggest with all humility that it isn't the property that has changed in value, but the land it's built upon.

I expect that's the case.

If you look back to the 1920s and 1930s, there was a lot of development around major cities on what was then perceived to be redundant agricultural land. Indeed it was redundant at the time when previously used to provide fodder to power the city's transportation systems.

Green belt policies from the 1940s onwards protected such land and the war time experience had suggested that domestic food production was desirable even when it needed to be subsidised.

[Lanark]

Yes, House prices have nothing to do with the supply of houses, rather they are governed by the supply and demand for CREDIT.

Between 2008-2010 we had falling house prices in spite of low interest rates, not because someone built an extra 10,000 houses, but because the banks were restricting lending, that only ended when MMR was introduced in 2010.

I think journalists and politicians like to keep peddling nonsense about needing to build more houses because 1) it enables them to get nice backhanders from the big house builders and 2) it avoids more difficult conversations about the mess the global economy is in.

[Bubblesofearth]

Between 2008-2010 we had falling house prices in spite of low interest rates, not because someone built an extra 10,000 houses, but because the banks were restricting lending, that only ended when MMR was introduced in 2010.

Jeez, I know there were supposed links to autism but an easing of bank lending as well? Makes you wonder what side effects the latest round of vaccinations might cause.

BoE

[88V8]

The cost base for extending an existing home is far more expensive than moving. Indeed new build doesn't attract VAT, but existing homes extensions and renovations do.

what about the effect where seemingly property is worth more dead than alive? You find a 1950s or 1960 bungalow on a reasonably sized plot being demolished and replaced by a new house taking up as much of the plot as possible.

Interesting points.
Our Home Counties 3-bed detached bought for £38k in 1980, we added a side extension of two rooms in 1991 at a cost of £50k.
Large bathroom and one reception.
Partly it was expensive because I wanted to match the existing joinery etc and external appearance so it did not look like an extension, but it's true, as a mean of buying a larger house it was expensive.

Adjacent to us was a 1920s bungalow on a third of an acre. One family owned from new. After we moved out in 2011 the paterfamilias died and now there are three huge detacheds sitting on that plot.
The location does not really justify it - busy B road, buses - but there it is.

However, all this and the foregoing interesting points, is about the supply side. The driver of house prices, indeed the price of anything, is demand.
Prices are rising because our population is rising, due to net immigration and the excessive immigrant birthrate.
The solution is a policy of zero net immigration and disincentives for more than two children.
Reduce the population and the self-inflicted 'crisis' will evaporate, along with the damage to the natural world such as our sewage systems which I dare say coped OK at the population levels for which they were designed.

V8

[servodude]

Prices are rising because our population is rising, due to net immigration and the excessive immigrant birthrate.
The solution is a policy of zero net immigration and disincentives for more than two children.

If you can, because you sound so certain... could you substantiate the claims here?

Before you try to though you might want to give a look towards "Factfulness" by Hans Rosling which does a very good job of driving a big hole through many of the plausible fallacies regarding "population" and "immigration" that have recently been regaining popularity
It's probably not quite the situation you expect even if the racist scaremongerers sound convincing

As an immigrant myself we've only just replaced ourselves
- though left the UK in the process


-sd

[GrahamPlatt]

Using the well known theory of supply and demand, you’d think it really was as simple as creating more houses. Or conversely, reducing the population, or even just making the population poorer so reducing the expectation of high values. And so it was I thought that what with covid doing one thing and Brexit doing the other, that house prices would be falling. Wrong again. I’m not terribly good at this macro thing.

[Arborbridge]

Using the well known theory of supply and demand, you’d think it really was as simple as creating more houses. Or conversely, reducing the population, or even just making the population poorer so reducing the expectation of high values. And so it was I thought that what with covid doing one thing and Brexit doing the other, that house prices would be falling. Wrong again. I’m not terribly good at this macro thing.

Sometimes, increasing a supply results in an increase in demand: e.g. building better roads.


Arb.

[Arborbridge]

Prices are rising because our population is rising, due to net immigration and the excessive immigrant birthrate.
The solution is a policy of zero net immigration and disincentives for more than two children.
Reduce the population and the self-inflicted 'crisis' will evaporate, along with the damage to the natural world such as our sewage systems which I dare say coped OK at the population levels for which they were designed.

V8

And don't forget the higher divorce rate which has caused splitting families requiring housing.

Non-immigrants also do quite well at increasing the population - I have eight grandchildren - and remember we were all immigrants once. Even the celtic fringes

However, I do agree that the increasing population - also of the world in general - is our main problem. Not many dare to raise the point, but we are too successful at breeding and surviving.

Arb.

[scrumpyjack]

Well the price of virtually everything is set by supply and demand, and I'm sure that is true of housing.

Government attempts to make it easier for people to get mortgages simply result in increased ability to pay, so house prices go up as a result. The increasing complexity of planning rules etc has meant it is much easier for big builders to operate than small ones, so the market is dominated by big builders. Having nearly gone bankrupt in the GFC the big builders are far more risk averse so no longer borrow huge amounts to increase their build rate. There have been many government inquiries in to the allegation of land hoarding by the builders and every time, on looking at the detail, the conclusion is that they do not hoard land.

For reasons of efficiency and not distorting the local market, builders prefer to develop sites over several years, it makes house building more cost efficient.

It has now reached the point that so much of the value of a property is the site, not the building, that it is increasingly worth demolishing the existing building and starting from scratch with the rebuild. This has happened several times in our village. Also as there is no VAT on new build but there is on renovations, that is another incentive to knock down!

Either increase the number of houses or reduce the number of people - it's quite simple. A long as the selling price of a house is greater than the build cost plus a fair margin, homes will be built. Land prices will adjust to that equation.

[stevensfo]

Well the price of virtually everything is set by supply and demand, and I'm sure that is true of housing.

Government attempts to make it easier for people to get mortgages simply result in increased ability to pay, so house prices go up as a result. The increasing complexity of planning rules etc has meant it is much easier for big builders to operate than small ones, so the market is dominated by big builders. Having nearly gone bankrupt in the GFC the big builders are far more risk averse so no longer borrow huge amounts to increase their build rate. There have been many government inquiries in to the allegation of land hoarding by the builders and every time, on looking at the detail, the conclusion is that they do not hoard land.

For reasons of efficiency and not distorting the local market, builders prefer to develop sites over several years, it makes house building more cost efficient.

It has now reached the point that so much of the value of a property is the site, not the building, that it is increasingly worth demolishing the existing building and starting from scratch with the rebuild. This has happened several times in our village. Also as there is no VAT on new build but there is on renovations, that is another incentive to knock down!

Either increase the number of houses or reduce the number of people - it's quite simple. A long as the selling price of a house is greater than the build cost plus a fair margin, homes will be built. Land prices will adjust to that equation.

Hard to believe that since I was in secondary school, the world's population has doubled!

But it will be interesting to see what happens in ten years or so, when all the baby-boomers start to shake off their mortal coils. The village where my mum lives has a high percentage of retired people and others in their early sixties. They are also building hundreds of new houses on the edge of the village, which is going to strain the infrastructure and cause chaos on the roads in a few years. Fast forward ten years and there are going to be a lot of empty houses up for sale!



Steve

[anon155742]

Prices are rising because our population is rising, due to net immigration and the excessive immigrant birthrate.
The solution is a policy of zero net immigration and disincentives for more than two children.
Reduce the population and the self-inflicted 'crisis' will evaporate, along with the damage to the natural world such as our sewage systems which I dare say coped OK at the population levels for which they were designed.

V8

Non-immigrants also do quite well at increasing the population - I have eight grandchildren - and remember we were all immigrants once. Even the celtic fringes

This is false. The TFR (total fertility rate) has been below replacement since 1973 so all population growth since then has been due to immigration

[Arborbridge]

Prices are rising because our population is rising, due to net immigration and the excessive immigrant birthrate.
The solution is a policy of zero net immigration and disincentives for more than two children.
Reduce the population and the self-inflicted 'crisis' will evaporate, along with the damage to the natural world such as our sewage systems which I dare say coped OK at the population levels for which they were designed.

V8

Non-immigrants also do quite well at increasing the population - I have eight grandchildren - and remember we were all immigrants once. Even the celtic fringes

This is false. The TFR (total fertility rate) has been below replacement since 1973 so all population growth since then has been due to immigration

I'll take that conclusion with a huge pinch of salt.

[anon155742]

Non-immigrants also do quite well at increasing the population - I have eight grandchildren - and remember we were all immigrants once. Even the celtic fringes

This is false. The TFR (total fertility rate) has been below replacement since 1973 so all population growth since then has been due to immigration

I'll take that conclusion with a huge pinch of salt.

It is correct no matter if you took it with a metric tonne of salt.

https://www.ons.gov.uk/peoplepopulationandcommunity/birthsdeathsandmarriages/livebirths/bulletins/birthsummarytablesenglandandwales/2020

From the link

As discussed in the 2019 release, the TFR has been below replacement level since 1973 and TFRs have been decreasing year on year since 2012 (Figure 1). Reasons for the decreases in TFRs in recent years could be:

[nicodemusboffin]

The price of houses in a market economy is determined (like the price of everything else) by supply and demand. So, all things being equal, building more houses will increase supply and have some influence on house prices. However, overwhelmingly the reason for the rise in house prices over the last decases is the rise in demand casued by the astonishing decline in the cost of money (interest rates). This actually means that the real fallacy is to assume that there is a house pricing crisis at all, when in fact arguably houses are no more unaffordable than in the recent past - affordability being measured as the cost of servicing the debt taken on to buy a house and/or the opportunity cost of lost interest from funding a purchase out of savings.

As an example, I bought my first house in 1991 for £53,000 - and the same/similar property would now sell for £300, 000. My mortgage was for 8% - so the house was costing me £4240 per year. If I bought the house now I guess I might get a mortgae at 2% (or less?) and so the house would be costing me £6000 a year. However in 1991 I was earning £11, 500 a year; someone doing the same job now would, i reckon, be on £25, 000 - £30, 000 - so in real terms the house is considerably cheaper! (Or rather 'more affordable'.)

(OK - I know this is simplistic, ignores the cost of paying back the principal, the impossibility of getting a mortgage for 10x salary and is a very 'OK Boomer' answer. However, I think the basic point is valid - that house prices are so high because interrest rates are so low, because it's low interest rates that have made houses affordable at such high prices. it follows that prices should cease to rise at a faster rate than the rise in earnings once interest rates stop falling (which - surely? - must be now) and will fall relative to earnings if and when interest rates rise. But building a few thousand extra houses a year won't make much difference when faced with the huge weight of 'free' money.)

[Arborbridge]

This is false. The TFR (total fertility rate) has been below replacement since 1973 so all population growth since then has been due to immigration

I'll take that conclusion with a huge pinch of salt.

It is correct no matter if you took it with a metric tonne of salt.

https://www.ons.gov.uk/peoplepopulationandcommunity/birthsdeathsandmarriages/livebirths/bulletins/birthsummarytablesenglandandwales/2020

From the link

As discussed in the 2019 release, the TFR has been below replacement level since 1973 and TFRs have been decreasing year on year since 2012 (Figure 1). Reasons for the decreases in TFRs in recent years could be:

I can see what you mean, but is the conclusion as simple as that? I only ask because when one sees a set of statistics quoted to further the end of a particular individual, someone else with a different agenda will come back with a different interpretation. Unfortunately, I am in no position to come to any conclusion myself, and would only believe a conclusion about this from some trusted expert source, such as More or Less, who are willing and competent to take all aspects into account.

So forgive me, if I am unable to argue the point, but my natural caution procludes my immediate agreement with you. So, the pinch of salt remains for the moment

I might also ask: if population growth has come from immigration, does it matter? Or perhaps, how much, does it matter?

Arb.

[nicodemusboffin]

I'll take that conclusion with a huge pinch of salt.

It is correct no matter if you took it with a metric tonne of salt.

https://www.ons.gov.uk/peoplepopulationandcommunity/birthsdeathsandmarriages/livebirths/bulletins/birthsummarytablesenglandandwales/2020

From the link

As discussed in the 2019 release, the TFR has been below replacement level since 1973 and TFRs have been decreasing year on year since 2012 (Figure 1). Reasons for the decreases in TFRs in recent years could be:

I can see what you mean, but is the conclusion as simple as that? I only ask because when one sees a set of statistics quoted to further the end of a particular individual, someone else with a different agenda will come back with a different interpretation. Unfortunately, I am in no position to come to any conclusion myself, and would only believe a conclusion about this from some trusted expert source, such as More or Less, who are willing and competent to take all aspects into account.

So forgive me, if I am unable to argue the point, but my natural caution procludes my immediate agreement with you. So, the pinch of salt remains for the moment

I might also ask: if population growth has come from immigration, does it matter? Or perhaps, how much, does it matter?

Arb.

I'd say that the pinch of salt is justified. Just because the TFR has been below replacement level since 1973 doesn't mean that immigration is the sole cause of population growth, as decreasing mortality is also a factor. Obviously, eventually, without net migration a country's population will fall if the TFR is below replacement level (umless death is abolished) but 1973 isn't even 50 years ago so death rates haven't (yet) had time to catch up with birth rates.