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Opinion: Government Analysis of the Housing Issue is Intellectually Dishonest

By Ben Paton

There are plenty of issues to worry about in the world. The extinction of the white rhino and the blue whale are issues. Global warming is an issue. Plastic waste is an issue.

And, of course, for us in this part of the world, high house prices are an issue.

The question is what are the true causes of the “issues”. The government has played politics with the “housing issue” in England. It has come up with a populist, facile, and superficial “analysis” that does not identify the real causes.

According to government logic, high house prices are the result of a “shortage”. Its analysis goes further. It seeks to argue that the higher the house price the greater the shortage.

It has therefore proposed a formula that links housing “need” to house prices. The higher the house prices the greater the “need”.

The absurdity of this logic can be seen if it is applied to other capital goods like cars. On this logic, the type of car that has the greatest need is a Lamborghini or a Rolls Royce.

The prices of capital goods are not set by annual supply and demand. The price of a house is not set like the price of a can of baked beans or the price of wheat. The price of houses is set by supply and demand for capital assets. The analogues are not wheat and baked beans but government bonds.

Would you rather own a government bond yielding 2% with no asset backing? Gilts are only backed by a government with a budget deficit and a country with a trade deficit. But a house will yield more than 2% if you live in it or if you rent it out in the buy to let market (even after tax changes designed to screw landlords).

Most rational decision makers would prefer bricks and mortar over a government promise. That’s why houses are a very attractive asset class. Let’s face it, government bonds are a Ponzi scheme.

Facts matter. Here are five:

  1. Annual supply of houses is around 2% or less of the capital stock of houses. The annual flows are trivial in relation to the capital stock. Annual supply of new houses obviously does not determine the price level.
  2. The biggest contributor to demand for housing is mortgage lending. Interest rates are lower than at any time in all recorded history.

If you have access to loans then houses are cheap. The ratio of house prices to incomes is a popular measure of affordability. Another relevant measure is the ratio of interest cost to capital value. That’s 30 to 50 times. If you can get a loan then a house is cheap.

Getting a loan is not necessarily easy of course. But it’s not difficult for the people who are buying very large quantities of houses. Go to a property auction and see who they are. Many are foreign investors.

  1. There is no shortage of houses if you look at the ONS statistics. There’s roughly a house for every two people in this country. That does not take account of the potential to convert surplus retail and warehouse space in towns.
  2. There is a shortage of social housing. That’s the result of government policy.

GBC’s Local Plan does little to address that. Nor does national policy. Its plain dishonest.

  1. House building is one of the most profitable businesses in the country. It is like shooting fish in a barrel.

Yes, high house prices are “an issue”. But they are not the result of not building enough executive homes. They are the result of the collapse of the banking system in 2008 and the consequential rescue with trillions of new credit.

That credit has to go somewhere. Much of it has pushed up house prices. That’s quite rational. Ultimately the creation of money increases the price level. Not immediately or linearly. But ultimately you cannot increase credit without increasing the price level unless productivity rises commensurately. It hasn’t.

To survive the inflation the only protection is to own ‘real’ ie non-financial assets like houses.

Is there a shortage of social housing? Obviously. Does that justify building whole new towns across the country? Obviously not. Just because there’s a shortage of mobility scooters in the car market does not mean that Ford should double production of Ford Mondeos. That just does not solve the problem.

Why is there a shortage of social housing? Because they sell ‘em off every year. There are fewer council houses than ten years ago. Meanwhile, demand increased. And housebuilders don’t build social housing unless they are forced to.

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7 Responses to Opinion: Government Analysis of the Housing Issue is Intellectually Dishonest

  1. A Atkinson Reply

    March 28, 2018 at 1:45 pm

    A great insight into the economics of asset prices. The government’s thesis reminds me of “spurious correlations” where people wrongly claim, or conclude, a relationship between two variables and have an interdependence with each other but actually do not. Statistics may show they move together but one does not cause the other.

    With houses, correlation of two variables and instances of price increases is taken as gospel or at least it is readily believed that they are related to each other because they both involve houses. It is far more complicated than that and perhaps plain wrong; as Mr Paton points out, unseen variables are the actual causal factor.

    The famous example of spurious correlations is US stock market movements were related to the length of skirts. Another is the number of films Nicholas Cage appeared in is correlated to the number of swimming pool drownings. Consumption of cheese in the US is related to people dying by getting tangled in their bed sheets or the divorce rate in Maine is related to the consumption of margarine. These are statistically correlated but, of course, not causal of the instance.

    Just because the thesis that house shortage/more supply has caused/will solve the price of houses both clearly relate to, and use, the word “houses” does not make the correlation less spurious than the ridiculous examples above.

  2. A Atkinson Reply

    March 29, 2018 at 9:25 am

    A study was published on the 23rd of March b the Resolution Foundation looking at this very aspect. The Resolution Foundation is “a non-partisan and award-winning think-tank that works to improve the living standards of those in Britain on low to middle incomes.”

    The opening reads like this:

    “At a time when politics has rarely been more divided, one major policy issue is a matter of cross-party consensus: we have a housing crisis. House prices were broadly unchanged from the mid-70s to the mid-90s, but have since exploded, rising by around 160% in real terms in just over 20 years. Almost everyone, from the Prime Minister down, agrees that ‘decades of undersupply’ are to blame for stratospheric prices.

    Yet since house prices began their vertiginous ascent, new housing supply has comfortably outpaced household formation for England as a whole. As a result, while there were 660,000 more houses than households in 1996, that surplus had almost doubled to 1.25 million by March last year.

    A growing surplus of houses isn’t, on its own, conclusive proof that there is no housing shortage. But these figures should make us question the conventional wisdom that high house prices are the result of a lack of places to live. I’ve been doing that over the past year, in a series of blogs looking at a range of evidence about what’s happening in the housing market.

    Whenever those striking national surplus figures are pointed out, two important challenges are invariably raised. One is a story about how the housing shortage is really a local phenomenon, so national figures aren’t informative. The second is that supply may only have outstripped household formation because declining affordability has prevented many people setting up on their own.

    In this blog I explore the evidence on both of these, showing that on both counts the data suggest that the rate of new housing supply has been more than sufficient for many years. Rather, the problems we see in the housing market are the product of two separate ‘crises’ neither or which can be solved by building more.

    I conclude by offering a framework for thinking about the different types of evidence that tend to be used in debates about the adequacy of housing supply.”

    The full piece can be read here:

  3. Fiona Curtis Reply

    March 29, 2018 at 1:45 pm

    A most interesting and thought-provoking letter. Many of these points are reiterated by independent and government-sponsored think tanks yet the “trajectory” continues.

    The irony is that Local Plans should be sustainable, yet the wider growth plan is completely unsustainable, as was demonstrated by a Professor from the University of Surrey at a lecture given by the Guildford Society not so long ago.

    • Harry Eve Reply

      March 29, 2018 at 8:03 pm

      Our draft Local Plan also claims to conserve and enhance biodiversity but does the opposite by bulldozing large areas of countryside.

  4. Jules Cranwell Reply

    March 29, 2018 at 2:53 pm

    Spot on by Mr Paton.

    Unfortunately, the GBC executive has been swayed by the myth of a “housing crisis”, which does not exist. There are homes aplenty throughout the country.

    What does exist is a crisis of demand in the South East, and particularly in Surrey. This is due to the lack of investment and infrastructure in other parts of the country which draws people increasingly to our region.

    Until the government starts to deal with this the excess of demand will only increase.

    Surrey is already the most densely populated and polluted county in the UK. Enough is enough!

  5. Colin Cross Reply

    March 31, 2018 at 11:32 pm

    If we seriously want to stop overheating the South-East of England we have to decentralise.

    How about not refurbing the Houses of Parliament and having a new building say in Stoke, Birmingham or Manchester?

    The South-East of England is becoming a victim of its own success and it’s time to change the dynamic behind this.

    It has worked for the BBC in Salford on a mega scale, so the model is there to be copied at a Government level.

    The South-East is near to crisis in housing terms and simply building more homes is futile and daft, time to change and look elsewhere to expand.

  6. Paul Bishop Reply

    April 2, 2018 at 7:50 am

    Housing shortage is and always has been a massively localised issue. 1.2 million surplus homes in the country does nothing to show the localised issues.

    All you need to do to see the struggles of young people, couples and families, is take a look at Rightmove.

    In three miles of Guildford there are only four three-bedroom properties available for under £350k – this value is hardly classed as affordable!

    There’s only 12 two-bedroom houses in the same bracket!

    Pretending this isn’t an issue is naive at best, more likely selfishness.

    The fact Mr Paton uses national statistics in his entire assessment clearly shows a fundamental misunderstanding of the market or maybe a purposeful misuse of statistics to suit his agenda.

    And back to Mr Paton’s car analogy, but correctly used. You need to look at this with comparable products to understand the supply and demand effect.

    Why would you pay four times the price for a Ford Fiesta in Guildford rather than a Ford Fiesta in Coventry? You wouldn’t, but this the real value difference of two-bed houses, directly comparable products, in the two places. This is supply and demand in action.

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