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2016-02-11 13:57:38
rlp
Feb 9th 2016, 9:52 by C.W. | LONDON
I WANT to hammer home a point that we made in a piece a few weeks ago. Whenever
economists talk about the British housing market (which by some measures is the
world's most expensive except Monaco) they will have a simple solution to
bubbly prices: build more houses. The logic is impeccable: there is high demand
for housing, but not enough supply. That leads to high house prices. Increase
the supply of housing, and prices will fall. Simple.
This explains why successive governments have had a housebuilding target of
around 200,000-250,000 a year (in the last decade Britain has built on average
about 160,000 houses a year).
I think economists' obsession with building new houses misses the point. For
one, it's not immediately obvious that Britain is suffering from woefully
inadequate undersupply of housing, at least at the national level. In the EU
there are on average 2.3 people per private house, the same figure as found in
Britain.
If overall supply is not a problem, then what is? Think about what determines
house prices in a given year: the number of people who want to buy a house in
that year (and the amount of money they have to spend); and the number of
houses for sale in that year.
The vast majority of houses coming on to the market in a given year are not
new-build ones, but already-existing houses. In fact, for the last few decades
the number of second-hand houses on the market has been at least six times
higher than the quantity of new-build houses coming on to the market (see
chart).
The problem for Britain is that far fewer already-existing homes are coming on
the market each year. In the late 1980s, roughly 2m second-hand houses were put
up for sale annually. Last year less than half that were. So the supply of
houses on to the market has dropped quite substantially. This leads to
inefficient use of the housing stock. Small wonder that prices are rising fast.
Turnover in the second-hand market is dropping for a few reasons. As the
population has aged, the average homeowner has become less likely to want to
move. Moreover, with prices rising fast, people are not rushing to sell up.
Stamp duty, a tax on housebuyers, has risen steeply over the long term,
providing another disincentive to moving: someone buying an average-priced home
in London faces an upfront bill of 15,000.
Imagine that Britain reached the magic target of 250,000 houses being built
every year. All else equal, the total number of houses coming on to the market
in a year would rise to about 1.2m; ie, still way below the levels reached in
the 1980s (and way below on a population-adjusted basis, given the population
has grown since the 1980s). So the housebuilding target, even if reached, would
clearly be no panacea.
Now, all this is not to say that building more houses is a bad thing. More
supply will lead to falling prices. But if you really want to bear down on
prices, then focusing on getting people to move houses more frequently (and
thus increasing supply of second-hand homes to the market) would be far more
effective.