Making housing affordable
Posted: Mon May 23, 2022 10:36 pm
It came up from time to time in other recent threads, so I thought I would create a new one, setting out an overview of the main issues. It is complicated and far from easy, so this will be a very long post.
Making housing affordable is a difficult problem many countries. I’m not aware of anywhere we can point to and say, “Look, they have solved this. Let’s look what they do.” It’s a pervasive problem in NW Europe. In Europe, Sweden has suffered some of the largest recent house price increases. That, and similar problems in Australia, New Zealand, and California, reminds us that it is not just a problem of places with high population density. Meanwhile, in China, they have tried to build new cities, and several are notoriously badly under-occupied, perhaps warning that house-building might not be a panacea.
Building houses in places where people don’t want to live is no solution, as China demonstrates. Various papers have been published suggesting that even building them in places where people do want to live might have a disappointingly limited effect on house prices.
Meanwhile, people variously suggest things like banning buy-to-let, higher taxes on property rental income, higher local and stamp duty taxes on second homes (even though stamp duty stupid tax that helps screw up the market, and is it even clear what a second home is?), making it difficult for AirBnB to operate, designating houses for “locals” only (whoever they are), etc. I tend to be suspicious of such “solutions”, as further interference in markets is rarely a successful method of improving the workings of a market that isn’t working very well.
A major factor in the current widespread high price of houses is clearly low interest rates. Low interest rates tend to increase the capital value of all kinds of economic assets, and houses are not an exception. Currently inflation-corrected or “real” interest rates are rather negative, as inflation is rather higher than the Base Rate. In Britain, lockdown and the expansion of telecommuting has presented an increased demand for larger houses. So an increased demand for more floor area is like a tightening of supply in a market of near fixed total floor area. There has also been a general tendency for the average house in the market to get smaller, both through new-build and through property division, in part in response to smaller household size.
Let us first set out the supply and demand for houses, as I think the fundamentals sometimes are overlooked.
The supply of houses into the market comprises mainly:
• Sales of privately owned housing – where frequently the sellers are funding the purchase of a replacement dwelling
• Newly built/converted housing
• Privately rented housing
• Socially rented housing
The demand for houses includes mainly:
• Long-term occupancy
• Short-term occupancy, such as holiday lets and other temporary accommodation
• Second houses: people with multi-location lifestyles, using all regularly
• Second houses: holiday homes that are not (much) let out to other holiday-makers
• Second houses: for money laundering, often barely occupied
These are not exhaustive lists, but I think that is most of it.
Long-term occupancy can be supplied equally by owner occupation or private rental – it’s the same building with the same floor-space and available for long-term occupancy. So let us not get too hung up on buy-to-let, alias private landlordism. Yes, suppressing private landlordism will reduce house prices. But that doesn’t make houses for long-term occupation more available, measured as total floor-space. Without the capital put up by private landlords, less will be built. Suppressing them is in part a rent-seeking argument by certain subsections of the population. I’ve argued this several times before, and many people won’t accept it, so probably you still won’t. Even if you disagree with my claim if anything it reduces the quantity of floor area available for long-term occupation, perhaps you might at least accept it is unlikely to produce a large increase in the quantity of floor area available for long-term occupation.
Long term occupancy is a substitute for short term occupancy. Short term holiday lets are now easier to arrange. To some degree, this reduces the demand for hotels, guesthouses and other forms of tourist accommodation, so some buildings/land those occupy can be repurposed. But it seems that the likely overall effect is to reduce the cost and inconvenience of tourism, and so increase the demand for it. And so some housing is withdrawn from the long-term occupancy market. This is a difficult question. If there is a demand for tourism and it requires accommodation, then where are we going to put that as well as the houses the permanent population will live in? Do they really want to reduce their local tourism market? It is especially difficult in crowded little settlements in beauty spots, where it is hard to expand to build suburbs for the permanent population, of the kind that tourists don’t want to rent. Whilst this is a serious and vexed problem, it mostly affects certain tourist areas.
Long term occupancy property is a substitute for second houses that get low occupancy, eg a holiday home visited for 2 or 3 weeks a year, and not let out to others in between. This is the style of ownership that probably most tightens supply in local markets, provides little local economic benefit, and most angers the locals. What are we to do? Arguably it is good to make it easy for people to let out their holiday houses, so they are less tempted to buy them and then fail to let them out to others. But there will always be people with money to burn, or launder. The trouble is that there is a continuum with no easy divide between a reasonable multi-property life-style, (eg an MP requiring London and constituency homes), and having a badly under-occupied holiday home you fail to let out. And it is hard to assess the level of occupancy of properties, and so difficult to tax people on low occupancy. Really the best thing is to try to encourage them to get people in, whether long or short term.
But again, I think this is mainly a local issue in certain areas. And whilst a big problem in some areas, overall only about 3% of households in Britain report having a second home in recent surveys. I suspect that we can live with that at an aggregate scale. If they all sold their second houses, that wouldn’t be very much additional supply, only a couple of years’ worth. And it seems unlikely to be much of a factor in making houses over-priced in, say, Croydon, and most other non-tourist towns. In more spacious countries in Europe, second houses are much more common. So a lot of anger, a serious problem in a few areas, but overall not going to have much effect on the wider market.
So we end up back at trying to increase the supply of new houses. Do we believe the claims of some studies that it would be of very disappointing effect? In some recent thread, someone suggested that the houses in the market available to buy comprised 10% new-supply and 90% existing supply. So what would even doubling new housing supply do to that? I think that overlooks the fact that many of the 90% are being sold by people who want to move on into another one. So actually not very much of that 90% is net supply to expand the market. So if the rate of house-building doubled, and so increasing the supply of new houses in the market from 10% to 20%, assuming the same market volume of used houses, that would actually be a very serious increase in supply to satisfy new buyers. An increase in supply of social housing or rental property also increases the amount of floor space available to live in.
Certainly an increase in the supply of new houses will increase the supply of houses to be converted into holiday lets and houses to own and hardly use. The rate of ownership of second houses has increased rapidly in recent years, by about 50% over 10 years or so. In part this is due to the difficulty of getting a decent return from financial investments, so people buy second houses instead. Though in many cases they let them out, either for long-term occupation or holiday lets, so they aren’t actually withdrawing the floor space from the market, although some of it might move to the holiday let market. Suggestions from some authors that you’d need some enormous increase in supply to have much effect on price seem to be to be overblown. Who is going to own all this underused property? At the moment only 3% of us seem to own some underused property? Is that really going to increase hugely once the price of houses starts to come down? Maybe it is: it is hard to know for sure. But I find it somewhat unlikely. Especially if the additional housing supply is largely in working and commuter towns, rather than tourist locations, that mainly attracts people’s under-occupied second homes.
Meanwhile, the Usual Tory backbench Suspects, doubtless much supported by the Daily Mail, have apparently succeeded in materially neutering the government’s plans to try and turn on the taps of housing supply. As they always do. So don’t expect anything much to happen.
Making housing affordable is a difficult problem many countries. I’m not aware of anywhere we can point to and say, “Look, they have solved this. Let’s look what they do.” It’s a pervasive problem in NW Europe. In Europe, Sweden has suffered some of the largest recent house price increases. That, and similar problems in Australia, New Zealand, and California, reminds us that it is not just a problem of places with high population density. Meanwhile, in China, they have tried to build new cities, and several are notoriously badly under-occupied, perhaps warning that house-building might not be a panacea.
Building houses in places where people don’t want to live is no solution, as China demonstrates. Various papers have been published suggesting that even building them in places where people do want to live might have a disappointingly limited effect on house prices.
Meanwhile, people variously suggest things like banning buy-to-let, higher taxes on property rental income, higher local and stamp duty taxes on second homes (even though stamp duty stupid tax that helps screw up the market, and is it even clear what a second home is?), making it difficult for AirBnB to operate, designating houses for “locals” only (whoever they are), etc. I tend to be suspicious of such “solutions”, as further interference in markets is rarely a successful method of improving the workings of a market that isn’t working very well.
A major factor in the current widespread high price of houses is clearly low interest rates. Low interest rates tend to increase the capital value of all kinds of economic assets, and houses are not an exception. Currently inflation-corrected or “real” interest rates are rather negative, as inflation is rather higher than the Base Rate. In Britain, lockdown and the expansion of telecommuting has presented an increased demand for larger houses. So an increased demand for more floor area is like a tightening of supply in a market of near fixed total floor area. There has also been a general tendency for the average house in the market to get smaller, both through new-build and through property division, in part in response to smaller household size.
Let us first set out the supply and demand for houses, as I think the fundamentals sometimes are overlooked.
The supply of houses into the market comprises mainly:
• Sales of privately owned housing – where frequently the sellers are funding the purchase of a replacement dwelling
• Newly built/converted housing
• Privately rented housing
• Socially rented housing
The demand for houses includes mainly:
• Long-term occupancy
• Short-term occupancy, such as holiday lets and other temporary accommodation
• Second houses: people with multi-location lifestyles, using all regularly
• Second houses: holiday homes that are not (much) let out to other holiday-makers
• Second houses: for money laundering, often barely occupied
These are not exhaustive lists, but I think that is most of it.
Long-term occupancy can be supplied equally by owner occupation or private rental – it’s the same building with the same floor-space and available for long-term occupancy. So let us not get too hung up on buy-to-let, alias private landlordism. Yes, suppressing private landlordism will reduce house prices. But that doesn’t make houses for long-term occupation more available, measured as total floor-space. Without the capital put up by private landlords, less will be built. Suppressing them is in part a rent-seeking argument by certain subsections of the population. I’ve argued this several times before, and many people won’t accept it, so probably you still won’t. Even if you disagree with my claim if anything it reduces the quantity of floor area available for long-term occupation, perhaps you might at least accept it is unlikely to produce a large increase in the quantity of floor area available for long-term occupation.
Long term occupancy is a substitute for short term occupancy. Short term holiday lets are now easier to arrange. To some degree, this reduces the demand for hotels, guesthouses and other forms of tourist accommodation, so some buildings/land those occupy can be repurposed. But it seems that the likely overall effect is to reduce the cost and inconvenience of tourism, and so increase the demand for it. And so some housing is withdrawn from the long-term occupancy market. This is a difficult question. If there is a demand for tourism and it requires accommodation, then where are we going to put that as well as the houses the permanent population will live in? Do they really want to reduce their local tourism market? It is especially difficult in crowded little settlements in beauty spots, where it is hard to expand to build suburbs for the permanent population, of the kind that tourists don’t want to rent. Whilst this is a serious and vexed problem, it mostly affects certain tourist areas.
Long term occupancy property is a substitute for second houses that get low occupancy, eg a holiday home visited for 2 or 3 weeks a year, and not let out to others in between. This is the style of ownership that probably most tightens supply in local markets, provides little local economic benefit, and most angers the locals. What are we to do? Arguably it is good to make it easy for people to let out their holiday houses, so they are less tempted to buy them and then fail to let them out to others. But there will always be people with money to burn, or launder. The trouble is that there is a continuum with no easy divide between a reasonable multi-property life-style, (eg an MP requiring London and constituency homes), and having a badly under-occupied holiday home you fail to let out. And it is hard to assess the level of occupancy of properties, and so difficult to tax people on low occupancy. Really the best thing is to try to encourage them to get people in, whether long or short term.
But again, I think this is mainly a local issue in certain areas. And whilst a big problem in some areas, overall only about 3% of households in Britain report having a second home in recent surveys. I suspect that we can live with that at an aggregate scale. If they all sold their second houses, that wouldn’t be very much additional supply, only a couple of years’ worth. And it seems unlikely to be much of a factor in making houses over-priced in, say, Croydon, and most other non-tourist towns. In more spacious countries in Europe, second houses are much more common. So a lot of anger, a serious problem in a few areas, but overall not going to have much effect on the wider market.
So we end up back at trying to increase the supply of new houses. Do we believe the claims of some studies that it would be of very disappointing effect? In some recent thread, someone suggested that the houses in the market available to buy comprised 10% new-supply and 90% existing supply. So what would even doubling new housing supply do to that? I think that overlooks the fact that many of the 90% are being sold by people who want to move on into another one. So actually not very much of that 90% is net supply to expand the market. So if the rate of house-building doubled, and so increasing the supply of new houses in the market from 10% to 20%, assuming the same market volume of used houses, that would actually be a very serious increase in supply to satisfy new buyers. An increase in supply of social housing or rental property also increases the amount of floor space available to live in.
Certainly an increase in the supply of new houses will increase the supply of houses to be converted into holiday lets and houses to own and hardly use. The rate of ownership of second houses has increased rapidly in recent years, by about 50% over 10 years or so. In part this is due to the difficulty of getting a decent return from financial investments, so people buy second houses instead. Though in many cases they let them out, either for long-term occupation or holiday lets, so they aren’t actually withdrawing the floor space from the market, although some of it might move to the holiday let market. Suggestions from some authors that you’d need some enormous increase in supply to have much effect on price seem to be to be overblown. Who is going to own all this underused property? At the moment only 3% of us seem to own some underused property? Is that really going to increase hugely once the price of houses starts to come down? Maybe it is: it is hard to know for sure. But I find it somewhat unlikely. Especially if the additional housing supply is largely in working and commuter towns, rather than tourist locations, that mainly attracts people’s under-occupied second homes.
Meanwhile, the Usual Tory backbench Suspects, doubtless much supported by the Daily Mail, have apparently succeeded in materially neutering the government’s plans to try and turn on the taps of housing supply. As they always do. So don’t expect anything much to happen.