“Britain’s soaring house prices and ‘broken housing market’ have long been put down to a chronic shortage of homes, but new evidence has emerged that building more homes is unlikely to bring prices down.
A paper written by Tony Blair Institute chief economist Ian Mulheirn argues that building 300,000 homes a year wouldn’t make homes in the UK more affordable. Nor, he says, would more homes mean that more people manage to get onto the housing ladder.
The paper, published today by the UK Collaborative Centre for Housing Evidence, suggests that 160 per cent of the growth in house prices since the late 1990s has had nothing to do with a shortage in housing supply. Instead, Mulheirn claims that rock bottom interest rates for more than a decade have made borrowing so cheap that those able to buy have ratcheted up their borrowing, causing prices to soar.
‘Building 300,000 houses per year will do very little to bring down house prices in Britain, and next to nothing to raise home ownership,’ he wrote.
‘The real culprit for sky-high house prices is low global interest rates that have made it easy for homeowners and investors to take on large amounts of mortgage debt and pay ever more for houses.’
The figure of 300,000 new homes needed a year has been largely undisputed for the past decade.
In 2004, Kate Barker wrote a landmark review on housing supply for the then Labour government, concluding that 245,000 new private-sector homes a year were needed, plus another 17,000 social housing units, to keep house price inflation down to 1.1 per cent annually. She later revised that number up to 300,000 homes a year.
But Mulheirn disagrees. He points to official data showing that since the 1996 nadir of house prices, the English housing stock has grown by 168,000 units per year on average, while growth in the number of households has averaged 147,000 per year. Even in London and the South East, the number of houses has grown faster than the household count.
As a result, while there were 660,000 more dwellings than households in England in 1996, this ‘surplus’ has since grown to over 1.1 million by 2018. Similar trends are also apparent in Scotland and Wales, suggested Mulheirn.
Nevertheless, UK house prices have spiralled from around 4.5 times median household income in 1996 to a multiple of around 8 today.
The most recent figures from the Office for National Statistics showed across Britain, prices rose 0.7 per cent in June to an average of £230,292 – up 0.9 per cent compared to June 2018.
Mulheirn argued cheap mortgage finance is to blame.
‘Since the late 1990s, mortgage rates have tumbled, with inflation-adjusted interest rates on five-year fixed-rate mortgages, for example, falling from 8 per cent to around 2 per cent today,’ he said. ‘Since mortgage interest rates tend to be the dominant element of the cost of capital for home owners, this change can be expected to precipitate a substantial increase in house prices of a similar magnitude to the 160 per cent increase seen since 1996.’
Meanwhile, he said, a shrinking social rented sector, cuts to housing benefit and slow wage growth among young people are making rented housing less affordable for many even as though private sector rents are stable.
He added: ‘Neither our ownership or rental affordability problems will be solved by hitting the 300,000 target.’
According to the paper a 1 per cent increase in the stock of houses tends to lead to a decline in rents and prices of between 1.5 per cent and 2 per cent, all else equal. This implies that even building 300,000 houses per year in England would only cut house prices by something in the order of 10 per cent over the course of 20 years. ‘This is an order of magnitude smaller than the price rises of recent decades,’ said Mulheirn.
‘If we are to create more affordable houses to buy and rent, the solutions lie elsewhere.’ …”