London -rents and affordability

Ian Mulheirn has responded to Simon Wren-Lewis’s blog see below.

I agree with almost everything here, Simon, as you’d expect from what I’ve written. But lest anyone be tempted to jump to conclusions on London based on the IFS chart, I think we should be careful about measuring rent as a proportion of renters’ incomes to draw any conclusions about the supply situation there.

The composition of the London PRS has changed radically over recent years, so we can’t be sure we’re comparing like with like over time. Secondly, and more importantly, we know that groups that tend to rent (e.g. the young) have been hit hardest by weak wage growth and cuts. All of that means rent is likely rising as a proportion of the average renter’s income, but not necessarily as a proportion of average incomes for all London households. If that’s the story, then the reason why the London line in the chart is rising is distributional: it’s not that London housing costs/rent have got more expensive but that the incomes of the people renting have deteriorated.

To isolate these effects, we can compare changes in the ONS’s rent inflation index and gross household disposable income per head for London. Those series suggest that rents as a proportion of average incomes have not grown since 2005 in London and have fallen elsewhere. That suggests that even in London housing costs/rents have been benign, and the problems (and hence solutions) are distributional.

https://mainlymacro.blogspot.co.uk/2018/02/house-prices-and-rents-in-uk.html#comment-form

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Another reason why we don’t need to build 300,000 houses a year!

Simon Wren-Lewis on ‘Mainly macro’ makes some interesting points about house prices, rents and house building.

House prices and rents in the UK

I am not a housing expert, but it seems to me that the public debate is completely confused because it fails to make the distinction between house prices and rents. If we are talking about the supply and demand for housing, the price that equates those two things is rent, not house prices.

I discussed why here, but let me summarise the argument. Rent reflects the cost of being housed, of having a roof over your head. If there are less houses to go around, rents will be higher: higher enough to make some people share flats, live with parents or whatever. Because houses to buy can quickly change into houses to rent, there are not really separate markets for buying and renting, but just one big housing market.

The price of a house is the price of an asset. The asset in this case provides a roof over your head for as long as you own it. This means that house prices depend on current and future rents. Crucially, however, like any asset, the price is the discounted sum of future rents, where the discount rate is the real rate of interest. If real interest rates fall but future real rents stay unchanged, housing becomes a more attractive asset, and so wealthy people will buy more houses, pushing the price up.

Thus the rise in house prices in the UK and France since 2000 has got little to do with a lack of house building, a point that Ian Mulheirn has stressed. But what about rents, which is where we should look for any imbalances in supply and demand.

Outside London, there has not been a rise in the proportion of income spent on rent. Essentially, and I suspect this applies before the mid-90s, housing costs (rents) have risen with earnings rather than prices, and at constant real interest rates that would mean house prices rising with earnings. This represents a very reasonable return on any asset, and is why we think buying a house is a good investment. Now you could argue that we should build enough houses so that this proportion of income spent on housing falls, as it has for food for example. What you cannot argue is that building too few houses has anything to do with why houses have suddenly become unaffordable to young people.

Building more houses may or may not be fine, but if real interest rates stay low it is not going to make houses affordable again for the generation that can no longer buy a home.

https://mainlymacro.blogspot.co.uk/

House prices and rents have little to do with supply of housing!

Simon Wren-Lewis on ‘Mainly macro’ makes some interesting points about house prices, rents and house building.

House prices and rents in the UK

I am not a housing expert, but it seems to me that the public debate is completely confused because it fails to make the distinction between house prices and rents. If we are talking about the supply and demand for housing, the price that equates those two things is rent, not house prices.

I discussed why here, but let me summarise the argument. Rent reflects the cost of being housed, of having a roof over your head. If there are less houses to go around, rents will be higher: higher enough to make some people share flats, live with parents or whatever. Because houses to buy can quickly change into houses to rent, there are not really separate markets for buying and renting, but just one big housing market.

The price of a house is the price of an asset. The asset in this case provides a roof over your head for as long as you own it. This means that house prices depend on current and future rents. Crucially, however, like any asset, the price is the discounted sum of future rents, where the discount rate is the real rate of interest. If real interest rates fall but future real rents stay unchanged, housing becomes a more attractive asset, and so wealthy people will buy more houses, pushing the price up.

Thus the rise in house prices in the UK and France since 2000 has got little to do with a lack of house building, a point that Ian Mulheirn has stressed. But what about rents, which is where we should look for any imbalances in supply and demand.

Outside London, there has not been a rise in the proportion of income spent on rent. Essentially, and I suspect this applies before the mid-90s, housing costs (rents) have risen with earnings rather than prices, and at constant real interest rates that would mean house prices rising with earnings. This represents a very reasonable return on any asset, and is why we think buying a house is a good investment. Now you could argue that we should build enough houses so that this proportion of income spent on housing falls, as it has for food for example. What you cannot argue is that building too few houses has anything to do with why houses have suddenly become unaffordable to young people.

Building more houses may or may not be fine, but if real interest rates stay low it is not going to make houses affordable again for the generation that can no longer buy a home.

https://mainlymacro.blogspot.co.uk/

Another ill informed call to build more houses!

Owen Jones in the ‘Guardian’ critiques the current housing situation and makes some interesting points but spoils it by falling for the ‘we must build more houses’ mantra!

Neoliberalism is a con, a fraud, and Britain’s housing crisis vividly illustrates why. The populist promise of neoliberalism has always been about extending choice for the individual. In a properly functioning society – which sadly we do not have – young Britons would be able to choose between a comfortable council house on a secure tenancy, a privately rented home with an affordable rent and security, and home ownership. All of these options have been trashed.

That’s why radical measures are desperately needed. The lowest level of peacetime housebuilding since the 1920s must come to an end: it’s time to build, build, build.

https://www.theguardian.com/commentisfree/2018/feb/16/labour-housing-crisis-tories-home-ownership

The problem is not the number of houses being built but who buys them and for what purpose. After all if someone is renting in the private sector it is not an issue of a house not being available but the type of tenure and cost of renting.

The developers tale

It was the end of the week, the Chief executive of Buildmorehouses was pondering the numerous news items arguing that developers should build more houses and use up their land banks. The problem was that although media pundits and politicians considered themselves experts on almost anything their actual knowledge was limited.

In common with other housebuilders, Buildmorehouses had built up a supply of land with planning permission. The had bought land wherever possible for development in the future. In essence the companies aim was simply to make as much profit as they could and in the process reward the CE with a large pay packet. It was far better for Buildmorehouses to buy the land than allow a rival to do so.

Now contrary to the simplistic approach adopted by many pundits, Buuildmorehouses was not a provider of housing to those in housing need. The company build houses to make a profit. Some types of housing were more profitable than others – luxury housing topped the list, you could make a good return if you could concentrate on these. You also knew that in certain areas demand from potential second home owners and holiday lets made development rather profitable. Thats why the company had bought several sites in desirable coastal locations.

Ok the CE accepted you needed to provide some housing for local residents. If you had to make this affordable by charging more for unaffordable houses or if you could get more permissions for luxury housing to offset these all the better.

All in all, Buildmorehouses had worked out how many houses they could build each year to meet local need (if residents could afford it)and to satisfy demand from those looking to relocate or buy a second home. There was no point in building any more.

So what to do if the Government pressed you to build more houses than were actually needed or demanded? Well it would not be very sensible just to build more if they could not be disposed of. It was of course always possible to stimulate demand to some extent – but even the markets for luxury homes and second homes had their limits. You could always advertise more of the houses in the affluent south east of England, there seemed to be an almost insatiable demand here, but pushed too far and supply might exceed demand even in this market.

And the Chief Executive knew that the current system did not actually provide many of those in real need with a home.

He was in a bit of a hole. How could he explain that there was really no need to build more houses without revealing that the current system was not working without making himself (and all those pundits) look incredibly stupid?

House building in England – some numbers

    Year Numbers
    2001-02 146700
    2002-03 159870
    2003-04 170970
    2004-05 185580
    2005-06 202650
    2006-07 214940
    2007-08 223530
    2008-09 182770
    2009-10 144770
    2010-11 137390
    2011-12 134900
    2012-13 124720
    2013-14 136610
    2014-15 170690
    2015-06 189650

DCLG, Table 122 Housing Supply; net additional dwellings,1 by local authority district, England: 2001-02 to 2015-16.

No we do not need to build between 250,000 and 300,000 homes each year!

Guardian columns have been colonised by commentators who pontificate yet rarely understand. John Elledge is a good example.

Most experts think we should be building between 250,000 and 300,000 homes every year in this country: this is no more than four years’ worth. In some regions, like the south-east, it’s barely two years’ worth. With this report, the CPRE has accidentally proved that restricting development to brownfield is a recipe for a continued housing crisis.

Then again, the CPRE doesn’t have to care, does it? Its job is to defend greenfield land, whatever the cost. The housing crisis? That’s someone else’s problem. Very possibly, it’s yours.

https://www.theguardian.com/commentisfree/2018/feb/13/brownfield-no-cure-for-housing-crisis

Developers often shy away from brownfield because it is less profitable. We are sure there are means to change that.

And where does Mr Elledge think our food comes from?

The average number of new homes built between 2001-02 and 2015-16 was 169,000 in England, roughly equal to the number of new households. In other words a market in balance.

The problem is that too many houses were bought by people for second homes, holiday lets, buy to rent. We need to address the imbalance within the total built NOT build more! But then why let facts get in the way of lazy commentators!