Supply and demand – get it right!


Simon Wren-Lewis in Mainly Macro makes the following point:

There are two reasons why house prices have been rising in the UK: not enough houses are being built and real interest rates have gradually declined (secular stagnation). As governments have relatively little control over long term real interest rates, you will only reduce mortgage debt by reducing house prices by building more houses. To put it very simply, the aggregate private debt problem in the UK is a reflection of our longstanding inability to build houses.

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

Unfortunately the simplistic approach that regards high house prices as due to a lack of supply is one commonly if mistakenly held. Demand elements oddly enough are ignored.

Lets look at those demand elements.

Population growth
Population growth adds to demand for more housing. If you think population growth is good (obviously sustainability and climate breakdown are not important to you), then you just state ‘we need more housing’! If we had a steady state population then there would not be the need for additional housing.

Demand for holiday homes
Demand for second homes frequently arises from more affluent households. It has the effect of pushing up house prices in general and by reducing the number of houses available for local residents creates a ‘need’ for more house-building.

Investment
Again largely arising from more affluent households there is demand for housing to use as an investment. The use of London as a centre for housing investment by affluent foreign buyers who regard London as a safe location to deposit their resources is a major factor in pushing up house prices in London. Buy-to-let can be included in this category although here property is viewed not only as a long term investment but as a revenue stream.

Rising incomes
As incomes rise there is more money available for spending on housing.

There are others but these are the main elements. If we are serious about reducing house prices then we need to adopt policies that seriously reduce demand.

A problem with reducing house prices is that rising house prices are seen as being good by the commentariat, most politicians and home owners. This is despite the reality of the situation that in general house prices increase at similar rates. If your house has doubled in value then so have most others. When you sell you think you have gained but then you discover that the property you wish to purchase has also risen in value and you are no better off!

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