A more realistic analysis of household formation

Following on from his critique of the current methodology to estimate housing need, Ian Mulheirn comes up with an alternative approach.

Mission: Unnecessary
Household formation in England looks set to run at about 150,000 per year up to 2031, well below current official projections.

The prime minister has described it as her ‘personal mission’ to solve the housing crisis by building more. And according to the chancellor, we need 300,000 new houses per year. To many this sounds like Mission Impossible; in fact it’s Mission Unnecessary.

My last blog told the story of why the official projections — the bedrock of the housing need figures — keep overestimating the rate of household formation. In this blog I recalculate the projections to try to correct the source of error. The results suggest that housing need is well below what the government thinks.

Combining the revised household size projections with the new population figures has a big impact on the outlook for household formation. By my calculation, adopting the ONS’s suggestion on household size trends cuts the rate of household formation by around 40,000 per year up to 2031. Meanwhile the lower population projection cuts household growth by a further 27,000 per year over the same period. The result is annual household formation running at around 151,000, rather than the current official figure of 218,000 — a 30% drop. This compares to an average household formation rate of about 140,000 per year over the past 20 years.

What does this mean for how many houses we need? It’s reasonable to think of housing ‘need’ as exceeding the rate of household formation. Alan Holmans, for example, suggested that in order to maintain the proportion of vacant and second homes, a extra 19,000 houses would be required each year. Adopting Holmans’ estimate, my projection implies a total housing need of around 170,000 per year up to 2031.

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