Friday, 11 October 2013

But is it really "the supply, stupid"?

From the FT:

If one wanted to increase supply [of housing], the solution is evident, but politically unthinkable: make a large quantity of land available for development and impose a swingeing site value tax, to compel building.(1)

Back in the 1970s, the UK built an average of 300,000 houses a year. (2) But between 2001 and 2011, building averaged 188,000 a year, even though the population rose by some 3.5m.(3)

It is the supply, stupid! The reason this point is not made the focus of policy is that doing so would be too unpopular and too dangerous.(4)

1) Hooray. The tax costs the actual builder nothing - the tax pushes down the upfront cost of the land by an equal and opposite amount, so the interest saved is always enough to cover the tax.

2) Yup, that was the twilight of the pre-Home-Owner-Ist era - the aim of Home-Owner-Ism being of course to reduce the supply of housing; to push up rents and prices and ultimately reduce the number of owner-occupiers.

3) Maths time:

Ten years @ 188,000 = 1.88 million new homes.

3.5 million population increase ÷ 1.88 million new homes = 1.86.

In other words, as long as new households are on average two or more people (and they are), then that would be enough new housing (assuming it were allocated efficiently, which it isn't, separate topic).

4) Dangerous to what or whom?
Fact of the matter is, house prices increase for the following reasons:

a) Credit fuelled speculation, pushing up prices as a multiple of rents.

And rents increase for the following reasons:

b)The tendency of rents to soak up a larger share of the economy as the economy grows.

c) Let's assume that new homes are built where people want to live; and most people want to live near urban centres (or within easy travel distance thereof).

Urbanisation (or specialisation or agglomeration or whatever you want to call it) itself boosts the size of the economy. For example, the population of Greater London is approximately equal to the population of Scotland and Wales combined - but because London is relatively densely populated, the total value of land and buildings in London is three or four times as much as the total value of land and buildings in Scotland and Wales.

d) Multiply up a), b) and c) and there is a massively exaggerated effect on selling prices.


Lola said...

You omitted factor (d) - state subsidies.

Mark Wadsworth said...

L, good point.

But the simple fact of allowing private individuals to "own" land and collect the rental value with little or no payment to the wealth creators is in itself a subsidy. Land values are actually 100% subsidy to start with.

Bayard said...

And your point 4) is? Don't keep us all in suspense.

QP said...

The thing the "simply build more" lobby don't appear to get is that, even if we built a house for every man woman and child in the country, the houses could never all be in the right place at the right time. In other words 'supply' can never match 'demand'. Everything points to location charging.

Mark Wadsworth said...

B, oops, I was seething with rage by that stage and forgot. Now added.

QP, we here (me, Ben and Bayard) have wrestled long and hard over quite why additional supply of new houses does not lead to lower home prices.

It's difficult to formulate, but I see it thusly - you can build as many HOUSES as you like, but the price paid is NOT something dictated by the equilibrium point between builder (supply) and household (demand).

The price is dictated by whichever household (demand) bids the highest - and once that highest bidding household moves in, that is no longer a mere HOUSE it is a HOME.

HOUSE = building.

HOME = building + household.

So you aren't paying a builder to build a HOUSE, you are either trying to outbid other households for a HOME or you are offering them enough for them to vacate their HOME.

QP said...

Interesting line of thought. I would say most people would want to do some work, particularly on a second hand house, before it becomes a home. I guess there are additional factors that turn a house into a home, notably local infrastructure and more abstract things like views. This brings me back to my point that new housing supply is typically built on marginal land. Often infrastructure is poor. Thus existing housing can command a premium, there will always be more desirable areas that people would want to move to if given the chance (more bank lending).

Bayard said...

Thinking about the supply of and demand for houses again, it may be important that it is not the house that is expensive, nor is it the house whose price fluctuates, it is the land it is sitting on. New homes are built on land with PP. The person or organisation selling you that land when you buy your new house is very seldom the person or organisation that bought the land without PP and got PP on it, therefore, no matter how great the supply of houses, the seller cannot offer much in the way of a reduction on price without incurring a loss. We can see what happens when there is an oversupply of building land: the owners sit on it and release it slowly enough for the price to remain high. There is no reason to suppose that this behaviour would not continue even if there were no planning controls at all. Everyone knows the "going rate" and the supply of desirable land is limited by geography.

DBC Reed said...

Can't help but feel that the point of Martin Wolf's landmark article has been missed: that we have gone beyond the point of no return with deliberate house price inflation. It needs to be read in the context of his previous articles where he has had faith in (not Georgist) land tax solutions.

Mark Wadsworth said...

QP, yes of course it is all about land, or more to the point, more about being with short travel distances of other people, businesses, amenities etc.

So cities form the same way as the first stars formed, two atoms clump together and they attract a third atom and so on and so forth.

B, yes, correct of course, agreed.

DBC, he did mention LVT in the article but only on sites with planning, which is a good start but nothing major.