Wednesday, 23 July 2014

Land Speculation and Housing Design

In an earlier post our host stated:

It's private, profit maximising developers who bash out the tiny homes because they can get away with it; ...

But why?  He then stated that:

...they arise because of the absence of state intervention. If local councils reintroduced minimum room sizes or better insulation requirements, this twat would still be shrieking about state controls and state rationing.

I do not think that this is the full story.  I think that the cri de cour for more state intervention is on top of existing failed state intervention, and policy failures.  Successive layers of intervention cannot surely be the answer?

It is generally observable in the free market that the magic happens and quality goes up as prices fall.  More is done for less every day. Cars are a good example of this.  There is no - as far as I can tell - state intervention in space standards or quality standars for cars.  (I am of course aware of 'safety' and 'emissions' standards).  Competion is pretty fierce between manufacturers.  And I will also concede that the car makers are the recipients of an awful lot of government subsidy, notably GM.

In the comments to MW's piece I related how I had known well two spec. house builders, and both were exercised as to how they could build good houses. The one I knew best, each year as part of his business planning sat down and worked out if he could build what he considered to be a suitable First Time Buyer three bedroom house and make a profit. His standards were close the Parker Morris Standards and were based on the analysis that the first house bought by a young couple may have to be suitable for ten years or so, and that this implied the need for at least three bedrooms to give space for children. By the late 1980's he could no longer do this.

You will recall that the Parker Morris Standards were space standards for public housing which were abadoned in 1980 under MW's favourite P.M.

So what is going on?  As regards house prices/space standards there are seemingly two factors that mitigate against competion delivering its magic.  One, that land is in finite supply and two, state interventions and policy failures.

We on here generally accept that LVT would sort out the unearned scarcity and exclusivity premium enjoyed by landowners.  We also know that existing tax policy favours land over production.

We also know that planning constraints driven by bureaucratic incompetence and nimbyism further restrict supply.

We also know that bad money and inflation (and that inflation is a function of money) drives asset prices, and specifically land price speculation. (We also know that speculators per se are not a Bad Thing in that in other areas of the economy they act as a form of insurance shouldering risk for others).

And with incipient inflation "honest work and sound production will tend to give way to speculation and gambling. There will be a deterioration in the quality of goods and services and in the real standard of living" [Henry Hazlitt - Man Vs. The Welfare State].

Surely then by removing the interventions and correcting taxation and policy errors developers would not be able to profit from speculation and standards would rise and prices fall.

Discuss.
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MW adds: "By the late 1980's he could no longer do this."

Yes of course, because by then full-on Home-Owner-Ism was taking off, banks and building societies were lending higher and higher multiples; rent controls were being abolished; NIMBYism was becoming rampant; council housing was being sold off.

So from 1945 to the early 1980s, builders lived off volume and 'earned' profits (good design etc) not land price speculation. Selling prices were effectively capped (at approx. half today's unregulated prices), but the builders were still happy to build 200,000 - 300,000 new homes per year.

13 comments:

Ben Jamin' said...

http://www.dailymail.co.uk/news/article-1054557/Rabbit-hutch-Britain-UKs-new-homes-smallest-Europe.html


"'England and Wales are the only parts of Europe where house-building is unregulated by legally binding minimum space standards.'"

Ben Jamin' said...

The incidence of building regulations, like tax, falls on land.

If you reduce regulation, homes get smaller and the value of land rises.

We could increased the cost of building a new home by 200% and aggregate HP's would not rise.

Not that this is a great idea, as it only increases deadweight costs.

Far better to have a LVT. This way HP's would drop, and with their extra discretionary income, people will fork out more to buy a bigger better home.

That's what happens when you have a level playing field. Privatised land rents distort pretty much everything. Home size included.

Lola said...

@JM - So you agree then that it is not really developers 'fault' that they have become speculators. It's the natural result of bad public policy?

Ben Jamin' said...

@ Lola

Not builders fault at all. House building is elastic in supply. It can't be.

Good to see Merryn Somerset Webb is on the case, again.

http://moneyweek.com/why-britain-has-the-nastiest-new-homes-in-europe/#comment-53696

Dinero said...

So why could he no longer make a profit building and selling the three bedroom

paulc156 said...

Of those 200-300,000 homes built per year 45-80 how many were private?

Lola said...

@ D. Land prices. And for all the negative issues highlighted by MW and I. He looked at what Barratts (say) were selling as a FTB house - small, two bed, no storage etc etc - and then put his ideal FTB house spec - three bed, reasonable but still modestly sized, some storage, garden +/- garage - up for costing and it couldn't be done. Such a house was only affordable if you were moving up...as it were.

Dinero said...

Its a slightly circular situation. If people build small and buyers go along with it then land values and prices per acre will go up thus apparently
"necessitating" smaller buildings on the accounts of the builder.

Mark Wadsworth said...

PC, about a third, although I don't see the relevance.

Din, no it's not circular. If you have a sensible tax system (LVT) or at least went back to the pre-1980s system, we'd be back to the old ways with larger, cheaper houses.

paulc156 said...

@MW It's not relevant. I only wondered because someone was telling me that the reason home ownership rose steadily after the war was due less to rent controls and more to do with tenants being taken out of the private market and installed in the large number of council flats that were being built, freeing up private sector housing for purchase.

Mark Wadsworth said...

PC, social housing was A Good Thing and will always be necessary as a sticking plaster, whatever the basic system is, even with LVT, you'll always need about twenty per cent social housing.

If you have rent controls, clearly there will be an undersupply of private rented and it will be a bit grotty. Which is fine in the short term, but for longer term, social housing is better.

Plus, the low rents in social housing indirectly put a cap on private sector rents.

So the explanation you were offered is circular and nonsensical.

The increase in owner-occupation rates were because private landlords threw in the towel and sold up, and two-thirds of new construction went to owner-occupiers, not to BTLs.

Ben Jamin' said...

@Din

It's a case of spending priorities.

Big house, rubbish location? Smaller home, better location?

As they say it's "Location, location, location".

So, landowners price the minimum size people will possible pay for, and pocket the rest themselves.

You could introduce minimum sizes, which would be good. This wouldn't push up aggregate HP's. But, it's a blunt tool, as it's the Government trying to second guess things.

Much better to let the market sort it out. Which you can't have while land rent is privatised.



Lola said...

Many people blame 'self cert' mortgage lending for driving up HP by providing 'excessive' credit. From my own experience I disagree with this, in part.

The 1986 Financial Services reforms - the scrapping of all the special privileges and restrictive practices the introduction regulation - did indeed open up the mortgage lending market. But, self cert per se was never a problem before 1999 (ish). Experienced lenders had strict multiple and deposit / equity criteria and really serviced those clients with variable or largely cash income (market traders for example). Mostly these type of clients are self motivated and tend to be able to make money. The 'good' Self cert lenders had very low impairment records - lower than mainstream players.

But, once Brown Balls picked up the homeownerist baton post 1997 the massive expansion of money and credit and the utterly flawed regulatory reforms drove a massive expansion in self cert providers and lending as well as driving lenders away from simple income multiples to 'affordability' criteria. The amount or mortgage funding washing about by 2007 was truly epic.

Distortions like this lead to speculative behaviours. And drive up land prices.

There are more forces acting on spec house builders than simple greed.