Monday, 8 June 2015

"Building new properties doesn't drive down house prices"

From City AM:

Building new properties doesn't drive down house prices, according to a study by the London School of Economics.

By looking at the price impacts of a series of Barrat Homes developments in suburbs and villages over the past five years, the researchers found no evidence of a price depreciation.

In fact, in some cases the opposite was true – the report, seen by the FT, says: “Developments of the size and scale studied, even in areas where originally objections were significant, can lead to more rapid rises in local house prices.”

Eight developments were looked at in total, each containing 300 new homes. All were based in the Midlands and South of England.

The results are contrary to the opinion held by many economists that more houses are needed to keep future house prices in check. The consensus is that between 200,000 and 300,000 new homes are needed each year, but in 2013-2014 the UK fell short of this with 141,000.


Which is what observant people have been saying for years. I only cottoned on to this a few years ago, thanks to their valiant efforts.

28 comments:

L fairfax said...

There were no controls in this research was there?
I.e. they didn't compare house price increases to place where Barrett homes tried to build new homes but failed.
So how do they know that the prices could have increased by more without the house price homes?

Antisthenes said...

It is nonsense to believe that the housing market does not follow the same rules of supply and demand like other markets. The only reason that prices keep increasing is because supply does not keep up with demand. That is because of restrictive practices, regulations and government national/local and NIMBY interference that seriously curtails supply.

Mark Wadsworth said...

LF and A, have you never heard of agglomeration?
More people = higher land prices.
More homes = more people
Ergo
More homes = higher home prices

Just look at real life! Look at land prices in Manhattan London or Tokyo!

L fairfax said...

@"More people = higher land prices.
More homes = more people
Ergo
More homes = higher home prices
"
What about Spain and Ireland?

Mark Wadsworth said...

LF why do ask me? Why don't you look up prices in Barcelona or Madrid compared to rural Spain, or prices in Dublin compared to rural Ireland? Them make up your own mind.

L fairfax said...

There are lot more houses in rural Ireland than there were a few years ago and prices in both rural Ireland and Dublin have have dropped since then by quite a lot.
This "research" how no control it doesn't look at any villages where the Nimbies won.

The Stigler said...

Maybe there are some short-term effects, but yes, it makes sense.

I've been in Swindon for 20-odd years, and it was a crap place to live when I first came here. As it's grown, we've seen a number of facilities created. We've now got 23 cinema screens, a Waitrose and a John Lewis store. And those JLP stores are here because the town has reached a level of population where there's enough posh people* that go to them to sustain it. The old bit of town now has a very fancy deli, a fancy wine shop, a couple craft butchers. That then feeds on itself - people will want to live there because of those things.

I think it's also why I rarely work out of the area of the town now. There's an agglomeration happening with business software. London is just too pricey and you don't need software developers to be there, but Swindon's cheap and close enough.

*John Lewis is sometimes the best value place to go, but it has a "posh" reputation. Apple stuff is often the same price as Apple, but with a better warranty, for example.

Mark Wadsworth said...

LF so you flatly refused to compare prices large city vs rural? I find it helpful to always start with simple observed facts, I am not sure which approach you prefer.

And you cannot simply dismiss the LSE report without having seen it - how do you know they didn't have a control sample?

L fairfax said...

@"And you cannot simply dismiss the LSE report without having seen it - how do you know they didn't have a control sample?"
They may have done but I have to judge on what it is reported.

I am not denying that agglomeration happens however the idea that building more homes makes prices rise is counter logical.
It is certainly not what happened in other countries.
An alternative explanation could be
1) Barretts estimate how many homes an area needs and because they want to make money they always build less than that area needs so they can sell all of them
2) Therefore after Barretts build houses, prices rise.
3) If they hadn't built them prices would have risen more.
4) Barretts know that many people like house price rises so commission a report to say that their homes make an area more expensive to win over NIMBIES.

L fairfax said...

PS if lots of houses are you need to make a city with high house prices, why has no one tried to do it?
Buy a large area of land and build loads of houses and they all become expensive.
It worked so well in Spain
http://en.wikipedia.org/wiki/Sese%C3%B1a

Dinero said...

Spain and Ireland are relavant but don't affect the general observation that
more houses=higher house prices
Spain and Ireland were a special cases of building houses and offices that no-one wanted.


The more general case under consideration is

step 1 houses built to meet demand.

Step 2 Aglomeration effects kick in and house prices go up.

People have been building houses in London for thousands of years and the prices have always gone up and up.

L fairfax said...

In London there are quite a lot of people on housing benefit.
Also house prices do not always go up in London there was a crash 89-95.

Mark Wadsworth said...

LF, 'other countries'???

Manhattan, Los Angeles, Tokyo, Sydney, Dublin, Barcelona? Can you find a single counter example apart from a few blips like Sesena or Irish tiger estates?

Din good answer, thanks

LF there was a crash so what - London was still more expensive than elsewhere and recovered quicker, ditto Dublin/rest of Ireland.

Dinero said...

> L Fairfax's question

People have tried and succeded, by buying a piece of land and building lots of houses, in making cities with high house, (land) prices The west coast of the USA has many examples of that.

L fairfax said...

Such as where?
Correlation is not causation.
If more houses = higher house prices then property developers could never lose money.
BTW the reason why there are many other examples as Spain and Ireland are one of the few countries where property developers were stupid enough to build more houses than people needed.

Dinero said...

exactly Spain and Ireland built more than demand as you say, and as I said, and so they are an anomaly as Mark and I said. So it seems you agree also.

You say that property developer could never lose money, well they couldn't lose money buying an empty plot of land and builing houses where people want to live, with proven demand could they. And that is the situation under consideration, where there is a known demand.

L fairfax said...

Yes the anomaly in Spain and Ireland was that they didn't plan properly. In the UK they do and as I said before
"Barretts know that many people like house price rises so commission a report to say that their homes make an area more expensive to win over NIMBIES."
Of course they don't look to see what happened where they didn't get planning permission.

Mark Wadsworth said...

Din, thanks more good examples

LF of course home builders can lose money !! They often overpay for the land. House prices generally will still be going up.

Dinero said...

> Mark

I can see an issue with statistics that could affect the calculation of the average house price when new houses are built.
Thenew houses will be in less desirable location areas and so they will infact be cheaper than the established houses. Therefore a nieve caluation of all house prices that does not take that into account will conlude that in the short term the acerage prices have gone down and incorrectly include the established houses in that statement of price movements.

Mark Wadsworth said...

D,yes another good point, you have to compare like with like

L fairfax said...

I can see an issue with statistics that could affect the calculation of the average house price when new houses are built.
The new houses will be in more desirable location areas (less social housing) and bigger and so they will in fact be more expensive than the established houses. Therefore a nieve caluation of all house prices that does not take that into account will conclude that in the short term the average prices have gone up and incorrectly include the established houses in that statement of price movements.

chefdave said...

House prices are strongly related to land prices and land prices in turn are related to the local economy. As the building of additional houses has little impact on the local economy there's no reason to suspect that new builds will lower prices.

People just say 'its a supply and demand issue' without thinking it through.

mombers said...

An angle on the Ireland/Spain situation. I don't think there was meaningful agglomeration as estates were built with no amenities nearby, i.e. no shops, etc. No one wants to live in them becuase nobody does live in these 'exurbs'. There are no existing house prices so they can't go up in fact...

mombers said...

"There are no existing house prices so they can't go up in fact..." And they can't go down either!

DBC Reed said...

Stop arguing.Watch Keiser ep 767 (Sat 6th June).He's saying what we've been saying for years now sans the LVT .Mark need to stop pissing around AND GET ON THE SHOW.

Bayard said...

"It is nonsense to believe that the housing market does not follow the same rules of supply and demand like other markets"

So all markets are the same, are they? How about water? Obviously, if there is a shortage of water, its price will increase, but increasing supply rapidly gets you to the point where everyone has enough water, thank you very much, and increasing the supply is not going to do anything to the price. If the market for water is different, so can the market for land. Each plot of land gains its value from its location. The location of each plot of land is unique. OK there are other locations which are pretty similar, e.g. there are plenty of places where the commuting time to central London is an hour, but there are none that are exactly the same.
In this sense the LSE findings are surprising, because the only place where supply and demand applies to the housing (land) market is right next door to where the supply is. However, you have to compare like for like. The market for three-bed semis is not the same as for four-bed detached. The market for new houses is not the same as the market for old ones. In that sense there isn't one housing market, there are many and it is not surprising that the price of an Elizabethan thatched 3-bed cottage is not reduced by the building of 20 four bed detatched houses with garage at the other end the same village.

LF, you are aware that there was a financial crash in 2008, because you mention it in one of your comments. Is it not possible that it was this financial crash that caused house prices in Ireland and Spain to drop, not the fact that there was a surplus of housing? If you care to look, you will find that, despite the severe oversupply, house prices didn't drop in either country until the crash, which is why the developers kept building. Also how do you explain England in the '60s and '70s, when a building boom was followed by a boom in prices, not preceded by one.

Also, please can you explain why, if increasing supply reduces house prices, why prices are rising in Spain again, booming in fact, despite the fact that all the ghost towns remain empty?

Random said...

http://www.ons.gov.uk/ons/rel/regional-trends/regional-economic-indicators/march-2013/sum-london.html
Well done Londeners ;)
"Watch Keiser"
On RT? The Russian propaganda channel?

DBC Reed said...

@R You seriously think that Keiser is parroting Russian propaganda?
No wonder I don't frequent this gaff so often any more!