Saturday, 13 February 2016

Economic Myths: Building more homes will increase owner-occupation rates

The politicians keep saying that owner-occupation rates are falling because homes are too expensive(1), that increasing new construction would get prices down(2) and hence reverse the decline in owner-occupation rates(3).

On closer inspection, none of these assumptions are correct:

1) Every home has to be owned by somebody, either an owner-occupier or a landlord. If high prices are deterring owner-occupiers, then why are they not deterring landlords as well?

2) We establish by observation that building more homes where people want to live (the sensible thing to do) does not push down prices in those areas, agglomeration effects mean that they go up slightly on average. Prices would only fall in emigration areas because of people moving to the new homes in immigration areas.

3) Whatever happens, landlords will continue to outbid owner-occupiers:

From page 11/12 of the DCLG English Housing Survey 2013-14:

In 2013-14, the private rented sector accounted for 4.4 million or 19% of households. Throughout the 1980s and 1990s, the proportion of private sector households stayed steady at around 10%. However, the sector has undergone sharp growth since then and has doubled in size since 2002.

So scaled up for the whole of the UK, that's an increase of about 2.7 million homes in the private rented sector between 2002 and 2015. From DCLG Table 209, in the same period, 1.9 million homes were completed for private sale in the UK, along with 0.4 million completions by/for Housing Associations and local councils.

In other words, landlords were easily able to soak up all net new homes and then some. Why? Because people who already have some 'housing equity' can borrow larger sums more easily than younger would be owner-occupiers. The recent tax changes might put a bit of a dent in that, we will see.

As Lole explains here, the mortgage market review did make things slightly more difficult for BTL but much more difficult for FTBs, so in relative terms, BTL's advantage is larger. Consider: BTL and FTB are playing football and there is a punch up between players. The referee sends off one player from the BTL team and two players from the FTB team.

So you can build as many new homes as you like, as long as landlords have a natural advantage, they will be buying them up (even if prices were to fall, which they wouldn't).


Lola said...

The MMR won't help matters at all. In fact it further skews the market to landlords and away from FTB. And that is my direct experience working on the sector.

The MMR is just another failed intervention in a long succession of failed interventions.

Mark Wadsworth said...

L, aha, thanks. I thought MMR made it a bit more difficult for BTL, but if MMR also made it a LOT more difficult for owners, then BTL have inched ahead in relative terms. Correct? Or can you do s post on this?

Random said...

Telegraph special pleading

How about tax cuts to increase growth instead?

L fairfax said...

Why do Landlords have an advantage, if you keep building homes?
I have friends in Spain in a town where people want to live, who were renting for 300 Euros pcm, they could buy for 200 Euros pcm (no deposit) and so did so.
They as someone who is buying today seem to me to have an advantage over existing landlords as they are not in negative equity. Obviously cash buyers could become landlords but why would they want to, with a large supply of homes? (Speculating only works if there is a limited resource).
Obviously in big towns where there is no space this would not be true, although this is a largeish town (over 100,000 people). Although I would doubt if there really is no space in big towns.