Thursday, 1 September 2016

Reader's Letter Of The Day (2)

Another letter which is not remarkable in itself, anybody who bothers to look at the numbers knows it, what is remarkable is that it is from Civitas, a fairly right wing Home-Owner-Ist lobbying group/think tank.

From today's The Evening Standard:

Rohan Silva is right to draw attention to the shortage of affordable housing in London but he is mistaken about its cause.

There is no shortage of land with planning permission for residential development as he suggests. Councils [in London] are approving in the region of 50,000 new homes for development each year - right in line with what most economists think London needs to keep up with demand.

The real challenge lies in getting those sites built on much more quickly once permission is granted. This is being frustrated by speculative land traders siting tight in anticipation of further price rises, and developers who drip-feed new homes onto the market so as to maximise sales prices.

Daniel Bentley, Civitas.


Observation tells us that in the medium term, additional supply in high demand/high wage areas creates its additional own demand and the overall effect is to push up rents and prices, but his point stands.

21 comments:

L fairfax said...

"Observation tells us that in the medium term, additional supply creates its own demand"
How long is the medium term? In Spain this did happen but has now created super cheap housing - £120pcm for the mortgage on a flat in parts of Spain.

Mark Wadsworth said...

LF, you know the sequence...

Higher wages -> attract people -> more people -> more economies of scale -> higher wages etc. Every time wages/profits go up, rents go up.

The additional housing supply leads to higher rents in areas where this cycle can be sustained i.e. large cities. If you build a million homes in the middle of the desert somewhere, it is unlikely to kick off.

L fairfax said...

Well my family in Spain live in a city of 228,000 people and mass house building has caused prices to go from 100,000 Euro to 35,000 for starter flats, saying that they really tried hard to prove that more house building causes prices to rise for ever - and failed.

Ben Jamin' said...

@ L Fairfax

I wonder how many of those homes would of got built with a 100% LVT? Planning restrictions or zero planning restrictions.

The average selling price having been 35,000 Euro from the start, and supply matched with demand.

Would love to see the number of vacancies and occupation levels.

Ralph Musgrave said...

I find the whole idea that increased supply does not lead to prices falling very bizarre. Obviously it’s possible for “speculative land traders to sit tight in anticipation of further price rises”. And they may do that if they anticipate that the authorities will only release enough land to enable building to continue at an inadequate rate. But in all markets, a big enough increase in supply eventually leads to prices crashing.

Bayard said...

Bizarre or not, it's observably true. The point is, that oversupply of things only leads to a price fall when those things are interchangeable. Oversupply of Ford cars is only likely to impact mildly on the price of Mercedes cars. Indeed, oversupply of Ford Kas will only impact mildly on the price of Ford Focuses. Every house is unique, to a greater or lesser degree. Even houses on an estate have their own unique location. Certainly, oversupply in Wolverhampton is not going to affect house prices in Dorking. Oversupply on one estate, however, tends not to lead to price reductions, but empty houses. Most of the Tiger Towns in Ireland lie empty and derelict, they weren't sold for tuppence ha'penny.
That's the market for new houses, where most everyone is saying supply must increase. However, there's another, much bigger, market, which never gets mentioned, the market for second-hand houses. Here, the occasional desperate vendor will lower their price to make a sale if there's lots on the market, but the majority sit tight, convinced that their selling price is the right price, it's just a matter of finding the right buyer.

L fairfax said...

The Spanish seem to have proved that if you build enough new flats on the outskirts of towns they become cheap. The market for second hand and new homes are linked. No one will pay more for a second hand home than a new one.

Bayard said...

"The Spanish seem to have proved that if you build enough new flats on the outskirts of towns they become cheap."

Yes, but only in that town, or possibly the next one. Building lots of new houses in Galicia is going to do bugger all to the prices in Catalonia. In any case, perhaps the Spanish have a different attitude to home-owning than the British. Hardly surprising since the Germans and French obviously do. So what happens in Spain doesn't necessarily happen in Britain. The point remains that it is observably true that houses and flats in the UK tend to remain unsold rather than be sold for less. It is only theoretically the case that building more houses ought to bring the price down.

"No one will pay more for a second hand home than a new one."

You obviously don't know anyone who lives in a house built before 1850 then.

L fairfax said...

@"Building lots of new houses in Galicia is going to do bugger all to the prices in Catalonia."
I agree, but it is nice for the people in Galicia and almost everywhere as it is cheaper.
@"The point remains that it is observably true that houses and flats in the UK tend to remain unsold rather than be sold for less."
Really? That could change if people know that the supply is going to go up. People only hold on because they know we don't build enough homes and prices will go up. In the 90s people sold at a loss (although high interest rates helped).
@"In any case, perhaps the Spanish have a different attitude to home-owning than the British. "
They don't believe me, that is why they had a boom. They have a different attitude to planning controls though.

I should have said "
"No one will pay more for a second hand home than a comparative new one."

Dinero said...

>LFaifax
One of the elements of the principle requires that the people living in the town work in the town, what is the case in your Spain example

Mark Wadsworth said...

LF, as Din says, rental values are higher in large towns and especially the centre of than small towns because of the self-perpetuating cycle I referred to above.

So if homes are built near London and people move from elsewhere to London, rents go up in London and down everywhere else.

It's called agglomeration benefits.

If they built loads of new homes in a low wage area without any natural advantages, then this would not fuel agglomeration benefits and quite likely prices would go down in that area. But that would be a stupid thing to do - market signals say build more homes in the high wage areas.

The Irish Tiger estates were built in the middle of nowhere and so no reason to assume that any extra population in those areas would lead to agglomeration benefits.
. that was the short answer to LF which I have now padded out a bit.

Bayard said...

"Well my family in Spain live in a city of 228,000 people and mass house building has caused prices to go from 100,000 Euro to 35,000 for starter flats"

How much of that price fall occurred in 2008? How many flats were built after 2008? I ask because after the crash of 2008, people had less money to buy houses with, so you'd expect prices to fall, mass building or no mass building.

"People only hold on because they know we don't build enough homes and prices will go up."

No, people hold on because they think we don't build enough homes and prices will go up. Historical data shows that prices are totally unrelated to how many homes are being built, but are strongly correlated to average wages and interest rates, i.e. what people can afford to pay for them. In the 60's and seventies houses were being built just as fast as they were in Spain or Ireland leading up to the crash of 2008, yet prices didn't come down, in fact they went up.

"In the 90s people sold at a loss (although high interest rates helped)."

I didn't say no-one sells at a loss. Some people have to sell and if prices are falling then they will have to sell at a loss, but since prices rise with wages and wages rise with time, then prices rise with time, so if you can afford to wait, you do.


"No one will pay more for a second hand home than a comparative new one."

What's so good about a new house, with all its teething problems and little things the builders bodged, painted some sort of magnolia, nothing in the garden except builders' rubble under a thin layer of soil and with a cheap kitchen? Nothing will have worn out in a ten year old house, the bugs will have been ironed out, sure it probably needs a new kitchen but most people do that anyway and, unless you actually like magnolia, you would be looking at re decorating the new house when you move in, as well.

L fairfax said...

@"LF, as Din says, rental values are higher in large towns and especially the centre of than small towns because of the self-perpetuating cycle I referred to above.

So if homes are built near London and people move from elsewhere to London, rents go up in London and down everywhere else.

It's called agglomeration benefits.

If they built loads of new homes in a low wage area without any natural advantages, then this would not fuel agglomeration benefits and quite likely prices would go down in that area. But that would be a stupid thing to do - market signals say build more homes in the high wage areas.

The Irish Tiger estates were built in the middle of nowhere and so no reason to assume that any extra population in those areas would lead to agglomeration benefits.
. that was the short answer to LF which I have now padded out a bit."
I know all that. I also know that in a reasonable sized town in Spain (not in the middle of nowhere, mass housing building has caused prices to fall from 50% of what I would pay here to about 10% and I don't think their wages have fallen that much. Out of interest London had mass house building at the beginning of the 20th century did houses get cheaper or more expensive?

L fairfax said...

This blog seems to show that in the 30s no regulations and lots of building made housing cheap
http://www.economicshelp.org/blog/7480/economics/when-london-house-prices-were-350-in-the-1930s/

A bit like Spain today

L fairfax said...

FWIW I would not build homes in London to solve the housing crisis. In the first place I would move pro single parents etc to pit villages and other places with cheap housing, which would probably be enough in itself.
It would of course make Britain a much fairer society where people who work be being better of than those on benefits (I wish I could afford the housing that some pro single parents I know can afford).

Mark Wadsworth said...

LF, you have to compare like with like. In the 1930s, wages were not going up (Depression) and there were lots of other measure in place to keep prices down (rent caps, mortgage caps, Domestic Rates etc). We had these measures for most of the 20th century.

You also keep talking about prices in Spanish towns. Please note I was talking about rental values, which are a much more reliable measure of values. Can you say that rental values have fallen as dramatically?

As moving pro single mothers out, makes sense, but moving more working people in would also push up rents.

Mark Wadsworth said...

LF, this is getting a bit messy so I have started a new post on your Spanish example.

Bayard said...

M, rent caps, in the '30s? I thought they didn't come in until after WWII. I would also have thought that the depression and the difficulty of borrowing money would have been enough to keep prices low.

Mark Wadsworth said...

B, according to Wiki, they were quite strict after WW1, then tapered off until WW2, then were reintroduced with a vengeance post WW2 etc etc.

Bayard said...

LF, Well, in this post alone we've covered lots of house building and prices going down (your example in Spain), lots of house building and prices going up (UK in the 60s and 70s), little house building and prices going down (UK in the 90s) and little house building and prices going up (UK for most of the C21st), which rather tends to suggest that the two things are unrelated.

Simon Cooke said...

It is always wise to start with the premise that increased supply in any given market will tend to reduce prices. The point here is that land owners sitting on sites with permission looking for price rises is only possible where other sites are not available to meet demand.

If there are fewer supply restrictions consequential on planning rules then if I want to meet demand then I can do so - either, as in Tokyo today, by increasing housing density (ie building upwards or changing uses) or, as in Houston & Dallas by allowing urban extension.

Planners in London do not permit either of these but seek instead to precisely predict - aka guess - the number of houses needed. This allows the land speculator the scope to arbitrage land prices by guessing better than the planners.