Saturday 9 September 2017

It's that myth again

Nick Hubble, who generally has the right idea about a lot of things, contradicts himself here.

"Prices are controlled by supply and demand. But over time they tend to converge towards the cost of production, plus a small return. Otherwise profits of sellers are too high and competitors muscle in with lower prices. But housing is not like other goods."

So far so good, but

"Government controls both the supply and the demand. At least in the UK it does. Here in the UK, restrictions are enormous. Supply and demand can’t respond to prices. On the supply side you have government with its control over the supply of land and building types. The green belt around London is responsible for much of the unaffordability there. On the demand side you have the central bank fiddling with the cost of borrowing. And everyone needs to borrow to buy a house. Consequently, between the two, the housing market is in the grip of the government entirely."

OK, but given that planning policy hasn't really changed since the Town and Country Planning Act of 1947, how does Nick reconcile that with

"Being right is one thing, but timing is another, says Akhil Patel. He sees house prices as a purely cyclical phenomenon. In fact, both house prices and stockmarket prices are driven by the same cycle – the land price cycle. Understand that and you can predict everything. This current upswing is far from done according to Akhil at Cycles, Trends and Forecasts."

Akhil then steps up to the plate with

"If land is not made available for housing via the planning system then this restricts availability of sites and their price goes up. This feeds on itself because current owners of sites can hold them back in anticipation of further increases in the future."

but then goes on to say

"Economies exhibit a very regular pattern of boom and bust and this goes back to the late 18th century in the UK/US. This cycle is fundamentally driven by speculation in land, fuelled by bank-created credit (money).

Why speculation in land? Land captures all of the gain of economic development (law of economic rent – well understood by all of the classical economists like James Mill, Adam Smith and David Ricardo. It’s been lost to modern economics. But the law of economic rent is to economics what the law of gravity is to physics. This law makes land a unique vehicle for speculation (and collateral). The boom takes land prices unsustainably high, businesses and households get squeezed, and the whole thing comes crashing down, bringing the banking system with it. The rhythm is an average of 18 years and has surprisingly little variation."


If house prices are controlled by the supply of building land, then you expect the supply of building land to follow the same 18 year cycle, for which there is no evidence, indeed the reverse is true: the higher the price of building land, the keener people are to go to the bother of getting permission to build. Akhil Patel gives as neat a summary of the 18-year cycle as you could hope to read. Why then do he and Nick Hubble insist on trotting out the supply/ demand myth? It's almost as if it's an unquestionable article of faith something that just is, like the laws of thermodynamics.

14 comments:

Mark Wadsworth said...

Faux Lib Kristian Nimitz trotted out the old "it's all about supply" nonsense recently.

I referred him to my article on how the current house price bubble started after Georgism-Lite was phased out and he said that was all irrelevant and/or entirely coincidental. It just so happens that prices and rents went up after rent controls were abolished. Entirely coincidental. It's all about supply, innit.

I pointed out that planning restrictions have been in place since God knows when and private housebuilding has been pretty constant since the 1950s, and he fudged it - his logic seems to be that when first introduced they had no effect but that the effect gets stronger as time goes by.

Bayard said...

M, Good point, yes, it's like questioning the existence of God to a practising Catholic. I've amended my post accordingly.

Sackerson said...

If it's an 18-year cycle then the low of c. 1981 should have been followed by slumps in 1999 and 2017.

Mark Wadsworth said...

S, the crashes (house prices and financial) are widely accepted to have started in 1972 1990, 2007.

Ww2 interrupted the pattern, in the USA it is recorded back to the 18th century.

Sackerson said...

So you're talking about the start, not the bottom. I bought our house alone, on only twice my then salary, in 1984, pretty much at the bottom of the market.

Bayard said...

S, it's not exact, to the year. I'd say that there is at least +/- 2 years or so, which is what you'd expect for a natural cycle. There was a post about this some time ago which went into the details.

Sobers said...

As someone with an intimate knowledge of exactly how the planning system works for large urban extensions and also how the financials stack up for such developments, I can categorically say that the thing that keeps house prices high is not the lack of land available for development, there's loads of it. The actual premium paid to the landowner for the pure planning permission gain is in the region of 15-25k/house, or roughly 10%. So you could remove the landowner from the equation entirely and nationalise land and build house on it, and prices would only fall by 10% max.

The reason for this is that the rest of the value created has been taken by the State in one form or another - either as additional costs imposed on the housebuilders by regulations on the construction of houses, or as pure cash payments - all developers have to sign what are called Section 106 agreements parallel to their planning applications - these agreements are basically a massive shopping list of payments the local authority demands for all manner of things they wish the developer to pay for in the local area.

For example, I am involved with a local village cricket club, which wishes to build its own pavilion. Luckily for them the village in question has recently had housing developments applied for and gained in multiple sites. In each case the developer has been made to pay some money into a pot for local amenities, one of which is the cricket club. It stands to gain in excess of 50k, and is just one of many organisations in the village who will gain. The developers will also have had to pay towards new medical facilities, schools, road improvements, not just locally but county wide. All of this money comes from the price of the houses eventually sold, and is fixed by statute. It can't be done away with by supply and demand - the developers HAVE to make these payments. They could have thousands of plots ready to go, they can't sell them for much less than the going rate as the State imposed fixed costs are so high. And if the selling price rises, as the general housing market rises, then the Local Authority will demand even more S106 money in the next round of planning applications. The S106 costs will now be the largest single cost of developing a large site, far larger than the price the landowner gets, and larger than the actual cost of building the houses, or the developers profit margin.

The State has taken over the development process by stealth over the last 20-30 years, without actually changing the planning laws, or imposing a specific development tax. But it now largely controls how much houses cost to sell for, by putting in place a fixed cost base that cannot be removed by market means.

Mark Wadsworth said...

S, in the UK, there was an extra little dip in the early 1980s, but that was UK specific.

S, nope. All these extra charges like s106, CIL, planning fees etc just eat into the price builders will pay for the land. Remove all those and the price of land goes up to match.

The cost at which Redrow et al carry their plots (as you say, £15k to £25k per house) is because they buy up farmland long term in the hope that it will get planning sooner or later.

What matters is the value of the land once planning has been obtained and the site is 'shovel ready'. And that is a very big number.

Mark Wadsworth said...

The linked article on the 18 year cycle is great

Sobers said...

"The cost at which Redrow et al carry their plots (as you say, £15k to £25k per house) is because they buy up farmland long term in the hope that it will get planning sooner or later"

No, developers very rarely buy land in advance at low prices, 99% of the time they tie it up on long term options at relatively low cash cost. £15-25k/plot is the going cash rate for farmland, with a planning permission but no infrastructure in place, today. I know this, because thats what I stand to get for my land that is going for development. I know the number of houses that will ultimately be built on my X acres. Divide one by t'other and you get a figure of £16.5k/house. This on a large site of over 4 figures of houses. And I've got a good deal, other landowners locally have had per house figures lower than mine.

This is the change thats occurred over the last 30 years, particularly the last 15-20. It used to be that you got a planning permission with no strings attached and had a free hand after getting that magic ticket. Everyone, landowners and developers made out like bandits. Now the State controls the entire process, from site allocation, to planning regs, building regs, S106 costs.

"All these extra charges like s106, CIL, planning fees etc just eat into the price builders will pay for the land. Remove all those and the price of land goes up to match. "

Yes, thats true. But the price of land is fully subject to supply and demand. S106 costs and regulatory costs aren't. If all the S106 and regulatory costs were removed, yes, initially the landowner price would rise to match. But then one could collapse that price by increasing the supply of planning permissions. One cannot collapse the State imposed costs. They are immutable. This is why house prices do not fall, despite houses being built everywhere left right and centre, and the supply of plots in the pipeline is equally large. The houses can only be built for a high price because of the State imposed cost base built in. A developer might have 1000 plots ready to go, but won't build a single house until he can make a profit above the costs he has had to agree with the local authority via S106. If the current market price is below that figure, nothing gets built.

My own local authority happens to own a large area of land (hundreds of acres) that it gave itself planning on over 10 years ago, before the financial crash. They got clever and thought they'd be their own developer, and not involve the big housebuilders. They borrowed loads of money, built loads of infrastructure etc. Then the crash came, and the price of housebuilding land went throught he floor, and they'd all these sunk costs that they couldn't recover. That land is still fields today, despite having full planning permission - they can't make the sums add up to actually build the houses.

Mark Wadsworth said...

S: If the current market price is below that figure, nothing gets built.

Correct. But the market price is above that figure or the land would have zero value (which it does in a lot of areas) but not in urban areas. My clients are getting £50k and upwards per home in the south east.

Dinero said...

Is the affect of the green belt on house prices being overstated by the article.
How many houses does it prohibit. It is crossed by roads and railway lines and so the difference it adds between the houses in question is one or two minutes travel time.

Bayard said...

"But then one could collapse that price by increasing the supply of planning permissions."

Do you have any evidence to support that statement. I agree that it seems likely that increased supply will lead to lower prices, but the difference with land is that no-one else can offer land in that particular location. It is like selling an old master. If someone wants that particular old master, you are the only person they can buy it off. Of course, there is a localised effect. If the supply of building land in a particular settlement goes up, then, if there is no competition from buyers, the price will go down. However, if the buyers outnumber the sellers, competition should ensure that prices are unaffected. Currently the housebuilding world is a bit of a monopsony, but this just proves that, not that there is a link between supply and prices. Geography means that sellers will always be limited.

"Then the crash came, and the price of housebuilding land went through the floor, and they'd all these sunk costs that they couldn't recover. That land is still fields today, despite having full planning permission - they can't make the sums add up to actually build the houses."

Yes, but it was not the supply of land that went up, but the supply of credit that went down.

Dinero said...

Actually I dont think the absence of houses in the green belt is that relevant. Even if the "supply and demand" effect was predominant, houses built in the area that is outside of the city and the green belt, would also reduce London prices, and it is the fact that houses can , have been , and are built there.