Saturday, 20 July 2019

Gloriously missing the point about housing supply and demand in London

Shaun Bailey in City AM:

We need a bold new approach to tackle London’s housing crisis...

Since 2000, London has added over two million people, but has built fewer than 400,000 properties. Add in the surge of foreign money into our housing stock, plus more people living on their own, and you have an expensive – and exclusionary – mix.

The only way out of our current mess is to build, but politicians have promised to do that for years. While some have done better than others, every single one of them has failed to meet London’s actual needs.


The lack of self-awareness is staggering.

Those two million extra people moved to London from somewhere else, quite voluntarily, mainly attracted by the higher wages. For a given supply of housing, people will continue to move there until rents have risen to a level where the higher wages are cancelled out by higher rents.

If housing supply increases, rents might fall, very briefly. People who were previously deterred by the higher rents will move to London. Rents will increase to their previous level, probably within days or weeks.

Fair play to the lad, he seems to be recommending that London builds a lot more council housing for fixed rents. Let's assume they give priority to people who already live in London, this frees up private rented accommodation and people from elsewhere will move in to them, it makes no difference to the new arrivals.

28 comments:

Bayard said...

Landowners have really got it sewn up: "the housing crisis -> build more homes -> give us an unearned windfall by granting us PP on our land" myth is really embedded in the public consciousness, although the third part, is, of course, never mentioned.

Mark Wadsworth said...

B, indeed they have.

Piotr Wasik said...

what is PP?

ThomasBHall said...

Planning Permission

Piotr Wasik said...

thanks

Dinero said...

Observing the dynamic that houses are sold to the higher income buyers first and to the lower income buyers second then therefore it could be said that if there was new building and selling of sufficiently multitudinous quantity then eventually the later sales will be to the lower income buyers and the later sales will take place at a lower price, all else being equal.

Mark Wadsworth said...

Din, I would counter-argue that the first sales will increase average prices and later sales will reduce them back to original average price.

Rent or price paid is purely a function of average incomes in an area.

If newcomers earn on average the same as incumbents (which they will), there will be no effect on prices.

Only if newcomers push average wages down would rents and prices fall. In large cities, agglomeration effects mean that this doesn't happen.

Dinero said...
This comment has been removed by the author.
Dinero said...

Initially there is no change in prices, building houses in towns, as it makes accommodation available in the centre available to buyers who would have made their house purchase further out, and so they become the occupiers of the new houses at the same price as before the new houses were built.
Then observing the dynamic that houses are sold to the higher income buyers first and to the lower income buyers second then therefore it could be said that if there was new building and selling of sufficiently multitudinous quantity then eventually the later sales will be to the lower income buyers and the later sales will take place at a lower price, all else being equal.
As you say the incomes of the buyers is the factor, and then there is the agglomeration effects.

Mark Wadsworth said...

Din, with a normal price rationing system and scarce resources, more supply = lower prices because higher earners get served first at higher prices.

But by moving to a high wage-high rent area, you can increase your wage and hence the rent you pay.

So it all cancels out neatly, and what we are left with is rents are dictated by wages.

Prices are just rent divided by prevailing interest rate (plus minus bits and pieces).

L fairfax said...

@"Those two million extra people moved to London from somewhere else, quite voluntarily, mainly attracted by the higher wages"
I know quite a few immigrants came because of the cheap housing, i.e. paid for by the tax payer. I would love to know what percentage of that two million pay for their own housing 100%.

L fairfax said...

PS I think that if we were to stop subsidizing rents then they would fall.
Maybe more people would arrive in London - but they would probably be better a bargaining than those whose rent is paid by someone else.

Dinero said...

The question is, does building new houses in Town increase the amount of current inhabitants that become owners. The answer lies in the statistics for the identity of current house buyers in town. It is the ratio of the number of contemporary sales to current inhabitants to the number of sales to newcomers. After the new houses are built and sold, the number of sales is higher and that ratio, the ratio between current inhabitants and newcomers for sales measured at that time, is the same as the ratio measured before.

Kevin the Chimp said...

What happens when you add 2 million people to the labour market?

Surely this will suppress wages, thereby suppressing rent as a second order effect?

Bayard said...

"The answer lies in the statistics for the identity of current house buyers in town. It is the ratio of the number of contemporary sales to current inhabitants to the number of sales to newcomers."

Er no, what happens if all the new houses are bought by landlords?

"I know quite a few immigrants came because of the cheap housing, i.e. paid for by the tax payer."

If you have actual statistics on the number of immigrants in London on housing benefit, do share.

Dinero said...

> Bayard

A proportion of Current houses are also bought buy landlords and so the ratio remains the same.

L fairfax said...

@Bayard
The national figures are hardly secret
https://www.migrationwatchuk.org/briefing-paper/367#benefits
"Looking at overall results it can be seen from figure 18 that rates of claim for Housing benefit, tax credits and Child benefit among the migrant population are considerably higher than among the UK-born. "
Which is from
The data is largely derived from the UK Labour Force Survey.
But for London
"
Half of social housing in Inner London is occupied by households with a foreign born household reference person (HRP) and the figure for the whole city is 43%[33] as table 2 illustrates. "
https://www.migrationwatchuk.org/briefing-paper/339

Of whom many receive benefits
Despite the below market rents 560,000 households, or nearly three-quarters of all the households in social housing, receive housing benefit
"

I remember reading a few years ago in a Spanish Language Newspaper (Cronica Latina now defunct) an advert advising people taking to take up their right to buy if they were going to leave the UK. If immigrants didn't get social housing - why would they put such adverts.

L fairfax said...

Of course in an ideal world everytime someone got a NI number the Government would record the person's home country so we can easily see how much people from country x contribute/cost.
Sadly the Government is not capable of doing this.

Of course if people think that recent immigrants don't get benefits - why don't politicians just stop them from doing so - no harm if it never happens anyway.

Curtis said...

LF, someone could be born outside the UK then come here aged 1, they may even be British by birth because their parents were just working overseas for a short period, but if such a person gets housing benefit then apparently for the rest of their lives they are an "immigrant sponging off the taxpayer"

Immigrants are not allowed to get any benefits until they are free from immigration restrictions - for EU/EEA citizens and their family members this takes 5 years of the EEA citizen continuously working (in the main), and for all other adults it now takes at least 5 years, although this period was shorter in the past (for children, it depends on their parents).

L fairfax said...

@Curtis
"Immigrants are not allowed to get any benefits until they are free from immigration restrictions - for EU/EEA citizens and their family members"
That is not true a friend came from Spain last year and got his rent paid and a teaching assistant was provided for his daughter as she didn't speak English. Now I don't have any problems with people complaining what they are entitled to and I would probably have done the same in his situation. I very much doubt that it is beneficial to the UK economy though.
That is not mean I dislike Spaniards or other foreigners just don't want them to give them money to come here.

Bayard said...

LF, I was hoping for something official, not something from a website with an obvious axe to grind.

Din, well, no, the answer to your question could be only be no, if all the new houses are bought by landlords or newcomers, which is unlikely.

L fairfax said...

@Bayard
If you look at the links the sources are given.
What website does not have an axe to grind? Most people have a fixed idea about immigration and don't change. I did change my mind - I know so many who have got free/ subsidised housing that I feel that although immigration to a scale is ok, we shouldn't defacto pay people to come here or stay here.

Personally I would love official figures for some reason the Government does not collect these.

Mark Wadsworth said...

KTC, increasing number of workers does not depress wages because of agglomeration effects. On the whole, the larger the conurbation, the higher the wages. This must be true or else there would be no large cities.

LF, B, it is true that immigrants are slightly over-represented in social housing. That's a separate topic and has little impact on private sector rents.

Din, B, during BTL heyday, 2000 to 2010, landlords bought more homes than were built. Osborne and Hammond have tried to reverse this by subsidising FTBs and increasing taxes on landlords.

Mark Wadsworth said...

C, it is difficult to know whom to believe. Some point out that Polish immigrants claimed child tax credits for children still in Poland. There are equal and opposite stories about EU immigrants being denied housing benefit. The truth is millions of anecdotes which illustrate how stupid and arbitrary our welfare system is.

L fairfax said...

@Mark Wadsworth
"LF, B, it is true that immigrants are slightly over-represented in social housing. That's a separate topic and has little impact on private sector rents."
True but I think a lot of those people (mentioned below) were attracted by the cheap rents (ironically) as much as the wages. I know someone who came here from Colombia got a council house and went back there on holiday telling people to come here for the housing! If they had had to pay private rents, I doubt they would have done that.
"Those two million extra people moved to London from somewhere else, quite voluntarily, mainly attracted by the higher wages."

L fairfax said...

@"The truth is millions of anecdotes which illustrate how stupid and arbitrary our welfare system is."
I think we can all agree on that.

"There are equal and opposite stories about EU immigrants being denied housing benefit."
Ascension countries were not allowed housing benefits for a few years - this is no longer the case.
See http://news.bbc.co.uk/1/hi/world/europe/3513889.stm
"However, workers have to register and only become eligible for benefits such as Jobseeker's Allowance and income support after working continuously in the UK for at least a year."

" So the curbs can be maintained for a maximum of seven years - until May 2011 in the case of workers from the eight countries that joined in 2004, "

One sad thing is that we don't have to let EU migrants who don't work stay here on the public purse - that is something we decide to do/ or are too incompetent to stop.

Dinero said...

Adding two million workers having the effect of reducing wages, that could exist as a factor in wages, but, You are also adding 2 million consumers.
And as Mark wrote there is the Agglomeration effect for firms and workers that increases wages. That is firms are more productive per worker as they have a flexible source of labour of multiple pre trained skills and inter firm transactions are easier as the firms are in the location of more firms, and the workers have more opportunities to move between firms for the best wages.
Prices for houses are not arrived at from a tension between supply and demand. To see why go back to Ricardo's law of Rent.
The rent of a plot of land comes from the fertility of that land. If a new fertile plot is added to the stock of plots, the fertility of the current plots is not affected.
In the modern application of Ricardo's law of rent the Fertility of the land is the income of the occupant, and the earning potential of occupying that plot, and it only takes two buyers bidding, for the selling price to be the highest price that the eventual occupant considers they can afford. And so the prices of the houses reflects the incomes of the occupants regardless of the quantity of other houses.

AAB College said...

Thank you for sharing
https://aab-edu.net/