Housing Crisis : Supply vs Demand In Colour

In the top graph we have a snapshot of the UK housing market, with 27 million dwellings being supplied at an average of £220K each.  At £100K this represents the capital only constituent of that average home. 

The bottom graph shows the results of two different ways to bring down average house prices (and rental incomes). 

The most popular option is to increase the supply of housing. Demand 1 stays the same, while supply is shifted to the right to position 2. The pink area shows the added costs resulting from this. 

The unpopular option is to reduce demand by a recurring tax on the rental value of land(location). Supply 1 stays the same, while demand is shifted to the left to position 2. The blue area shows the reduced costs resulting from this. 

Of course in my graphs I've made all sorts of assumptions/guesses about supply/demand elasticity which gives the following results.

The difference in the number of houses is 12 million x average capital cost £100K = £1.2trn

The numbers don't really matter, but the principle does. Given economic policy should be about reducing costs, why on earth do so many economists recommend policies that increase them?

Housing Supply (non)Crisis. LVT will sort it out.

Currently, total housing expenditure is depressed because landowners do not compensate those they exclude for their loss of opportunity. This increases the demand for housing, leading to over consumption/misallocation. In order to quantify this, we only need to compare the consumption of owner occupiers and those that rent, as the latter are already paying the correct level of compensation, albeit pocketed by a landlord. 

Note, that due to the effect of subsidised social housing, the differences are smaller than if following were to strictly compare private rented vs owner occupied.

It is reported that the UK has over a million more dwellings than households, and twenty five million empty bedrooms. How many of these are over consumed due to owner occupiers not paying their full housing costs? Lets try doing some maths to find out.

Across England and Wales the average household size was 2.4 people. This figure was the same for owner occupied, but lower for rented households at 2.3 people.


Looking in more detail, the average household size was lowest among those households owned outright, at 2.0 people per household. This may in part be explained by the residents being older, with some members of the family having moved out, or a pensioner living alone.

The above graphic and text was taken from the ONS Home ownership and renting in England and Wales – Detailed Characteristics

 From it we can extrapolate that for every 100 owner occupied households 300 bedrooms are consumed but for every 100 rented households only 218.

So if we factor in 0.1 more people per household on average for owner occupiers, their below market housing expenditure causes the over consumption of  11.8 million bedrooms in England and Wales alone on a pro rata basis.

A 100% tax on the rental value of land(LVT), would thus take those 11.8 million bedrooms and reallocate them more evenly across tenures. This would involve lots of up-sizing, down-sizing and side ways moving.

While the consumption of bedrooms may not be the whole picture regarding housing demand, a LVT would allow the market to rationalise our existing stock,  and radically alter the demand for housing in the process. It may well be the UK has more than enough housing to cover any changes in population or household make up for the foreseeable future, it we allow a fair and efficient market to do its job. Yes, new housing always needs to be built. But perhaps just not the extra number or types currently being forecast.