Tuesday, 23 September 2014

Economic Myths: Why younger people can't afford houses any more.

Exhibit Onw, via HPC Survivors from The Cornishman, an article about the ludicrous house-price-to-earnings ratio in the south west.

Along comes complacent Baby Boomer Home-Owner-Ist Mr C. Freak in the comments:

A deposit was always a year's wages even in the 60s and 70s, but single people didn't expect to be able to buy their own home then.

And now they expect 'years-out', holidays and constant contact with 'iphones' to boot.

Note that the commenter completely ignores the economic issue at hand - the ratio of house prices to earnings.

Even if everything he said were factually true (it isn't, it's all lies actually and ignores the reasons why housing used to be relatively cheap), then there must still be enough younger people prepared to pay the deposit and mortgage repayments on those eye-watering prices, or be prepared to pay enough rent to their landlord for him to be able to pay the deposit and mortgage repayments.

If it were really true that younger people refuse to spend much of their disposable income on housing, then house prices would have dropped quite calamitously, wouldn't they?
Exhibit Two, from the slightly better informed but no less wrong corner, City AM:

House building in the UK has been in a continual state of decline since the 1970s, making it harder to own a home and to pay rent, according to a report released yesterday.

In the several years preceding the financial crisis, just under 200,000 houses were completed per year – half the number that was built in 1970, according to the report published by the Office for National Statistics yesterday...

Strict planning rules and the spread of the green belt are to blame for the shortage of homes, according to former Bank of England policymaker Stephen Nickell.

Even if we go along with the Economic Myth that there is a direct correlation between supply of physical housing and house prices, changes in planning laws have nothing to do with the fall in residential construction.

Private sector builders have been building on average 150,000 - 200,000 new homes each year since the 1950s, we've dropped slightly below that, but not much. That's their optimum level of output; build any more and you lose some of your profit margin.

You risk pushing down new prices slightly on a micro-level*, but far more important is that if they increase supply, that greatly increases the price they have to pay for inputs (bricks, labour, expertise), because the supply of those is price insensitive. if we gave them planning permission for a million new homes, they would still only build 150,000 a year.

The real reason for the fall in new construction is because local councils aren't allowed/encouraged to build mroe social housing, they're being encouraged to sell it off and piss the money away on Housing Benefit for private landlords instead.

* It's easier selling ten houses on a small development than 100 houses on a larger development, but once those houses are all sold and occupied, their prices go back up to whatever the older houses in the area sell for. So the builder is better off building them ten at a time than 100 all in one go.


L fairfax said...

It my road 20 years ago a deposit plus stamp duty was £7K now it is £54K (assuming a 10% deposit and prices going up from £62K to £400K).
Which jobs which had take home salary of £7K in 94 now have take home salary of £54K p.a.?

Steven_L said...

10% deposit? What and get £360k debt? While there is an ongoing problem with debt-deflation?

You must think I was born yesterday!

L fairfax said...

I wasn't suggesting it as an idea, just pointing out how prices have risen.

mombers said...

I like your point about how young people are frittering away all their money on YouPads and iTubes. How on earth can anyone get a penny of rent or mortgage out of them??????

Mark Wadsworth said...

LF, ta for example. In most of the UK it's not quite so extreme, but awful enough.

SL, go on you lazy sod, get on the ladder. Eeeh, when I were your age (continued in the comments section in The Daily Twat).

M, you'd struggle to fritter it on YouTube :-)

Rich Tee said...

Just been looking at a job in Surrey that pays about the same as the same job in Leeds.

Problem is that the rent on a one bedroomed flat in Surrey is getting on for double what the rent is on a similar property in Leeds.

In Leeds I can save a lot of money every month, but if I want my dream job in Surrey that money will go into the pockets of a landlord.

Mark Wadsworth said...

RT, that's Ricardo's law of rent for you.

mombers said...

@MW the youth of today fritter hours a week on YouTube that they could be using to earn more money to hand over to landlords...

mombers said...

landowners that is!