Monday, 9 January 2017

Muddled assumptions which cancel each other out.

Somebody alerted me to this drivel at the Adam Smith Institute (but I can't find the email any more, thanks anyway):

Thankfully the situation is much better now, but in some ways we still have the worst of both worlds in housing policy. You might imagine that housing policy aims at balancing out two concerns: quality and quantity/price.

You might think policy picks one spot along a line: at one end we guarantee very high standards in design, materials, space, and amenity, but prices are high; and at the other we allow lower quality housing to proliferate, meaning prices are low. 

In fact we have managed to create a planning system that builds mostly ugly, unpopular housing in inconsistent and unpredictable ways, mostly where it's least needed, and builds so little of it that prices in growing cities are staggering.

He is making two opposite assumptions and completely ignoring the real world:

1. That an increase in supply of housing = lower prices

2. That an increase in the quality of housing = higher prices.

Truth is, rents and house prices are set by what people are willing and able to pay to live at any particular location. Construction costs have more or less nothing to do with it.

To show why his two assumptions cancel out, let's assume that higher quality means larger homes. Let's imagine every home had been built with one more room that it actually is, or that all rooms were a bit bigger, so two kids can share a bedroom comfortably, there's space for a guest bed in the sitting room, the kitchen's big enough to have some friends round etc.

It would be quite easy to have done this without using any additional land by building up a little bit higher, using loft space etc, so location values are barely affected. The additional construction cost would have been amortised and paid off years ago.  But the quality of housing (as crudely measured by size) has increased.

1. That is clearly an increase in the supply of housing. There is more space available. Applying his logic, prices would fall.

2. Each individual home is now more desirable, better quality and cost a few thousand pounds more to build at some stage in the past. Applying his logic, prices would be higher.

It can't be both can it? So one or both of his assumptions is incorrect.

IMHO both are incorrect. What would happen is that there would be a net movement of people from lower to higher value areas, pushing down prices in lower value areas and pushing them even higher in higher value areas.


Lola said...

Yeah. I saw that. Ben Southwood gets very muddled about quite a few things. He's a bright boy though.

ThomasBHall said...

He is- although he is muddled on this one. I love the fact that the four comments on the piece are from YPPers though...

Mark Wadsworth said...

L, let's hope so.

TBH, cheered me up as well. Are we the only people who leave comments?

L fairfax said...

Do you agree with this bit
" Instead of giving the badly-off more money and letting them decide how to economise on scarce goods, they hand them high value real estate with no option of buying better food, clothes, training or transport instead. "

Mark Wadsworth said...

LF of course I agree! But not with his conclusion that social housing should be sold off. It should be rented out for the most they can get. It's like LVT.