Wednesday, 18 April 2018

Stats confirm, don't build houses if you want to increase incomes.

In response to Ian Mulheirn's thorough de-bunking of the supply shortage narrative of the housing crisis, Capex has let John Myers, aka London YIMBY, have yet more publicity to rally the troops against the dissenting voices.

The article is just a re-heat of the same old tosh, however one thing that did catch my eye was this graph from the Resolution Foundation showing the relationship between rises in house prices and the increase in housing stock per capita. Myers comments "... the think tank’s report also contained the encouraging — and unsurprising — revelation that countries building plenty of homes have generally not seen huge price rises, despite low interest rates and a big banking sector."

Myers goes on "Accounting for changes in incomes would likely make the picture even clearer, as the government’s own numbers to justify the Housing Minister’s comments on immigration showed last week, because rising incomes greatly boost demand for bigger and better homes"

Leaving to one side that in Myers' articles, it's never location that is the biggest factor in the differences in prices across the UK, the point he raises is obvious. So for a bit of fun, let's correlate changes in incomes within countries during the same period(OECD data) with changes in housing stock:

What this shows is that an increase in housing stock per capita correlates with lower increases in incomes within countries at 0.61, which is probably about as strong as the scatter plot for price increases vs stock. It's interesting how Ireland is the outlier, probably due to their over supply on the run up to the crash.

On the face of it, it appears that if you want to enjoy bigger increases in incomes, the last thing you want to be doing is build loads of housing.

Of course, this is wrong. But my point is, without putting things into their proper context, all sorts of misleading conclusions can be drawn. I'm afraid that's why the current policy of blaming planning and under supply for housing issues is wrong. It's being pushed by those with a very narrow field of vision.

For the record, I think a land value tax would result in a huge amount of redevelopment. Only it would then be property facilitated and directed by planners with the right incentives i.e. to maximise aggregated land rents. Instead, in large part due to the supply side fanatics, we'll yet again end up with the worst of both worlds i.e. more crap and not much/no improvement in affordability.


Lola said...


But "...Only it would then be property facilitated and directed by planners with the right incentives ie to maximise aggregated land rents. Dear God. No!. Not 'directed' by planners' please? Facilitated, yes. Facilitation implies that planning control bureaucrats grant those valuable licences in line with developers seeking to maximise return and by association LVT maximisation. 'Directed' gives 'planners' licence to 'plan' i.e. centrally plan. To which ambition "no" is the right answer.

L fairfax said...

One good thing about LVT is that if no one could get a rebate due to low income is that it would encourage people who don't work to leave places which are expensive.
Which would be good for people who do work in those areas.

Mark Wadsworth said...

In the second graph, the axes aren't very clear.

I assume that horizontal is increases in income and vertical is changes in housing stock per person?

It would be easier to read if you had changes in housing stock on the horizontal axis, same as the first one.

Either way, these inter-country comparisons are largely meaningless. We know perfectly well why UK rents and house prices shot up 1990 - 2015, it's because they abolished Georgism Lite which had kept them low until 1990.

Also, Japan land prices were at all time super bubble highs in 1990, so from there on was always going to be downhill. The USA is a game of two halves - massive land price increases on east and west coasts, flat or declining elsewhere. Germany has always had lower interest rates than other countries, so falling interest rates will have less impact on prices there.

And so on, I'm sure we could find a country specific factor in each case that has little to do with 'supply'.

Mark Wadsworth said...

L, in defence of town planners, I did a talk at the Royal Town Planning Institute and it is clear that when they are looking at larger projects, foremost on their minds is how to chisel as much money out of the development as possible (planning fees, roof taxes, whatever). That would all be much easier with LVT.

Mark Wadsworth said...

LF, you or I would see that as an argument in favour of LVT, but the socialists would see it as an argument against and the Homeys will play the Poor Widow In A Mansion card again.

Lola said...

MW. Oh agreed. But there are 'planners' in planning offices who are (a) frustrated architects who think that they are the arbiters of design, (b) keen to impose Social Justice on developers/builders (c) love using their coloured pencils to create nice pretty maps with 'zones' (d) have particular prejudices with certain developers (e) all of the above and also let other personal prejudices get in the way of objective and dispassionate application of the rules. I have experienced most of them.

mombers said...

Anything to do with the huge inefficiencies that building homes in the 'wrong' places has? People move to exurbs to get 'on the ladder', facing longer commutes and/or taking lower paid jobs in less productive localities. I think David Blanchflower did a study on homeownership rates vs employment. Definite negative correlation

Ralph Musgrave said...

Does this "cutting input costs has no effect on sale prices" theory apply elsewhere? E.g.: a drop in the price of steel has no effect on the sale price of new cars?

Mark Wadsworth said...

RM, reducing build costs clearly reduces the cost of building. But the price/value of the finished package land plus building is fixed by other factors.

Bayard said...

"We know perfectly well why UK rents and house prices shot up 1990 - 2015, it's because they abolished Georgism Lite which had kept them low until 1990."

Don't forget the slashing of interest rates to zero as well.

Ralph Musgrave said...

Mark, So you agree that lower land costs cuts builders costs. That in turn increases builders's profits. Why then would market forces not work in their normal way: i.e. encourage builders to build more houses, which in turn would cut the sale price of houses, and reduce profits back to their normal level?

Derek said...

Ralph, he didn't say, "lower land costs", he said, "lower building costs". The sequence is actually lower building costs cuts builders' costs. That in turn increases builders' profits. Market forces then work in the normal way, encouraging builders to build more houses which increases the demand for land to build on. That in turn increases the price of land, and the extra cost of land cancels out the reduced cost of building, reducing profits back to their normal level.

Mark Wadsworth said...

B, yes, and that, see my earlier comment, that explains most of Ireland's bubble as well.

RM, I refer you to D's explanation.

Ralph Musgrave said...


Whether it’s a cut in land costs or other costs of construction makes no difference: when an industry’s costs decline, competitive forces result in prices declining and the volume of sales rising (except in a few rare instances where the normal rules of supply and demand do not work in the normal way: instances which are set out in economics text books).

Re your claim that a cut in land costs will only be short lived, that depends on exactly how the land cost reduction takes place. For example if government decides to make an extra few square miles of land available for building in 2019, and then reverts to the existing regime where land for development is very restricted, then obviously your hypothetical scenario is valid.

However, I suggest any rational government would say “the price of land with planning permission (£6million per hectare on average) is now absurd, so let’s aim to make that £1million on a permanent basis.” In that scenario, there would be a permanent reduction in house prices.

Mark Wadsworth said...

RM, that's simply not how the land market works. Houses in some areas will always be worth more than identical houses in other areas. The difference is land value.

If you allow more to be built in desirable areas then as a result of agglomeration effects, prices go up more.

There are more homes inside the M25 the an in the whole of Scotland. Where are they more expensive?

Mark Wadsworth said...

RM, you can't cut the cost of land. It is zero. The value comes from location.

L fairfax said...

"There are more homes inside the M25 the an in the whole of Scotland. Where are they more expensive?"
M25 almost certainly because it is a more desirable area,although of course the amount spent by the Government in HB helps makes the difference bigger.

Mark Wadsworth said...

LF, yes, the government spends a lot of money making inside M25 a better place to live and on subsiding rents, extra help to sell loans etc.

L fairfax said...

@Mark Wadsworth
Of course subsidising rents makes inside the M25 a worse place to live by increasing the cost of living.