Somebody asked me recently whether this ratio still holds.
The answer appears to be, yes, there is still a ratio but since 2005, it is closer to one-to-eight than one-to-ten. Maybe he was using different data sources? Maybe it's do with Help-to-Sell and all the similar subsidies that Labour introduced post-2008? See *UPDATE*. I used numbers from here and here. If anybody finds transaction numbers for a longer period, please send me the link.
The reason for this is simple. House builders know that if they build more homes, their selling prices would drop and costs would increase. They work on marginal revenue and marginal costs, which are much lower (or higher) than overall average revenue (or costs) and they stay at the narrow sweet spot which maximises marginal profit per unit i.e. by drip-feeding one new home for every seven existing homes that are bought and sold. So anybody who believes that handing out planning permissions like confetti would lead to more construction and lower prices is living in cloud cuckoo land, home builders will always stick to the one-to-eight profit maximising level.
OK, we can argue over cause and effect, but it's clear from the chart that the blue completions line lags (i.e. responds to) the red sales line by about a year. Homebuilders make their decision on how many units to start when sales are high, and this year's completions depend on last year's starts, in extreme situations (like 2008) they just leave things half-finished (or something like that).
This is quite unlike mass-produced goods where average costs go down by much more than selling prices if output is increased, so as far as a manufacturer is concerned, the more the merrier. In 2008, house prices fell by about a fifth and supply fell buy a half to maintain or at least maximise margins.
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UPDATE I contacted him on Twitter @resi-analyst and he posted this chart showing a one-to-ten ratio and the impact of HTB:
Friday, 23 October 2020
Neal Hudson's one-to-ten ratio
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5 comments:
"So anybody who believes that handing out planning permissions like confetti would lead to more construction and lower prices is living in cloud cuckoo land....".
Speaking as a cuckoo, strikes me that since LAND accounts for about a third of the cost of houses, and since the cost of land with planning permission is about a hundred times that of agricultural land, there is a huge scope for cutting the cost of land for builders by - er - increasing the amount of land with planning permission.
If the cost of bricks and timber halved, would that cut the cost of building houses, or not?
RM, no. Cheaper bricks = land value goes up.
RM, no because building land is not agricultural land with a PP premium added, agricultural land is building land with a lack of PP discount applied. If you scrap PP, then all land becomes building land, at the building land price.
You can see this in the operation of restrictive covenants. Take a two acre field. A developer would expect to get 32 houses on this and its price as building land reflects this. However, if it is sold with a restrictive covenant on it, limiting the number of houses to two, then its value falls to nearly a sixteenth of what it was. Lift that covenant and it goes back to the full building land price.
So handing out PP like confetti will simply put up the price of agricultural land, not put down the price of building land.
RM I think you'll find lad with planning is about a 1000 times agri land in the places where they actually want to build.
MW agreed, in 2008 there was a new massive development near me. They just stopped building immediately, but still kept selling. As things improved they ramped it up. All gone long ago.
B, thanks, that's a good way of explaining it.
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