15 Feb 2008

What happened to all that pent-up housing demand?

The government’s stated aim is to build 3 million new homes in Britain by 2020. That’s 12 years away, so that’s 250,000 per year. Currently the total of new house completions is about 180,000 a year. Therefore the government wants to up this by 70,000 houses a year, that’s a 40% increase. Why?

The stated reason is that houses have become unaffordable. By applying the nostrums of classical economics, the government sees that the solution to this problem is to increase the supply of houses. Now previously on this blog I have examined some of the flaws in this argument, so I won’t repeat them here.

The point that struck me today is that the economic environment looks to be solving the unaffordability problem for us without so much as a brick being laid. House prices have stopped rising. In fact, they are currently adjusting themselves downwards in all parts of the UK except Scotland (they never seem to fall in Scotland). And earlier this week, the Governor of the Bank of England, Mervyn King, said “There are no reasons to see house prices above current levels in the next few years.” Indeed he predicts that the price:earnings ratio of UK housing will fall by 20% over the coming five years. This suggests that either house prices will fall quite quickly by around 20% or that they will stagnate for several years until earnings catch up and make them, once more, an interesting investment.

So that mans that in 2013, houses will be around 20% cheaper, relative to earnings, than they are today. Does that not address the problem of affordability? And address it far more effectively than tinkering with the rate of new housebuilding?

Given that the economic landscape seems to have changed, and to have changed significantly — i.e. this is no blip — isn’t it time for the government to re-assess its housebuilding programme? In fact, the big housebuilders are already doing this for them. Far from increasing the number of homes they are building, they are all currently cutting back on production.

But the government is blind to all this. In the next couple of weeks, we are being told to expect Caroline Flint, the new housing minister, to be making a statement about where the ten eco towns are to be located, and she will also probably confirm her commitment to the three million new homes target. At the moment, that’s about as likely an outcome as a British-crewed Mars landing by the end of next year.


  1. So after a 200% house price increase in the past decade, a now forecast (and yet to materialize!) mere 20% reduction has solved the problem? I don't see how. A brief credit crunch from the other side of the Atlantic can hardly help the English housing market catch up after decades of exceptionally restrictive planning policies. The problem has only been solved when long-term house-price development is back at the Bank of England's 2% target for general inflation, i.e. the kind of stability that many other countries in Europe enjoy.

  2. Meanwhile, Rightmove today announced that the average asking price for houses in February rose by over 3% in one month.

  3. Housing will still be an expensive commodity, for sure. But my issue with the 3 million new homes is that building them won't make housing any cheaper, it will just make Britain bigger. It's the Milton Keynes effect writ large.

    Until we sort out of our problem with carbon emissions, we should stop expanding the economy for the sake of it and concentrate on smart growth, which means getting more out of the 25m houses we have already got rather than expanding the stock to 28m.