24 Oct 2012

Do we really need any new homes?

There is a an unspoken problem at the centre of our housing debate. Are we short of new homes? Almost every commentator states that we are and that we therefore have a housing crisis on our hands. But the evidence for it is thin on the ground and what there is is almost always constructed from data which is only partially relevant.

Like the length of council house waiting lists, which is long and growing longer, but this only tells us the demand for council/social housing. Which, in turn, tells us that either private housing is too expensive or social housing is too cheap, but it doesn't really inform us as to whether there is a shortage of housing overall.

Or rents. Rents are going up in the South-East, having been pretty stable for many years. The reason seems to be that the population is increasing, private housing is too expensive to buy, mortgage finance is difficult to come by and so private renting is the only option for many. The squeeze is on, for sure, but this still doesn't lead to the conclusion that we are short of houses.

For to be short of houses, we have to have some notion of how many houses there should be. We don't. The nearest we come to it is something called the rate of household formation, popularly believed to be around 250,000/annum in the UK as a whole. This is used as a yardstick against which to measure our pitiful attempts to match it.

In the 20 years I have been writing about housing, we have never got close to this target. It's only ever been an aspiration. In the Blair boom years, we achieved about 180,000 new homes a year: now it's down to around 100,000. In the past five years, we have fallen short of this notional target by an accumulative 750,000 homes, so you'd think house prices would have rocketed as a result. Which, of course, they haven't.

Which perhaps in turn tells us that the notion of a rate of household formation is bunkum. Households form when they can afford to. When times are tough, they hang together. A household formation rate is a nebulous idea which may well be derived from historical data but it tells us nothing about the situation as it now stands.

To have a housing shortage, you have to have something more concrete to measure it against. Like what? Well, some sort of housing standard such as number of bedrooms per head of population. Or national housing floor area, or some such Domesday Book type data (which the national census doesn't seem to collect). If we had such data to hand, we could then set a standard — such as there must be 1.5 bedrooms for every man, woman and child living in the UK — and then we could judge whether or not we have a shortfall.

Without such an approach, there is really no way of knowing whether we have too many or too few homes, anymore than we might know whether there is a road shortage or a supermarket shortage. Relative to what?

The only hard data we actually have are house prices which are very efficient at allocating resources, so that supply and demand are kept in balance. For every buyer who thinks prices are too high, there is a seller who think they are too low. Do the sellers thus conclude there is a housing surplus? No. So why do buyers insist there is a shortage? Because they'd like to see lower house prices, naturally.

But the sellers — largely the elderly half of the population — want house prices to stay high to pay for their retirement. They certainly don't want them to crash. And, surprise, surprise, it's the oldsters who are mostly dead set against new building in their area. They are the classic NIMBYs. They are not stupid.

So in a nutshell, the young would like there to be more homes so that the prices might inch down a little, whilst the sellers are perfectly happy with what we've got, thank you. That's the essential tension between the young and the old which creates our housing market. It doesn't however follow from that that we have a housing shortage.


  1. Spencer writes:

    Perhaps the problem is that the current stock isn't designed for the 21st century. The post war housing are an outdated, inefficient use of space both inside and out, as well as being dull and uninspiring. The social housing of the 60/70/80s has proven its mainly anti-social nature, whilst the current spec/developer housing feel cramped and equally dull and uninspiring. Perhaps the young want something designed by Apple/Sony/Samsung etc, that whilst beneficial if affordable, has to be functional and appear as if some thought had at least gone in to its design. Its tempting to knock down the old stock and replace it with something new, a sign of the current throw away philosophy. However, some satisfaction might be gained from making it easier, from 1) a planning perspective, to do something more radical with the current housing stock without the curtains twitching and 2) a financial perspective, so that if paying market rate for old stock, to avoid the pitfalls of then over-capitalisation by modernising it.

  2. You'd think that this debate would be raging, but those interested in pushing new houses are very good at surpressing it. I'd like to weigh-in with the fact that the UK had 720,000 empty homes in 2011 ( http://www.emptyhomes.com/). Bedrooms per head would be a fantastic KPI and should not be hard to generate.

  3. Kate de SelincourtOctober 26, 2012

    Interesting blog Mark, quite agree about 'predict and provide' being all about aspiration (I won't say who's aspiration!) and very little about need.

    I think bedroom density per head would be vv interesting to know, but this would have to have a regional - or even more fine-grained - breakdown to be useful?

    Isn't one of the problems that the economy in the SouthEast (mainly) has overheated (plus added pressure from v wealthy foreign "Euro - flight" investors trying to buy up Mayfair) so the empty homes are not always where the cash demand is? The bedrooms per head KPI might throw a lot of light on what was really going on, whether people in the SouthEast really are crammed 3 to a bed etc?

    I would be amazed if 'property analysts' didn't monitor this sort of info somewhere?

    Of course the assymetrical economy is to do with the financial sector, globalisation, death of manufacturing etc - that can't be fixed by housebuilding. Well d'oh! you might say, but isn't that exactly what people are trying to achieve with Pathfinder programmes, and calls for investment in construction, construction, any old construction?

  4. Mark, I think I take issue with the statement 'you'd think house prices would have rocketed as a result. Which, of course, they haven't.'
    In the 20 years you've been writing about housing, house prices have rocketed; it's only relatively recently that they have slumped. The reasons for this are much debated; overpricing during the period of rocketing house prices was only part of it. Economics of supply and demand surely dictate that the price of a rare commodity increases. So more houses = lower prices, other things being equal.
    Now I've been buying homes (for my own occupation, I should add) since the 1970s so I've seen a lot of boom and bust. On the whole, youngsters have never been able to afford what they want, and during those decades there have been times when mortgages were simply not available - at any interest rate, to any borrower. Not so different to the situation now, but it didn't last.
    I do agree with Kate that the SE situation is not typical of the whole country. When is it ever in GB, or even UK? The SE has its own economic micro-climate, and that includes the economics of house buying
    We do have a lot of empty, or at least very cheap, homes in places where buyers don't want to live. Solution? you can't move the homes, but can you bring jobs to those places, so that people want to live there again? That would be my preference.

  5. Linn,

    I was referring to the last 5 years when the new supply has all but dried up but prices have fallen/stablised. That defies the normal conventions of supply and demand. Sure, in the 15 years previous, prices rocketed. Trebled. It's just that the normal rules of supply and demand seem to operate only very sketchily when it comes to the housing market.

  6. I think trying to use logic on the housing market is like trying to use a tape measure to judge poetry. The housing market seems to have a life of it's own, mostly based on it's own expectations and human nature. There are many ways in which reality should intrude on to the housing market, but I won't hold my breath.

    That said, I think you make an interesting point. As a Londoner I think looking at it regionally is definitely the way to go.

  7. Interesting blog. I have to agree.
    800k ish empty homes and 1.3M with second homes and scores of empty non-res property that could easily be converted.
    I do think there needs to be more extracare built though if we are going to be in a position to deal with the changing demographics over the next 10-15 years.

  8. The line 'the sellers — largely the elderly half of the population — want house prices to stay high to pay for their retirement' basically nails the issue for me.

    Rather than supply and demand per se being the driving force behind house price growth, it's more the REALISABLE demand that matters. During the boom years where credit was cheap house prices grew dramatically. Now that credit's scare they've stopped growing.

    As Mark says this basically all boils down to an integenerational issue; high houses prices represent a massive transfer of lifetime wealth from the young to the old on the scale of £100ks.

    In the longer term I suspect that the politics of this might become rather interesting. The capacity/tolerance of the young to pay the increased levels of income tax needed to finance pensions is likely to reach breaking point if rent costs continue to remain high and people are having to rent into their 30s and 40s. I suspect that, at some point, the government will have to begin looking at shifting the tax base towards wealth (i.e. up the generational ladder) in order to compensate. Of course, that won't be popular either ...

  9. with regard to prices.......


  10. How is it possible for the rate of formation of new households to consistently outstrip the building of new houses? If you have 10 houses containing 10 households and you form 2 new households but only build 1 new house...

    ...one of the households has to sleep in a tent. Or am I missing something?

  11. Matt,

    The "rate of household formation" is not a given, though its presented as such. It's a highly elastic measurement which responds to a number of factors - population increase, house prices, rent increases, tax incentives, work opportunities. For instance, if a young couple want a home of their own but they can't afford it, then they might consider sharing with others or living with parents. They might aspire to forming a new household, but they can't. So they haven't actually formed a new household.

    What people are really referring to here is the aspiration to form new households, not the actual rate. The problem with focusing on the aspiration rate is that that too is elastic. If house prices were much lower, then more people would want to form households. If houses were free, then maybe every single person would aspire to having their own house and maybe two or three.

    1. Following on from last point, the so-called rate of household formation is therefore bound to outstrip the actual supply in almost all market conditions, except a shrinking population, or extreme economic distress, like happened in Ireland after the crash.

  12. Thanks for sharing your own insight regarding housing problems. Owning a house is definitely a dream for everyone and it’s something you strive for, sadly not everyone can afford a good house and if ever get a huge house for their family using mortgage, they may have problems with paying the mortgage off or in some cases they may even get foreclosure. My opinion is that as long as you can afford a house and you have all the means necessary to pay you should definitely go for it, you could also seek professional help because you can tell them what kind of house would best cater to your needs and they would look for the best deals there is for you.

    Kristopher Washington

  13. As someone has already pointed out - refurbish all these empty houses before starting to build new ones, regenerate, don't build new.