A quick one. I promise.
Bond Vigilantes, who are always worth reading, have a post titled “Stamping down on foreign flows into UK property could be sterling suicide”. Feels like an odd concern on the day that the pound’s strength has hit the front page of the FT. *
Their post has an interesting claim that contradicts a piece of conventional wisdom about UK housing: that there is a massive supply problem. When asked what Britain definitely needs, our politicians can agree on one thing. They shout Houses, don’t they?
BV agree with Fathom, contradicting this:
As Fathom Consulting have pointed out, if there was a housing shortage then why haven’t real rent costs jumped higher? The chart below plots nominal wage growth versus UK rent costs back to 2001 – rent costs were actually increasing at a slower pace than wages pre-2008, and have only been running fractionally above wage growth more recently. If there was a supply shortage, then we would expect to see real rent costs increasing quite sharply as people become forced to spend more on housing as a percentage of their income, but this isn’t the case.
I wonder if the conventional wisdom – and the experiences of so many people, all of those that failed to graduate in time to get on the ladder – can really be overthrown by a graph. My intuition is that there is something missing from the graph: quality. Or even quantity of a sort. As Metro reported, Britain is building the smallest houses in Europe. What I suspect is happening is that we are paying roughly the same rents but for ever smaller properties. Our “consumption” of housing services is weirdly constrained. This is also showing up in more people staying on couches or with their parents. The demand is suppressed, in that case, so that the price signal doesn’t show up the problem as well as it might.
Economists are meant to believe in prices. But quantities matter too. Housing is an odd service, in that everyone has to have it. If Britain’s housing stock suddenly halved, most people would still live somewhere. Rents would rise, but not to the full extent that would demonstrate the housing supply problem to a naive economist. It would be shown in the poor standards, cramped living room floors and irritable parents with overloaded washing machines.
UPDATE: and this story about “microflats” in the FT – £400-500 a month, 18-35 square metres – shows that the market doesn’t only respond by jacking up rents. It also cuts quantities.
*but I agree with Chris Giles: this is like a big export industry. Doing up houses and selling them to conspicuous consumption obsessed foreigners seems like as good a way of earning money as any – if only supply were unconstrained …