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 …


5 thoughts on “Does the absence of a surge in rents mean “no supply problem here”?

  1. Your theory could be right, but I thought common measures of things like rental yields took into account the type of dwelling and number of bedrooms, etc. Also, it seems odd to me that so much of the housing shortage manifests in the quality or quantity of rental dwellings rather than price (ie rent).

    I have another idea, based on my observation of the similar Australian residential property market: prospective home buyers don’t consider renting to be a viable long term substitute to owning. At least here, couples get to ‘nesting’ age in their early-mid 30s and they want a place they can settle down in and plan their kids’ schooling around, without the risk of being turfed out after a year (very few residential leases here extend beyond 12 months). The fact that they can get a rental property at a 3% gross yield doesn’t seem to deter them from buying. This may change in the future, and if it does, I predict rental growth will quicken and house price growth will slow. But until then, I wouldn’t expect rental growth to match price growth. So in short, I agree with you that slowish rental growth doesn’t imply there isn’t a housing shortage; but I would go further and say that the rental market doesn’t tell us everything we need to know about the home ownership market.

  2. Good interesting points. I know that there is a fair degree of hedonic adjustment in house price indices (otherwise, how can one really tell that house prices have gone up as opposed to bigger houses have been sold?). No doubt there is SOME for rents, though I don’t have the resources to check. However, it would not be able to factor issues like: sleeping on the friend’s couch, moving in with the girlfriend earlier, staying with the parents. It would also struggle to measure thwarted aspirations: people choosing to consume less housing than they really want in other ways.

    I think the UK has the same thing as Australia. However, given we have now many millions of renters too, I would be surprised if this was enough to prevent their producing some sort of pricing consequence for rents?

  3. I think a lot of surge in house prices reflects low mortgage rates and foreign money and so the small increase in rents is telling us that pressure is not as high as it looks. But a couple of other thoughts – isn’t one issue that the rent series looks at all rents, whereas house price indices are of marginal buyers/sellers? (this presumably would only mean rents lagged houses price though, I think). Also there’s been a big increase in houses bought for buy-to-let, hasn’t there? This would push up house prices and push down rents, I think.

  4. As someone who has been visiting the UK for the last 20 years, the one thing that has struck me is how the quality of the houses has increased over time, I mean in terns of interior decoration, warmth of the house, kitchen specifications and exteriors. The days of woodchip, lino and peeling paint façades are gone, even rental property looks good. New build space per building is certainly lower but multiple bathrooms are now common. And remember the existing housing stock did not go away and families are smaller, so its hard to argue for me that hedonically houses in the UK are worse overall. I think the excessive house price story in the UK is mostly a London issue. The rest of the UK does not look too bad in international terms, adjusted for the very high specifications that the uk has for new building and the long planning permission time. London is high because of limited supply in the fashionable areas, rents are not as high because people are happy to rent in less desirable areas.

    The one thing in my view that would help house prices in London would be school vouchers. If lower middleclass families could be sure of their schooling options they would be less keen to put down roots and more willing to experiment with less desirable areas.

    1. That is certainly a good counter to my argument. But I am not sure it feels l deals with the possibility that while quality per square foot might be higher, consumption of housing is much lower because of sharing at home, filling up spare rooms, etc. Perhaps the data is out there in family surveys etc. I need more resources to investigate…

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