Ian Mulheirn says UK housing is not a supply problem. No one can prove him wrong

Around three years ago in some bistro in Soho, Ian Mulheirn startled a tableful of economists going at their cassoulet with the bland statement: “Housing? It is not a supply problem”.

To call this heresy is melodramatic. We just thought he was winding us up. To question the mantra “just build more houses already” felt more like the kind of smart-alec model-play economists like to indulge in, such as when Hayek reportedly told Richard Kahn that buying a raincoat would worsen the Great Depression, or Scott Sumner reminds people that low interest rates can be contractionary (unlike Hayek, he has a point). Surely it is obviously a supply problem? Just look at those easily-googledup graphs of housebuilding, house prices, ownership rates? Screenshot 2019-08-22 at 16.15.12.png

Screenshot 2019-08-22 at 16.14.08
It all fits rather neatly into a political narrative, too: around 30 years ago, the wicked Thatcherites sold off the council homes and around the same time NIMBYs seized the planning system. For a while people kept on owning homes because other kinds of wicked capitalists (bankers) lent them money they could not afford, but when that game was up, the whole edifice came crashing down, leaving our young robbed of their future. It is a story that convinces the free market liberals and socialists alike. If this lot ever joined in a Government of National Unity, a Million More Homes might be the only agenda they coalesce around.

But Ian wasn’t trolling, and the next day at the FT I received a rather impressive and weighty report full of careful analysis like this

Screenshot 2019-08-22 at 16.21.08
I proceeded to find some hours in my day for arguing with Ian and proving some embarrassing mistake in his fundamental thinking. Because, of course, he could not be right – it is obviously a supply problem, it must be some trick of his model or failure to consider some obvious factor. Clearly we do not build enough houses – just eyeball those charts! We have had a long boom in net immigration, house supply has not risen in line, house prices have, come on, use Ockham’s razor, it HAS to be supply …
And so a long email chain began. Really long – probably the longest of my life. And every decent point I could think of, Ian patiently rebuffed over the next few months. I learned an embarrassing amount myself. The rental time series do NOT show rents swallowing an ever larger portion of the household income. There is a critical difference between Housing as an Asset, and Housing as a Service, and for the former you need to think in terms of an asset that has a yield, which must be compared to all the other interest rates available. Yes, Ian had thought about household formation being ‘endogenous’ – trans: the cost of housing possibly suppressing people going off and setting up homes.

And then Dominic Raab of all people helped to prove Ian right, or at least that the Government agrees. In early 2018 he as housing minister kicked off some ugly argument about whether immigrants were responsible for our soaring house prices and as a consequence the official MHCLG thinking on this subject was aired. Here it is. There in Table 1 is a straight acknowledgement of the elasticities that Ian references. 1% more houses means 2% lower prices: over the 1991 to 2006 period, the 20% extra houses (i.e. about 5m, or 200,000 a year) had therefore led to house prices being 40% lower than they would otherwise have been. Sounds a lot? Well, over that period house prices had risen 160%.

To put it another way: if some combination of council house building, green belt destruction and NIMBY-confronting had raised the building rate by 100,000 a year, there might have been 2.5m more houses, about 10% more, and house prices might have risen 20% less. So they might have risen by 140% instead of 160%. And that is one ENORMOUS amount of extra building – and, according to Ian’s figures, it would have hugely outpaced the actual rate of household formation.*

Let me repeat: the Government through its figures agrees with Ian. No feasible amount of house building will make housing more affordable, or the buying of a house markedly easier.

Ian has now moved to the Tony Blair Institute (he was at Oxford Economics before, and we briefly worked together at the Social Market Foundation). From the TBI he has released his latest attempt to educate the supply-convinced: it can be found here. Please read it and tweet me or, better, him what you think he has missed, because I know you think he must be wrong. Mostly lurking, I have watched him patiently and politely argue with people for three years now. See this Resolution Foundation blog. His ability to keep his temper in the face of so many arguments he has already heard is quite amazing. Do follow him. And read that paper, and reflect on charts like this showing the greater affordability of housing as a service.

Screenshot 2019-08-22 at 16.54.59.png

You may ask: what WILL make houses more affordable? A massive shift in the interest rate curve might, though it will also push many more owners into distress; houses were more ‘affordable’ in the early 1990s from that point of view, but the rate of repossession was also sky-high from the unaffordability of the monthly mortgage payments. Transfers of buying power from (old) owners to the (young) yet-to-own might, but that is a monumental political challenge. Greater mortgage availability might, but people will shake a withered finger at you and warn of repeating the errors of the 2000s.

The tougher question is: if this is so compelling, why is everyone so sure the problem is supply? Why do we all feel it in our guts? Here I cannot answer, and cannot rule out myself throwing down my pen one day, shouting “it MUST be supply” and restarting one of those enormous email chains. You tell me.

All in all, it is right that the provision of housing is a political issue. But whenever I hear someone profess some obvious sounding answer, I will always ask: “have they tackled Ian Mulheirn yet?”

*UPDATE. Jonathan Portes has politely pointed out an error in the way MHCLG presents the outcome of elasticities; instead of applying that 20% to the original price (i.e. to 100) it should be applied to 260 and so the total price would have risen 108% not 160% in light of that extra supply (this is his tweet, which Ian acknowledges). However, this error is only so egregious because we are talking about analysis of a very large, 25 year run up in prices (and 2 is apparently a high estimate for supply elasticity) – and 25 years of doing that extraordinary price explosion. It strikes me as still being the case that even adding 300,000 houses more than expected in just one year – about 1% – would lower the price level, ceteris paribus by just 2%.

The best way to put Ian’s point is to quote it directly: this is how he makes it in the document

To put these figures in context, it is worth considering the situation in England. The latest available data suggests that the first half of 2018 England had a total of just under 24.2 million dwellings, 4.9% more than the number of households. The above relationships suggest that, if households in England were to form at a rate of 200,000 per year, net additions of 300,000 per year would cut real terms house prices by 0.8% per year, all else equal. Applying the range of UK estimates above, such rate of additions might therefore be expected to reduce prices by between  7% and 13% over 20 years.

 

Published by freethinkingeconomist

I'm a mid 40s, former special adviser (Downing Street 2017-19, BIS from 2010-14), former FT leader writer and Lex Columnist, former financial dealer (?) at IG, student of economic history, PPE like the rest of them, etc. This blog has large gaps for obvious reasons. The name is dumb - the CentreForum think tank blog was called Freethink, I adapted that, we are stuck now.

6 thoughts on “Ian Mulheirn says UK housing is not a supply problem. No one can prove him wrong

  1. I agree with Ian Mulheirn’s hypothesis but I don’t understand his aversion of letting “wild west” house building to tame prices. I really wanted to ask him this question, so would appreciate it if you could. In his original blog post, he cited Ireland as an example and said that such wild building is a massive misallocation of resources. But loads of goods, once really dear for the average family – think of cars, computers, healthcare, even overseas holidays – have massive (over)supply and waste also. Many households own second and third cars that are hardly used. I doubt my family is the only one with many perfectly working laptops, iPads, and iPhones lying around unused because we “upgrade” too frequently. And let’s not mention the weekend “city breaks” to Europe (or even the Far East!). In short, we live in a world of abundance and waste. Why then should our consumption of housing goods and services be running only at the rate of household formation, and not run way way ahead to the point of satiation like other goods and services?

  2. There is an argument for building more houses, quite separate from reducing their cost. This is that the UK as a whole is committed to be at zero net carbon by 2050 and the Government has committed itself to a ‘future homes standard’ which will ensure that new UK homes will be built without fossil fuel heating from 2025. Only limited improvements can be made to existing housing to reduce heating fuel use; building new high-standard housing would encourage people to move from old, fuel inefficient, Victorian and Edwardian housing that could then be demolished to provide space for new buildings.

  3. I’ve been arguing for years that simply increasing supply won’t “solve” the housing crisis (and felt quite isolated too!) I’m pleased to have access to Ian’s arguments and data, though I like you will struggle with the idea that it’s more affordable, for those on average and below average incomes.

    There is enough housing it’s just not fairly distributed, is broadly my argument. And the “build more” argument is a hoax to justify building densely in profitable areas. Which inflates land values and reduces possibility of social housing. Which is used as an argument to build more unaffordable housing etc.

    There was also a “greenwash” element to this – density is good – which has created quite unsustainable developments with enormous embodied carbon. Laurence is right that improving existing homes is hard – but it’s not that hard. £15-20k will work wonders on even a Victorian house, and save you all the energy needed to demolish and create materials for a new one. (Plus people like’ em)

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out /  Change )

Google photo

You are commenting using your Google account. Log Out /  Change )

Twitter picture

You are commenting using your Twitter account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )

Connecting to %s

%d bloggers like this: