Would it matter if we built “a million too many houses” anyway?

The previous post about housing supply kicked off quite a debate (by the standards of my Twitter stream). It reminded me of how for 90% of the time I have been arguing against Ian on the whole housing supply issue and probing what will always feel like a counterintuitive thesis – that building many more houses cannot meaningfully address what everyone in the media accepts is “Britain’s Housing Crisis”.

I won’t summarise all the points made; I think Ian will probably address them himself. Those that spring to mind were:

  • Ian has somehow gotten the rental price series wrong. I doubt very much this is the case. He has been obsessively monitoring this and is hardly the sole source. I even noticed it myself in a five year old post which itself links through to Bond Vigilantes and Fathom Consulting. Rents just haven’t soared according to ONS figures
  • The (low) elasticity of response to more supply of houses means it is a ‘free shot’ – we all just get richer! This doesn’t even work on its own terms – any elasticity around 1.5 will lead the overall value of housing to being lower if you build more – but in any case it is not the point of housing policy to hit some asset-value target.
  • Ian must have gotten the household and housing numbers wrong because we cannot find all the empty houses. Here I have to defer to him about how these numbers are compiled. I understand there are real doubts about how local authorities count vacancies, but this is not an area I am expert on.

But for me the strongest response is best put in a comment left here:

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?

Why not? It is a curiously statist way of looking at things, to “count” the demand we need (household formation) and try thereby to work out what the country needs.  We don’t do that for cars or iPads or cinemas. Why not just let the market do the work? And this is after all what most supply-side advocates are calling for: they notice artificial restrictions (the Green Belt, local planning rules, the hoarding of decent sites, etc) and want them attacked so that whatever demand is latent can be met.  Who cares if the aggregate of all these dispersed decisions adds up to something  that exceeds what an economist thinks is ‘needed’? No one is proposing some state-driven building scheme that will crash through all these market signals.

The obvious rejoinder is that unnecessary investment is waste.  As Ian puts it

greater supply is likely to result in further growth in the number of unoccupied houses, which may not be an efficient use of scarce investment capital.

Imagine we were a village economy of 1000 households that usually built only 10 new houses a year. The village has only a little surplus resource for investment, which it may want to put into flood defences, new fishing boats, or a school; doubling the housing investment rate would hold down these other good things and damage the village’s prospects.  In the case of the UK, if we were  talking about a million extra, cheap, homes then the total cost might be £100bn – a huge amount of diverted investment, if that is how to frame the problem. If it were like investment in our energy infrastructure, we would be employing hundreds of analysts to argue about the right amount.

But is it? We are not a big village collectively choosing how much to sink into R&D, roads, cinemas and shopping centres.  Housing is dispersed – it is not like grid infrastructure. When you thwart someone’s attempt to invest in new housing, do you really cause investment funds to flow into better things? There have certainly been claims to that effect – that British Banks are only interested in backing (safe) property investments and uninterested in backing good British Business. But it would be an odd justification for housebuilding restrictions, to argue that this was we push more finance into (good) SMEs. And remember there really hasn’t been a housebuilding boom this last 30 years – that is the whole point. The charge is generally levelled instead against the business of lending towards the buying and selling of already existing homes.

In short, it would be highly speculative to argue that restrictions on housebuilding are a well-designed effort to improve the allocation of scarce British investment capital.  People might just spend the money on holidays or gambling instead, not smart business investment. And we are in a global market for capital. Good ideas get funded.

Nevertheless, if you accept Ian’s premises, you have to ask what would happen if supply restrictions were loosened.  Here is what I think:

  • Perhaps more houses would be built where people actually need them, and less where they don’t. The national surplus does not get worse. If restrictions have held back house supply in Wandsworth, lifting them enables more people to live there. These people come from other areas leaving behind more vacant properties and less building in those places.
  • Perhaps some more households form in response – though I think Ian has addressed the question of suppressed households and finds is implausible that average household size is going to keep falling at the rate it once did.
  • Perhaps the total number that are vacant, nationally, rises

If it is the last of these, is it such a terrible thing? Maybe it sounds like it is, from a pure efficiency point of view: vacant houses are like the inert inventory a shop or manufacturer keeps aside ahead of need. Efficiency means cutting down on inventory.  But as my commenter implies, every other decently functioning market has excess capacity. It is anti-competitive to stop a supermarket being built, because we already have ‘enough’ supermarkets. Same too with houses.

Accepting Ian’s premise, a burst of a million houses above trend might lower rents by 5-8%. The effect on total landlord profits might be greater – the same total rental envelope is now spread over a more supply. Neither of these strike me as a particularly bad thing. I haven’t checked for a while (so do correct me) but returns on capital in the property-investment business are pretty good. Cutting down on economic rent is a good object of policy.

So I still think that any feasible level of increased housebuilding is not likely to lower the cost of housing by all that much. Unaffordable houses will still appear very unaffordable. But I cannot see the case for artificial restrictions to supply. Let the market do its work. Just don’t be surprised if the effect is a bit ‘meh’.


Published by freethinkingeconomist

I'm 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, and formerly in my mid-40s. 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.

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