Why Building 300,000 Houses Annually Won't Solve The Housing Crisis In The UK

The prices of average houses in the United Kingdom increased by more than 160 percent since the low prices in 1996, which has led to a drop in homeownership among young people.

Commentators, policymakers, and even political leaders believe the cause of the drop in homeownership is the undersupply of housing.

They believe there is a short supply of affordable housing for most people. 

However, we do not believe in the housing shortage story, which informs the need to rethink the fundamental policy around real estate in this region.

Housing Supply Has Been Outstripping Household Formation for Several Years

Many believe that the houses, which are built, do not meet the demand for housing. However, according to official data, the houses we build meet the demand for housing.

The English housing stock grew by 168,000 units every year since 1996. However, the average growth in the number of housings is 147,000 every year.

Therefore, the number of dwellings was 660,000 more than the number of households in 1996 in England. However, the number had increased to 1.1 million in 2018.

We can also see the same trend in Wales and Scotland.

The increasing surplus of households nationally can obscure the low supply of households at the regional level. However, according to the available data, the number of houses is growing faster than the number of households count in both the South East and in London.

Housing Affordability

Do not just focus on the housing volumes. It is essential to focus on housing costs. People consider the cost of housing before forming new households.

Therefore, you need to differentiate between the price of the house and the cost of the housing services.

National statistical agencies use the market rent on rented houses or imputed rents to measure the daily costs of the housing services. So, the daily costs of the housing services do not depend on the purchase of the house.

Therefore, the shortage of housing should be reflected in the rising imputed rents and market rents. The rents are not even rising faster than the average incomes of households.

According to the data from ONS and Department for Work and Pensions (DWP), the median household incomes have risen faster than rents since 1996.

In addition, affordable constraints have been eased. In fact, the average house affordability has been stable for the last two decades in London.

However, if the housing supply has been low, we would not have expected to see it. In fact, the housing stock keeps growing every year.

What Causes Prices to Keep Rising?

If the cause of the increase in house prices in the UK is not due to shortage of housing, then what might have caused the house prices to increase to 8 times median household income today from a multiple of 4.5 in 1996?

A combination of the cost of capital and market rents determines the changes in house price formation. Therefore, the prices of a house can crash or jump, depending on the shifts of the cost of capital main components, including expectations of prices growth in the future, taxes, and mortgage interest rates.

If the rents remain stable, such volatility can still occur.

The mortgage rates have been tumbling since the 1990s. If you adjust the interest rates for inflation, they have fallen from 8 to 2 percent.

The mortgage rate is one of the main elements of the cost of capital for most homeowners. Therefore, the change in mortgage rates is one of the main causes of the changes in house prices. That is why there has been an increase the house prices.

How Much Would 300,000 Houses Every Year Improve Affordability?

Inadequate housing supply is not the main cause of the growth of housing prices over the last 23 years in the UK. However, can the solution be increasing house supply?

If we can hit the target of the government of adding 300,000 houses every year, we can reduce the prices of rent and house prices.  However, according to the academic evidence, increasing supply will not reserve the increase in house prices of the last two decades.

According to several modeling exercises, an increase in housing stock by 1% can lead to a decrease in the house prices and rents of around 1.5% to 2%, all things being equal.

This means if we build 300,000 houses every year, we cannot reduce the prices of houses by around 10% in the next 20 years. Therefore, we need to look for another solution. We should not just focus on building houses for rent or for sale.

The Decline in Home Ownership

Many people believe one of the main causes of the decline in homeownership is the high prices of houses in the UK. However, if you look closely at the data, you will notice that one of the most important factors is the mortgage market.

According to this report, the peak of homeownership was 70.5% in England in 2003. However, it declined quickly to 63.1% in 2016 from 69.1% in 2007. This is the period when house prices declined sharply across the country.

The reduction of mortgage lending to first home buyers is the main cause of the decline in house prices during this period. The house prices took time to recover. A lot of people couldn't afford to purchase a house.

If the issuance of mortgage lending to first home buyers persisted for more years, we would not have seen a decline in homeownership in these years.

Therefore, it is difficult to believe that providing 300,000 new houses every year can help raise homeownership. Providing more houses cannot impact the house prices since home ownerships are not sensitive to the house prices. They are more sensitive to the availability of mortgages.

Policy Implications

Policy implications are more important in the 2020s.

You cannot solve problems of low homeownership or high house prices by boosting the supply of housing over the current rates.

Problems, such as housing benefit cuts, social housing stock erosion, and slow wage growth, are the main cause of the increasing housing affordability problems for most young people, especially the ones in the private sector who rent houses. Therefore, inadequate housing supply is not the main cause.

It is, therefore, more important to tackle these problems since they can help improve house affordability. We should not just try to increase market supply. And, as this analysis on impact housing will tell you, we should also not just focus on increasing affordable houses or also on impact housing to help solve the crisis.

Overseas investment flows and high-interest rates have made it difficult for most people to own houses. This is because they do not want to pay the high-interest rates.

It is expensive for most people to afford a house if they must pay high-interest rates. Therefore, policymakers can protect first-time homebuyers by insulating houses from asset price volatility.

If we want to make the mortgage market to be more stable and increase homeownership, then we either need to reduce the financial incentives that landlords get or subsidize first-time home buyers.