In November 2003, before he was evil, Vince Cable said:
"Is not the brutal truth that ... the growth of the British economy is sustained by consumer spending pinned against record levels of personal debt, which is secured, if at all, against house prices that the Bank of England describes as well above equilibrium level?"
Even with recent falls, house prices are still above what they were in 2003. Numbers vary but Nationwide figures I've seen indicate an average house price around £165K. That's about 7 times the (median) average salary. With banks being more sensible/cautious about lending you would expect the price to collapse but it isn't. The question is, why not?
Well, we know that there is a shortage of housing - around 250,000 new households each year versus a new build rate that has been between around 150,00 per year. However, if demand was being met or exceeded then would it not be likely that the price would crash? So, reasons why new builds aren't keeping up:
- Planning. This is the usual reason given - that red tape and NIMBYs are preventing the construction of new housing. I've got no way of knowing if this is true.
- Developers are sitting on land with planning permission, knowing that if they build too much now then the price will go down. Again I've got no way of knowing if this is true.
This page has a graph of the number of property transactions in the UK (source data here). It shows transactions being about half what they were in 2007. This might be driven by people hanging on in the hope of getting a better price in the future.
The number of new builds has fallen from a high of 206,620 in 2004/5 to 146,960 in 2009/10 (source data from a link in here). That lends some weight to the argument that developers are deliberately restricting supply, but on the other hand that's about a 30% reduction where the fall in transactions is about 50%. It could be explained by planning regulations but I'm not aware of these being tightened over that time period.
Of course most the "problem" is only really serious in the South East. If only people and companies could be persuaded to move away from London to where prices are more reasonable then that would equalize things. But, for whatever reason, that doesn't look likely.
It can't be good for the country as a whole either. Wages are held down by competition from India/China but people in those countries don't need to spend £1,200 a month to house their family. Prices have to fall but this will be unpopular.
Some people will point out that immigration has an effect on demand for property. It does. But from here:
Professor Nickell, who advises the Government on affordable housing, said that since 2000 the ratio of average house prices to average annual earnings had risen from four to seven. If net immigration had been zero, house prices would, according to Professor Nickell, still have risen to 6.5 times average income
Of course, it would be irony beyond the average Daily Mail reader that their house price is being kept up by immigration.
So, where I'm short on facts:
- Are developers artificially restricting housing supply? Is this even possible?
- Is planning really a problem?
- I've seen estimates of between 500,000 - 1m unoccupied premises. How many of these are immediately habitable?
- If a load of affordable housing was built, what would stop it being snapped up by the Buy To Let gang?
- What happens if councils are inundated with homeless people who cannot afford housing on the open market?
- What's going to happen when interest rates go up?
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