29 June 2022

Does the census really prove we don’t need to build more houses?

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One of the few things people across the political spectrum can agree on is that the rent is too damn high. As are deposit requirements, mortgage payments, house prices…you name it – just about everything in the British housing market is deformed and dysfunctional.

Most people interested in this area put the price crisis down to an old-fashioned idea called supply and demand. There aren’t enough homes in the places people want to live, so the prices of the existing stock are exorbitant. Immigration, the surge in buy-to-lets, overseas purchases and the natural need for more space as society gets richer all combine to inflate demand, while we have failed to build sufficient homes on the supply side for decades. These two factors together explain the housing crisis.

There is, however, a rival school of thought, led by Ian Mulheirn of the Tony Blair Institute, which argues that the only real culprit for sky-high house prices is low interest rates, not the fact that we don’t build enough. In this view, the housing crisis is an asset price bubble and nothing more. Obviously, interest rates have an impact on house prices – and Mulheirn is right to point that out – but the idea this is the only issue is for the birds.

‘Exhibit A’ for his argument is that new home building has consistently outstripped household formation. If we’ve got more homes than households, the reasoning goes, it can’t be under-supply that’s pushing up prices.

So, when a batch of England’s 2021 census data dropped yesterday, Mulheirn claimed its findings as vindication of his supply-denier stance. Here he notes that more homes were built between 2011 and 2021 than households were formed. The corollary of this, he says, is that housing targets have been deliberately overcooked to suit the ‘narrative’ that we need to build more.

What’s in a household?

Admittedly, to a lot of people it might seem highly intuitive that these figures show we are building not just enough homes, but too many! After all, the logic goes, if we have more houses than people to fill them, where’s the supply issue?

That argument only makes sense, however, if you ignore what a ‘household’ actually is, and how household formation relates to the housing market. A household is not the same thing as a family, even if we use the terms interchangeably in a colloquial sense. Instead, the ONS defines it as:

‘One person living alone, or a group of people (not necessarily related) living at the same address who share cooking facilities and share a living room, sitting room or dining area.’

Take a fairly typical living situation where six people are sharing a house. For the purposes of the census they would all count as a single household. Of course, some people like the camaraderie of living in a big place with lots of friends. But I would be willing to lay a deposit-sized sum that many, many people would rather live alone, or with their partner, or simply somewhere they have more space.

Using that ONS definition of a household also leads to some very muddled thinking. It confuses having a home with being adequately housed. It means you care about two families sharing a property with separate kitchens, but not about the same two families sharing the same property but sharing a kitchen – the second case is one household and, in Mulheirn’s logic, not a group in need of extra housing.

To put it more simply, a lower number of new households than new housing is not a sign that housing demand is being met, because the formation of households itself depends on housing supply (it is ‘endogenous’ to use an economicky term). Put more bluntly, there would be far more households if we built far more housing.

Missing millions

One statistic spells this out starkly: there are now over 1 million more people in their 20s currently living at home compared to 20 years ago. If they all moved out, we’d need about another 500,000 homes. We’ve also seen a steep rise in multi-family households in recent years. If we built more homes, couples and individuals would be able to move much more easily, rather than share with other people, and many of those adults still living with their parents could move out, either to rented accommodation or by buying own homes. And more people would have families sooner, if they could actually afford a home to put the children into.

Another problems with the households/new-builds argument is that it doesn’t tell us where the new houses were, or where the new households were formed. It’s not much use building thousands of homes up north if the demand for housing is strongest in the south-east (though you’ll still find MPs arguing the opposite…).

And the problem is that because areas with few new homes see fewer new households forming, you end up in a death spiral of housing supply, where unaffordable homes reduce household formation, and this is then used as an excuse to build even fewer homes if we based this on household formation alone.

The same goes, incidentally, for the zombie argument that if we only had fewer empty homes the housing crisis would go away. As Freddie Poser wrote recently, the fact those homes are empty is usually because people don’t want to live in them – and anyway the UK has a much lower percentage of empty homes than countries with functional housing markets like, say, Japan (seriously, look up the cost of an average flat in Tokyo). Indeed, the UK has the second lowest proportion of empty homes in Europe, after Poland.

Another set of census data bears this out too. The drop in the rate of new births over the last decade, culminating with the lowest ever Total Fertility Rate in 2020. It would be foolish to claim this is entirely down to the housing crisis. Childcare costs, cultural change, people marrying later and so on all play their part too. But the cost of housing is the elephant in the room, not just in terms of people starting families, but – as Jeremy Driver has noted – in families having the number of children they actually want. Moreover, it feeds into other problems, with the cost of property driving up childcare providers’ costs and, in turn, parents’ bills.

Why does it matter?

To return to Mulheirn and his supply/households argument, the obvious question is: why should we care what one housing economist is saying, especially if so many of his peers vehemently disagree?

First, it’s a very helpful thing to have dissenting voices – not only to keep the rest of us on our toes, sharpening our own arguments and spotting their weaknesses.

The problem is that his arguments have now permeated into the upper reaches of government, with MPs and ministers using his research as an intellectual fig leaf for rolling back what was once a very ambitious, exciting pro-housing agenda.

Another fairly big issue is that both Mulheirn and his followers are simply ignoring all evidence to the contrary – including data on regional prices (if supply doesn’t matter then prices should not vary across the UK, but they clearly do), and international comparisons (the UK has seen prices rise much faster than other countries which have seen the same fall in interest rates).

On top of this, if interest rates rose, house prices might fall, but houses would still be fairly expensive (it’s just that the cost would shift to interest payments, not repayment of the principal sum). So higher interest rates really aren’t much of a solution – to use an extreme example, if a £300,000 house falls to £200,000 but the interest rate rises from 2% to 6%, the average cost over a 25-year mortgage doesn’t really change (indeed, the average monthly payment would rise slightly).

Thus the whole argument Mulheirn puts forward is self-defeating if the aim is to make housing affordable in terms of people being able to afford a family home. Which is why you then turn back to supply.

Sadly, rather than tearing up the rules and letting us build, build build, the Government now seems more focused on regulating holiday lets and clamping down on AirBnBs – an issue that might affect some tourist-y areas but is hardly central to the housing crisis.

What is necessary is a more holistic approach to supply and demand – understanding that issues such as buy to let vs first time buyer mortgages, interest rates, overseas buyers and immigration all matter – but that supply is an inescapable element of fixing the housing crisis. And while Ian Mulheirn doesn’t need to understand this, ministers and officials really do.

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John Ashmore is Editor of CapX.