1 June 2021

Don’t hold your breath for a house price crash


Today’s news that house prices have risen 10.9 % since a year ago confirms estate agent tales of a hot market. As the economy reboots thanks to vaccines and the end of social restrictions, the exuberance will likely continue for a while.

Predicting the future is hard, except in UK house prices. They have fluctuated around a rapidly rising trend since the 1947 Town and Country Planning Act replaced fairly generous and predictable statutory rules with a much tighter discretionary system for approving what could be built. That vastly reduced where you were allowed to build more homes.

We had already essentially stopped building homes during World War 2, so it’s been more than 80 years that we have failed to build enough housing in the right places to meet demand. The resulting needless shortage means the UK’s housing stock is now worth an eye-watering three times what it would cost to build today.

Most governments have been pretty happy about that upward trend. Gordon Brown held a meeting to discuss a wave of new social housing, but that idea met the objection that it might crash housing prices and lose them the election.

The typical homeowner regards rising prices as a great thing, and for many of them it is – if your current house is larger than you need, and you want to downsize.

But for an increasingly large number of people that’s not true. Most young people today can’t even dream of buying a home, and many families are stuck in much smaller homes than they want.

Average house prices in this country depend principally on interest rates, property taxes, demand, and supply. So long as supply is tight, demand stays up, taxes don’t change, and rates remain low, prices will stay high. And if demand instead continues to increase with incomes, prices will rise.

Of course, it’s not quite that simple. Location, location and location are the biggest drivers of the price of any home. Many people have now kitted themselves out to work from home, and employers have adapted. That technology has partly mitigated the obscene housing scarcity in our most expensive towns and cities. Those desks, webcams, and lighting kits have caused a step change in the trend to spending less time in the office that already existed before Covid. The office is returning but the average person will be there less than before.

That means many, especially families with children, see the attraction of leaving the city for a cheaper location with more space and more greenery, with a longer commute three days a week that they prefer to the shorter commute they did Monday to Friday.

But cities will not go away until virtual handshakes or even hugs are as good as the real thing. That is a distant future. And for every young family who moves out, there is a young professional who wants that home. London rents have dropped by close to 20% in many places, but will start to rise as people return to offices, bars and restaurants. Businesses have continued to sign new office leases over the last year, although some old office space could be better used for housing: indeed, plenty of offices across central London were originally built as homes.

This pointless continued scarcity of housing where it is most needed causes immense damage to society. It reduces wages, steals opportunities, damages families, and increases inequality. We could fix it while making almost everyone better off – whether through increased wages, better healthcare paid for through GDP growth, or sharing the benefits from allowing more homes on their street. But until then, every jump in prices – far above the cost of adding more homes well – represents more dreams needlessly destroyed.

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John Myers is co-founder of London YIMBY, a grassroots campaign to end the housing crisis with the support of local people.

Columns are the author's own opinion and do not necessarily reflect the views of CapX.