29 April 2015

There is no UK “housing crisis” and there never was one


The political parties have been offering their solutions to the UK’s “housing crisis”.  But what does “housing crisis” mean here and why is it believed there is a “housing crisis”?

We can consider three things that might be meant by the term “housing crisis”:

  • That there aren’t enough houses — more specifically, there aren’t as many houses as there are households, either over the country as a whole or in particular regions (in which case those regions are “in crisis”, rather than the country as a whole being in one).
  • That it is so expensive to live in a house that many people can’t afford to do so
  • That it is so expensive to buy a house that many people can’t afford to do so

It’s pretty obvious that what most commentators mean by “housing crisis” is the first thought — that there aren’t enough houses to go round.  And it’s also pretty obvious where this idea came from — and why it can now be seen to be wrong.

During the 1980s, across much of England and Wales, there were fewer new houses built than there was growth in the number of households.  So by the time of the 1991 Census in some parts of the country there were only slightly more dwellings than households, as we can see in the following figure.

Figure 1: The growth in housing demand outstripped the number of new houses built during the 1980s

Lilico 1

It was feared that even this might under-state the problem, since the 1991 Census was widely believed to materially under-estimate the population, with large numbers of people refusing to register for the Census or the electoral register in an attempt to avoid the Poll Tax.

During the 1990s this problem seemed to be getting worse.  Inter-censal population and housing estimates suggested that in London and the South East there had come to be fewer dwellings than households – households were doubling up in the same dwellings.  This culminated in the 2000 Mid-Year-Estimates (MYE) of the Department for Transport, Local Government and the Regions (DTLR), as here:

Figure 2: In the late 1990s, it was believed that this trend had continued into the 1990s

Lilico 2

Thus was born the notion that there was a “housing shortage” in London and the South East of England.  It is perhaps worth emphasizing that the data quoted here were precisely those used, at the time, to claim that there was a “housing crisis”.  They came from the House Builders Federation report “Building a crisis”, from June 2002 (which would not have had access to the final versions of the 2001 Census data), which states on p11 that “In 1981, there were 4.1% more dwellings (18.0 million) than households (17.3 million) in England, a comfortable margin to allow for vacant dwellings, although not nearly enough to cover the number unfit for habitation. By 2000 this surplus had shrunk to 0.2% [This is quoting the 2000 MYE data from the final bar in Figure 2]. The country almost certainly slipped into a crude deficit of dwellings (i.e. more households than homes) during 2001, the first deficit since the 1960s.” This study argued for a large expansion in housing supply, with a key aim being to build sufficient additional new houses that the housing stock should exceed the number of households by 3 percent, “thus achieving a home for all”. (Of course, as we shall see below, the Census data shows that this target had already been more than exceeded without any need for additional large increases in supply.  Yet this was not greeted by housebuilders with any “Good news!  There is no housing crisis and there never was one!” reports…)

For many commentators, this “housing shortage” idea appears to be confirmed by movements in house prices.  As house prices began to spike upwards in the early 2000s, especially in London and the South-East, that was widely attributed to this housing shortage.  It was claimed that house prices were rising because people were desperately out-bidding each other simply in order to have somewhere to live.  The government established the Barker Review of Housing Supply to investigate how housing supply could be increased, and the Communities Plan for increased housebuilding.  The political parties continue today to seek to match promises on how they will get housebuilding to 200,000 or more.

But the whole concept of there being a “housing shortage” in London and the South East was false.  It was based on estimation errors and a mis-reading of the 1991 Census.  That was shown by the 2001 Census.  In the 2001 Census there turned out to be 900,000 fewer people in England and Wales than the inter-censal estimates had suggested – a massive error.   And what was true of England and Wales as a whole changed the regional picture dramatically, as we can see:

Figure 3: But that was completely wrong

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Instead of surpluses of dwellings over households falling across England and Wales and going negative in London and the South East, as the 2000 government estimates had suggested, they actually increased everywhere except London where they stayed constant and comfortably positive.

Those government inter-censal population estimates, on which the whole idea of there being a “housing shortage” was based, were simply wrong.  They had the population markedly too high.  During the 1990s the number of new houses actually expanded faster than the number of households.

The same was true in the 2000s, as was shown in the 2011 Census.

Figure 4: In the 2000s the trend of new house numbers expanding faster than the population of households accelerated

Lilico 4

It simply isn’t true, and never was true, that the country or regions of the country have a shortage of houses.  (By the way, if anybody starts talking to you about “hidden households” or “suppressed household formation”, try asking them how much their estimate of the number of households dropped when it turned out there were 900,000 fewer people in the country than they’d thought.  If the answer isn’t “half a million, and that transformed the picture on the adequacy of the UK’s housing stock”, you can safely conclude that they’re back-engineering their analysis to come to the “housing crisis” answer they want.)

Well, what else might “housing crisis” mean if not a shortage of houses?  Perhaps it means that houses are too expensive to live in?  There’s very little evidence to support that idea.  The Office for National produces an index of private housing rental prices, which we compare below to the consumer prices index over the past ten years.

Figure 5: Private rents have risen slower than consumer prices for ten years

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We see that, far from renting becoming ever more unaffordable, exactly the opposite has happened over the past ten years — rents have not even kept pace with inflation.  (There are good reasons to believe that rents ought to rise roughly in line with real per capita incomes — so normally a percentage point or two faster than inflation over the longer term.)

So that brings us to our final proposition: that there being a “housing crisis” really means “house prices are very high.”  Now this one’s definitely true.  Buying a house is indeed very expensive.  So is buying a Ferrari.  So is buying a yacht.  But we don’t normally talk of there being a “yacht crisis”.

Now obviously virtually no-one in Britain needs a yacht.  But, equally, virtually no-one needs to own a house.  What we need is to be able to live in houses, and as we’ve seen already the cost of renting houses has not been rising particularly rapidly.  So housing being very expensive is not a social problem in its own right.

It might well be a policy problem for all kinds of other reasons.  We might want to encourage a property-owning community.  House prices might be or have been excessively high and then crash, creating economic problems such as negative equity.  People might foolishly have bought houses expecting them to keep rising in price so they could sell out at a profit, and now be trapped in debt.  These are all potential or actual problems.  But none of these is a “housing crisis”.

But doesn’t the large rise in prices demonstrate that there must have been something wrong with our analysis earlier?  Doesn’t the fact that houses are so expensive suggest that there must be too little supply or that renting is actually very expensive?

No.  House prices rose very rapidly in the 2000s because the willingness to pay for housing rose rapidly as (a) economic conditions seemed very favourable; and (b) mortgage credit became very easy and very cheap to obtain.  And when, from 2007 onwards, these factors reversed, the prices of houses bought with mortgages crashed enormously, as we can see from the standard Halifax series.

Figure 6: Index of Halifax real house prices (Jan-83 = 100)

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The supposed “housing shortage” by no means prevented house prices from dropping 33 per cent in real terms between July 2007 and October 2012.  It was good economic conditions and easy, cheap mortgage credit that bid house prices up in the early 2000s and poor economic conditions and limited mortgage availability took them down.

Similarly, why did house prices rise the most in London and the South East if not because those regions had run out of houses?  Because London and the South East were the wealthiest, fastest-growing regions so willingness to pay to live there was the highest.

We need to continue to build more houses.  And it is likely that, with accelerating population growth, the rate of new house-building in the future in the UK will need to be more rapid than it was in the recent past.  But we do not have a housing shortage in England as a whole or in any region of England.  High house prices are not because we have run out of houses.  It’s perfectly understandable, given the data at the time, that people believed that in 2000.  It’s simply refusing to look at the data if people continue to believe that now.

Andrew Lilico is Chairman of Europe Economics.