Unaffordable housing is not just down to low interest rates (whatever clever economists may claim)

For years supporters of urban containment policies like the green belt and enthusiasts for more "strategic planning" have argued that Britain's high house prices were simply a consequence of low interest rates:

Another paper, this time from the Bank of England written by former MPC member David Miles and Victoria Monro, shows that the rise in house prices we have experienced since 1985 is mainly the result of lower real interest rates. The other, less important, driver is household income. Those two effects together can account for all the increase in house prices relative to inflation. The increase in house prices is not the result of a shortage of new houses.

This is from Simon Wren-Lewis, who is reliably wrong about most things and particulary wrong here but he gets cover from other economists and from this influential work in 1984 which modelled housing as a financial asset. Those of us who are not economists are always hesitant to criticise these wise folk but it did seem to us that, regardless of such clever modelling, the rules of supply and demand must apply to housing just like everything else.

It seems us non-economists might just be right after all - there isn't a straightforward link between house prises and interest rates:

In the decade from 1990 to 2000, UK house prices rose by just 30% while rates more than halved, falling from 11% to 5%. Then from 2000 to the start of the financial crisis in 2008, house prices doubled while rates barely budged. Since the crisis rates have fallen to just above zero and house prices have risen by a further 20%. They have remained flat in real terms on average.

So at the level of the whole nation there's a pretty weak link between interest rates and prices. This link gets weaker when regional variations are considered where the 'interest rates only' model underestimates the changes in prices in London and the South-East while overestimating price changes in the North of England. The real killer, however, is when we look at international comparisons:

We input actual data on average rents and interest rates for each economy and hold all other factors constant over time...for countries like Germany, Italy and the US, the model predicts house prices of more than double the actual level in the latest data.

The research finds that, while other asset classes like equities show remarkable international consistency, this is not true for housing suggesting that the financial model of housing markets (even a modified version of the original interest rates only model) is not reliable. The UK (and other places like Spain) with tightly constrained urban housing markets has a system that responds poorly to rising demand. Put more simply, more blame needs attaching to policies designed to constrain land supply, that require a long and risky approval process, and which place substantial additional costs on development. In short, the planning system.

The article from which these findings comes still wants to model housing as a financial asset but at least the matter of supply has become a real issue rather than being dismissed as "bad ideas, like ...house building is the answer to high house prices". Wherever we look, from the UK and Spain to Auckland or San Francisco, we see that artifically constrained land supply acts to drive up housing costs, in some cases to the point of extreme unaffordability.

In the Demographia Survey, virtually all of the major housing markets that are “severely unaffordable” have urban containment (such as urban growth boundaries and other policies that severely limit or prohibit new development on the urban fringe). Research in Australia, New Zealand, the United Kingdom and the United States has found comparable land values spiking 10 times and more across urban growth boundaries.

It really is time to reform strategic planning, put an end to urban containment as a policy, to scrap the green belt, so as to allow the housing market to function properly.

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Why houses are expensive.

I like Peter Hitchens, he offers the same iconoclastic hammer to the centre-right's certainties as his brother did for the centre-left. Among Hitchens' common themes is a harking back to a time when we had full and steady employment, low levels of crime, stable communities and trust in institutions. Quite rightly, Hitchens tells us that these things are good things and that conservatives - whether of that party or not - should be concerned to get them back.

Sometimes, however, this enthusiasm for the essential elements of conservatism leads Hitchens to the realm of fantasy:

The homeowners of Britain are being lied to, and unfairly smeared to try to get us to accept a hideous and irreparable destruction of green space in suburbs and the countryside. They are also being blamed personally for a problem they did not cause, in a nasty war on the middle-aged. They should resist this.

This opening gambit is familiar, a justified reaction to the now too common trend of blaming 'baby boomers' for all the ills of modern society and especially for houses being so expensive. Hitchens tells us that this ain't so and the fault lies with "grabby developers", mass immigration, the "epidemic of divorce", the success of London, right-to-buy, and what he calls "targeted inflation".

Now, leaving aside the 'positive money' argument that Hitchens uses in his "targeted inflation" argument, it's hard not to see some truth, at least in the creating of demand for housing, in this list. And, as the rules of supply and demand tell us, increasing demand will raise prices if new supply isn't readily available. The problem with Hitchens argument is that he lays all the blame for house price increases on increasing demand for housing (whether as a home or as an investment) and none of the blame on the lack of housing supply.

Or more importantly, land supply. Because it is how much land we have on which to build (taking as read the increased demand Hitchens describes) that determines how much the homes built on that land will cost. After all it costs pretty much the same to build a house in Kensington as it does in Burnley but the former will sell for a few million while you'll be lucky to get a hundred grand for the house in East Lancashire.

And the supply of land for housing, across most of England, is something determined by government. Moreover, for nearly 70 years, the government - national and local - has determined that most of the land in places where people want to live will have a 'presumption against development'. Not to protect special beauty, heritage or environment but simply to prevent 'sprawl' and encourage denser development in the existing towns and cities. The name for this policy - and it's popular right across the English-speaking world - is urban containment. I saw this described in a school debating competition on this subject as a 'tourniquet for the city'.

Urban containment- even when we're laissez faire on densities - doesn't work. Indeed, it's one of the primary reasons for the housing crises in London, San Francisco, Sydney, Auckland, and Madrid. Here's work from Australia's reserve bank on the subject:

According to the research, and assuming typical mortgage provisions, (Note) the urban containment effect (our term) adds from $150,000 to nearly $500,000 to house prices in major Australian metropolitan areas --- this is not the house price, but the additional impact of urban containment ... The urban containment adds up to $29,000 to annual payments on the average house in Australia’s major metropolitan areas

In the UK this uplift would be between £80,000 and £275,000 - this is the cost of that tourniquet and represents, when multiplied by the hundreds of thousands or properties involved, billions in lost opportunity for the UK (and those other places caught in urban containment's web). And remember, simply making development more dense doesn't solve the problem (partly because building upwards is expensive but most because densification simply increases land values which are the source of our problem in the first place).

If we are to have a debate about urban containment it needs to be on an informed basis - one that recognises the social and economic costs of these policies. It isn't good enough simply to list the reasons why there's more demand for housing and then shout:

...the rape of the Green Belt and the overdevelopment of the countryside will mean our children inherit a blighted country, almost unrecognisable as the beautiful, civilised place my generation inherited from our forebears.

This is splendid polemic but doesn't answer the question as to how we offer the same deal to the next generation - how do they get that stake, a real tangible stake, in their land and culture? I agree entirely that some of the development we get today is pinched, crammed, and dominated by brick and concrete with little space for garden, greenery or the margins when kids can build a den or play out the make-believe that ten-years-olds invent. But this overdevelopment is caused by the lack of land, by the containment. London's 1890s and 1930s suburbs - the places Hitchens' waxes lyrical about - were built with space and openness because the land was cheap, there weren't planners with clipboards and rulers to tells them what they could or couldn't do. Why would future developers not do the same given space and a free rein?

The social cost of urban containment isn't a joke either - this is America, which is worse than Britain, but anyone visiting our cities will see this happening:

Homelessness has long been a San Francisco problem, and with home prices rising, it’s arguably worse now than ever. A January report on SFgate.com claimed that the city’s homeless count is close to 6,700, and a local advocacy group estimates the count at 12,000. The problem is all very visible throughout the city, and increasingly, in Oakland and Berkeley, with open drug use and fights blaring out from the encampments that rest along sidewalks and below underpasses. A recent U.N. official, after visiting the Bay Area, said that in some ways, the city’s treatment of the homeless is worse than what she saw in the slums of India.

For sure, there's other reasons for homelessness than just high rents but getting a roof over peoples' heads should be a start. And, right now, someone losing their rented place in London, is going to find it really hard to get another place, for the first time in my lifetime people are on the streets solely because there isn't a home available for them to live in.

It seems likely that we will keep these policies - the rage in Hitchens' polemic really does reflect how people feel - but I hope, in doing so, that we won't carry on pretending that there isn't a social cost to having urban containment. We'll keep large swathes of countryside - much of it not especially special - while cramming more folk into unsustainable city living, having more homelessness and a generation embittered by their inability to do what their parents did, buy a house.

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Can't afford to buy a house? You really should blame the planners...

Or so research from the Reserve Bank of Australia says:

...we find that, as of 2016, zoning raised detached house prices 73 per cent above marginal costs in Sydney, 69 per cent in Melbourne, 42 per cent in Brisbane and 54 per cent in Perth. Zoning has also raised the price of apartments well above the marginal cost of supply, especially in Sydney. We emphasise that this is not the amount that housing prices would fall in the absence of zoning. The effect of zoning has increased dramatically over the past two decades, likely due to existing restrictions binding more tightly as demand has risen.

So next time someone tries to tell you it's the banks or the housebuilders or immigrants or mortgage lenders or some other of the myriad excuses for high house prices, smiles sweetly and say:

"Nah, it's the planners."

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You don't want to live there, do you? A comment on sky-high house prices

I know, I know. You don't want to live on the edge of Woodside, a former council estate on the Bradford side of the Bradford-Halifax boundary. Location, location, location as the saying goes.

But stop and think for a minute. Just recently the resolution Foundation had this to say:

HOME ownership among young people across Bradford and West Yorkshire has halved in a generation.

The findings have been announced by think-tank The Resolution Foundation which said it counters “the popular perception that the struggle to get on the housing ladder is largely confined to London and the South East”.

So here we have three flats that will be sold at auction rather than through the regular market and which will end up in the private rental sector. Yet finding £5,000 for a 10% deposit and borrowing £45,000? Is this really unaffordable to working young couples in West Yorkshire?

Bradford's median full time working income is about £450 per week (was £447.1 in 2014) - let's call that two grand a month between friends. And let's further assume that twentysomethings earn two-thirds of median. A typical Bradford young couple (if such a thing exists) should be able to afford - with comfort - one of these flats.

But then, of course, you don't want to live there do you!

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If your London housing policy doesn't mention planning reform it's wrong

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What follows doesn't alter the fact that London needs a lot of houses across every tenure but it does provide a little context and suggests that we need a better understanding of the drivers for housing demand in the metropolis. And hopefully gets us past articles filled with stuff like this:

She puts the micro-boom in Hackney down to the post-Olympics changes that have transformed an area which once had failing schools and high crime into a part of London appreciated for its architecture, parks and cafes, but which remains just affordable to people no longer able to live more centrally.

The problem with this is that discussing Hackney's delights (or the weird world in which it has become some sort of attractive neighbourhood) doesn't really help us understand "the heart of the housing bubble". It just tells us that house prices are going up in Hackney. Indeed, Hackney, like its next door neighbour Islington, has seen prices rise significantly faster than the London average.

This graph is something of an education for anyone considering London's housing situation (you can see a bigger version here):

The bar graph bit shows the differentials in London house prices from 2008 through to 2011. What seems clear from this graph is that the outer eastern boroughs (Newham, Waltham Forest, Barking & Dagenham, Bexley) have seen the biggest fall in house prices whereas - Tower Hamlets aside - inner eastern boroughs (Hackney, Islington, Southwark, Greenwich) have seen significant rises, in Southwark's case by over 20%.

The demand illustrated in the article above is younger, as the author makes clear:

Everyone who comes in is white, and in their late 20s and 30s, unless they are older parents accompanying their children; this demographic is repeated at each of the nine viewings and open days that Keatons allows us to attend over three days.

The question isn't just how long all this can go on before the bubble pops (the answer, if other international cities are any guide, is 'a lot longer than you think') but where are the workers going to live? Of course the folk spending £700,000 on a three-bed terrace in Hackney* will be working (very hard I suspect too) but in their offices there will be people on half the money.

For some of these people the answer is that they're at home with mum (which is not really sustainable), in expensive rented flats, probably sharing or else cramming onto a train from Southend, Chatham or Peterborough where they still have an outside chance of being able to afford either rents or a mortgage.

There's nothing new in this pattern - back in 1987 when I left London, I had a boss who commuted in from Eastborne and colleagues whose commute was from Peterborough, Maidstone and Hemel Hempstead. But it reminds us of the devil's deal we've done - constraining new build, limiting permitted development and making no compromise on London's green belt has been great news for property owners in the metropolis but not so great for the population who want to buy or rent property.

Add the time and cost of actually getting a planning permission on land you're allowed to develop and we have a recipe for a housing market so schlerotic that repeated heart attacks are simply inevitable. So I find it bizarre to hear London politicians opposing more liberal permitted development rights (converting empty shops into homes, for example), proposing daft politicies like rent controls and even suggesting tighter controls on housing development.

What we need to hear from these London politicians are proposals for planning reform. We never do though.

*We don't have these problems in Bradford. £700,000 would get you at least half-a-dozen three-bed terraces more if you're not too fussy about quality or location

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No Bradford doesn't have a housing crisis...

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Nor is it worsening. Yet we keep being told this:

Bradford has an affordable-homes crisis which is worsening year-by-year, the National Housing Federation has warned.

The federation, which represents housing associations, says a rising number of people are being priced out of a property market where the average house price is £142,000 but average annual earnings are £18,500.

Ah, the NHF again. So let's deal with the issue - firstly it's not simply about house price, it's about rents, but let's start with those prices.

According to those nice folk at Zoopla the current average price for houses sold in Bradford is £118,940 which is a slight rise (less than 3%) on the previous year. But if we look at the 'affordable' bit of the market - terraced properties and flats - we find that the average is below £100,000.  Still too much for those on Bradford's average earnings but only two-thirds of the NHF figure.

Which brings us to rents. Again looking at Zoopla we find an average rent of £486 per month - not super cheap but hardly at crisis levels. And again the average for terraced properties is at or around £400 per month.

Moreover, I'm prepared to bet that there are parts of the city where rents are lower still - indeed little different from social rent levels - and we know that you can buy a property (about 60 are on the T& A website right now) at £50,000 or less.

No-one's saying we don;t need to build more houses or even that there aren't problems wrought by a combination of a growing population and low wages. But there isn't a crisis. Not even a little one.

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Bradford doesn't have a 'housing crisis' - not even a little one

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Almost exactly a year ago, Cllr Val Slater, scourge of the middle classes (and Buttershaw councillor who lives in Bingley), had this to say about Bradford's "housing crisis":

“We do have something of a housing crisis and when there’s a shortage of any commodity, the prices go up"

This was in response to news that, in 2011 Bradford's house prices has risen by nearly 10% and Cllr Slater leapt on this to try and justify building 45,000 more houses in the District - mostly on green field sites in the Aire Valley.

Yesterday the same news story popped out - except that Bradford's house prices have fallen by nearly 10%. Surprisingly, Cllr Slater wasn't there to with draw her "it's a housing crisis" argument for building more houses.

But then Bradford doesn't have a housing crisis - we have a few problems, the historically large families in the Asian community have led to a shortage of large family homes and a degree of overcrowding and there are places like Holme Wood where the private market is almost entirely private rental sector these days. These are, however, problem that reflect the City's demographics and economy rather than any lack of housing supply. If I were to make a prediction, it would be that, if the City's economy picks up, we'll see abandonment in less popular areas with a large PRS and low demand (e.g. Holme Wood, Buttershaw, Allerton).

What we don't have is a crisis in housing supply. Not even a little.

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