Want to get housing policy right? You need to learn from road building

With housing policy in the news again, I’ve given a refresh to a piece of mine from 2015 about an under-debated aspect of cracking the problems.

Imagine what would happen if, due to an unfortunate editing error, the transport and housing policy speeches of a centre-left, environmentally friendly politician – who could be a Lib Dem, Green, Labour, Ukip, Plaid, SNP, SDLP or even a wet Tory – got mixed up.

Speech one:

It’s absolutely absurd to think we can fix the housing crisis by concreting over beautiful fields and building more houses. More houses will just increase demand and perpetuate the crisis.

Speech two:

With our population growing every year we have to build more roads to keep up. Our current congested roads are a scandal, with traffic jams driving up the cost of driving and forcing people to move further and further away in the search for congestion-free roads.

Curious isn’t it, the way that idea of providing more supply is considered self-evidently flawed in one policy area because it will generate more demand, but also a no-problem answer in another by so many people?

Of course, two different policy areas are, well, different, so what is true for one might not be true for another. But the striking contrast should at least give pause for thought: if building more roads often generates more demand that gets you back to square one, is there really no problem with more supply begetting more demand in housing?

It’s a variation on the point that David Boyle makes in his excellent Who Killed The Middle Classes? where he also points the finger of blame for the housing “crisis” at demand, not supply. In his case, demand generated by the huge influx of money into housing finance, because if you provide lots of money to people to buy goods, is it really any surprise that prices then go up?

[David Boyle] suggests that the problem with house price inflation is not principally a shortage of supply pushing up prices but an excess of money fueling the price rises instead. Inflation may be a case of too much money chasing too few goods, but Boyle argues that for our property market, the problem is much more with the first and not the last part of that statement.

It’s an interesting thought, one at odds with what nearly everyone else says about the housing market – and one which suggests the current policy of trying to make it easier for people to borrow, so pumping more money into the housing system, will make matters worse, not better.

Aside from the influx of money driving up prices, there’s also the question of household size. It’s dropped massively. So massively that, as I pointed out previously:

In 1961 the average household size was 3.0 and it’s now nearly a quarter lower at 2.3. Or to put it another way, if households were to return to that 1961 average, this would free up 23% of homes. Of course that’s not going to happen overnight, but the calculation shows just how much pressure has been added to the housing market by falling household size.

Will building more houses just generate more demand for ever-decreasing household sizes rather than reduce prices, similar to the roads argument about how more roads generate more demand?

Just as “soaring rents” is a deeply entrenched view, widely held oblivious of the fact that the evidence keeps on rolling out that rents are not soaring, so too the idea that more housing will reduce housing costs is so deeply entrenched that almost no-one questions it.

I’m not sure what the answer to the question is, but I’m sure that asking it is wise – which is why Simon Jenkins’s new piece, in parts excellent and in parts infuriating (as ever!), is very welcome:

The chief determinant of house prices is wealth, subsidy and the supply of money. During the credit boom, prices soared in America and Australia, where supply was unconstrained…

Neil Monnery’s Safe as Houses is one of the few sane books on housing economics. It points out that German house prices have actually fallen over half a century of steady economic boom. The reason is that just 43 per cent of Germans own their own homes, and rarely do so under the age of 40. The British figure hovers between 60 and 80 per cent. Germans are content to rent, a more efficient way of allocating living space. They invest their life savings elsewhere, much to the benefit of their economy.

The curse of British housing, as another economist, Danny Dorling, has written, is not under-supply but under-occupancy. In half a century, Britons have gone from ‘needing’ 1.5 rooms each to needing 2.5 rooms each. This is partly caused by tax inducements to use houses as pension funds, partly by low property taxes and high stamp duty on transfers. Britain, Dorling says, has plenty of houses. It just uses them inefficiently, though high prices are now at last shifting the market back to renting.

Footnote: One of the very few politicians to show an interest in household size is Liberal Democrat peer Dick Newby: “[He] said that more than half of people aged over 55 years old had spare rooms and suggested the Government should help them to move house. Over half of over-60s – equal to around eight million people – are interested in moving, research has shown”.