Why are British house prices still so high, even in the wake of the worst financial crisis for generations? Housing bulls would have you believe it’s down to a shortage of property. After all, if there’s a physical shortage of houses, and a growing population, then prices are bound to stay high unless a huge number of new houses are built fast. Given our planning laws and generally conservative attitude towards development, that seems unlikely. So it’s a great sales pitch for property.
The trouble is, it’s not true. One of the most interesting titbits from the 2011 census was highlighted this week by Andrew Lilico on the ConservativeHome blog. As Lilico notes, between 1981 and the 1991 census, the number of surplus ‘dwellings’ (properties) compared to households (one person or group of people living together) dwindled as fewer houses were built. Further estimates in the late 1990s suggested the situation had worsened.
In fact there seemed to be a significant shortage of ‘dwellings’ in London and the southeast – in other words, two or more ‘household’ units were cramming into one dwelling. Around the same time, the property bubble kicked off. “Thus was born the notion that there was a ‘housing shortage’.”
Yet the 2001 census – “the most accurate ever conducted at that point” – revealed there were plenty of extra houses. In many regions the surplus was back to 1981 levels. The number-crunchers in the 1990s had simply over-estimated the size of the population, due to flawed assumptions about immigration to and from EU countries, and the shunting of asylum seekers around Britain (which led to double counting), among other things. The 2011 figures just confirmed this. In almost every area (including London) there was an even bigger surplus of property than in 2001.
You can argue that children are staying with parents for longer, so household formation has fallen. But, as we’ve said for years, the real problem with the housing market is not a lack of property. It’s low interest rates. Low rates mean few forced sellers, so sellers can afford to hold out for whatever price they think they need in order to trade up or downsize in comfort. But weak banks (which is why rates are low in the first place) mean only a few buyers have the necessary means to secure a mortgage.
So the pool of both willing sellers and able buyers has shrunk, which is why transactions have halved since the financial crisis. In turn, those who can’t afford to buy, but want their own house, end up renting instead – which is why just 64% of households owned their own house in 2011, compared to 68% in 2001.
There’s nothing wrong with that, though for tenancy to become a genuine long-term option in Britain, the problem of security of tenure must be addressed. But if you’d rather we stuck with the whole ‘property-owning democracy’ dream, the solution isn’t more houses – it’s higher interest rates.