It is very unlikely that the perennial wish of housing commentators to simply ‘build more houses’ will make any meaningful dent in prices.
Many people think this is counter-intuitive, so I’ll try to explain why it’s not.
It’s because flows of supply are too small relative to the stock of housing to much affect prices. There are 23.7 million homes in England. In the 12 months to June, only 153,330 were completed. This means that even if annual housebuilding were to treble, we’d see a less than 2% annual increase in the housing stock.
There’s an analogy here with government bonds. Even before QE, government borrowing did not much affect bond prices. This was simply because the new supply of bonds was generally small relative to the existing stock.
It’s the same with houses. Houses are an asset, and the price of an asset depends upon the willingness and ability of people to hold the stock of it. Changes to the flow of the asset are generally too small to have much effect. For this reason, many economists have traditionally modeled house prices as if only demand matters; see for example this (pdf) or this (pdf).
If supply doesn’t affect prices, what does? Lots of things: demographics (pdf), incomes, debt levels, expected incomes and the availability of credit. My chart shows another influence: real interest rates. The lower these are, the cheaper is the cost of credit and hence the higher are house prices. (Or if you want to be fancier, lower interest rates mean a higher net present value of future housing services and hence a higher house price.)
Obviously, some possibilities would do more overall harm than good. A recession would cut house prices, but it’s a lousy idea. I suspect the same would be true of tougher immigration controls. And other policies to help buyers would do no good because they’d be offset by price increases. Help to Buy, for example, seems to have pushed up prices. And I’d expect cuts to stamp duty to have a similar effect; yes, there’s a strong case for reforming property taxation but we shouldn’t hope it’ll much help first-time buyers.
That said, there are some demand-side policies that might reduce house prices, such as restrictions on owning second homes or housing as investments – in short, reversing the financialization of housing. Instinctively, I’m not over-keen on these; they would be abridgements of freedom. As ways of reducing house prices, however, they might be worth considering.