On cutting house prices

Ian Mulheirn, echoing Kate Barker, writes:

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).

This isn’t to say that increasing housing supply is a bad idea. It’s not at all. It’s just that it isn’t a magic bullet for solving the problem of affordability.

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.)

All this raises a puzzle: if high house prices are due to high demand, and if they are a problem (as I think they are on balance), what can be done to help young people buy them?

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.  

Comments

[SpinningHugo]

Time.

It takes a long time for the increase in supply to impact much on price. A much longer time than the lifetime of any government. So, governments don't see it as a priority and don't do it.

2% is not much over a year, but 2% per annum is a big deal over 25 years.

So no, increasing supply is not a short term magic bullet. But long term?

[Luis Enrique]

Have you read D2 on this?

https://thelongandshort.org/growth/rent-uk-housing-crisis

policy conclusion: give tenants more rights so housing becomes less like an asset to be bought and sold at will

and this moment of clarity tweet is good:

https://thelongandshort.org/growth/rent-uk-housing-crisis

I am very fond of my target zero nominal house price growth idea, but nobody else seems to be:

https://medium.com/@CarterPaddy/my-radical-centre-8f621023b1b0

[Blissex]

«It’s because flows of supply are too small relative to the stock of housing to much affect prices.»

I am disappointed in our blogger because this one is a ridiculously simplistic argument: the amount of houses traded every year is also "too small relative to the stock of housing to much affect prices", but of course it does, because what matters is the balance between the small percentage offered for sale and the small percentage demanded for purchase. Most people live in their properties and don't sell them every year; it is the the people who do who create the housing market.

Therefore even a small increase in house building would greatly change the balance between houses offered for sale and houses demanded for purchase.

[Blissex]

«reversing the financialization of housing.»

This is the real point, and the vital detail is property equity extraction, not just level of mortgage payments. I'll try to explain something that very few people seem to understand:

* There is indeed a huge stock of land, but most land is not traded.
* A lot of land is quite cheap outside the south-east and London because it is far from areas with plenty of jobs and infrastructure.
* Amounts sold and bought every year are pretty small.
* However consider a street of terrace houses say in Guildford: if 1 house of 20 was bought for £200,000 and sold for £400,000 10 years later, *all* 20 houses on the street now have a valuation of £400,000, so the seller of the house has a cash capital gain of £200,000 but all other 19 owners also have got a nominal capital gain of £200,000.
* That is of course ridiculous: if all 20 houses had been put up for sale at the same time they would not have been given a valuation of £400,000 but far lower.
* However, *as far as lenders are concerned*, the valuation as *collateral* of all 20 houses, including the ones that were not sold, has become £400,000.
* Therefore they will be ready to lend an extra £200,000 to each of the other 19 proprietors, who can then cash-in their virtual capital gain *without actually selling* their property. Some who might have sold their property hoping to get £400,000 will instead remortgage it without putting it on the market and depressing prices with extra supply.

The really important bit is the last: cashing in virtual capital gains without selling. This means that supply is strangled, and lots of poor widows live in comfortable luxury in big empty mansions, from consuming their virtual equity.

This gives rise to what I call the "debt-collateral spiral": more debt fuels higher big prices, and higher bid prices collateralize higher levels of debt, creating a fantastic spiral.

Increasing supply breaks the spiral, because in order to cash in new builds they actually have to be sold.

Everybody in the BoE, Treasury, building industry, understands that very well; J Stiglitz described the debt-collateral spiral a few years ago, and the first descriptions go back at least as far as I Fisher and the "The Great Crash 1929". Balance sheet recessions almost invariably are the result of the end of a debt-collateral spiral, when the spiral implodes.

Whether the spiral is based on land as collateral or shares as collateral.
As soon as an asset class can be traded on margin it surges in valuation, and when the leverage can increase over time the valuations explode.

[Blissex]

This is so fantastically backwards that it seems quite delusional to me:

«It takes a long time for the increase in supply to impact much on price. A much longer time than the lifetime of any government.»

I reckon instead that the effect, given the small volume of the active property markets, would be quite rapid and within the limit of 1-2 terms of government.

«So, governments don't see it as a priority and don't do it.»

And that's why governments don't do it: because the goal of "governments" is much bigger much faster house prices in the south-east and London and an increase in new builds would crash prices too fast. In the past several decades every time house prices have fallen in the south-east and London there has been a change of government, and only when there has been a fall in house prices.
Destruction of the unions, smashing of the industries of the north, generalized deindustrialization, reduction of company pensions to a third, Iraq madness, PFI corruption, offshoring, immigration, cancerous growth of parasitic finance, crapification of the NHS, none of those have been fatal. Not even the collapse in real prices of property outside the south-east and London.

I guess some people even in tory governments do worry about the housing shortage, and if it had a slow effect on house prices, they would encourage a lot more house building, as the price fall would not affect their careers; but since the effect is likely to lower prices in 1-2 parliamentary terms, they don't want to destroy their own majorities.

[Blissex]

«As soon as an asset class can be traded on margin it surges in valuation»

An example that I often make is high-end smartphones, like Apple iPhones, which sell for £600-£800 of which net profit is around 40-50%. That's ridiculous in two ways:

* A 40-50% net profit is absurd for mass market electronics products.
* Apple iPhones are mass market products even if their cost £600-£800, when most consumers would have difficulty paying an unexpected bill of £400.

The answer is simple: most buyers buy Apple iPhones on margin, thanks to very high APR very high leverage debt disguised in 24-month phone plans. The number one bait is "no upfront payment" (100% margin!).

The real core competence of Apple is not electronic product design, it is selling very expensive mortgages on electronic products.

As long as it lasts, it is amazing... :-(

[Blissex]

«Increasing supply breaks the spiral, because in order to cash in new builds they actually have to be sold.»

For the avoidance of doubt: it is not the only way to break it.

[D]

Blissex,very enlightenin, please start your own blog.

Chris, be great to have a response to Blissex point about building increasing supply of houses for sale significantly.

[Blissex]

«Most people live in their properties and don't sell them every year; it is the the people who do who create the housing market»

Let me put this another way: the market for land is phenomenally illiquid and "thin". In particular it takes enormous increases in price to make offer more liquid and enormous decreases in price to make demand less liquid.

Most people won't sell their property to realize a 5% higher price, or won't buy a second property because of a 5% fall in prices. The same for 50%: most people won't choose homelessness or renting just because price has gone up by 50%, and most renters or homeless won't buy only when the price has fallen 33%.

[Luis Enrique]

'the goal of "governments" is much bigger much faster house prices in the south-east and London'

Until it looks like they will start losing votes because public opinion has changed

[Blissex]

There is a lot more in this discussion, and I am trying to be short, but... My argument is that new builds would affect the liquidity of the housing market a lot, given how illiquid and "thin" it is, and thus prices. But in some cases they won't have that effect, when hoarding new builds is possible: for example when the builders can get mortgages on new builds, and thus keep them off the market, or when houses have become "collectibles", like gold bars, as they are to many chinese buyers. Consider:

http://www.interfluidity.com/v2/168.html#comment-1618
December 27th, 2008 at 8:48 pm “PDT Devin Finbarr writes:
The basic problem with both bonds and stocks is that people have been buying them as collectibles, not as cash flows. IE - people buy a stock with the intention of selling it to someone else, not with the idea of making money off of dividends. Or people buy a share in a money market fund that holds long term bonds with the intention of selling the shares to someone else, not the intention of holding the bond to maturity.
A collectible is valuable precisely because everyone else also believes it is valuable. Thus the retail investor is being smart and rational.
The problem is that bonds and stocks should not be trading as collectibles. People should only invest based on expected cash flow.”

As to “a street of terrace houses say in Guildford” I was actually thinking of a very interesting novel about a street in London:

http://www.telegraph.co.uk/culture/books/bookreviews/9100944/Capital-by-John-Lanchester-review.html
"But the book is a more or less unimpeachably plausible portrait of one (fictional) street in Clapham, a popular south London “village” where a spacious but fairly hideous Victorian house can command a price approaching a hundred times the UK’s median annual income."
For a different take on the overwhelming importance of housing in England, Ben Judah' "This is London" also has portraits of terrace streets in London.

[Luis Enrique]

I just spotted I gave the wrong link about to Dan's tweet. here is the right one

https://twitter.com/dsquareddigest/status/915700488569606144

Blissex this is in direct disagreement with you I guess - similarly, the number of IPOs is very small relative to the stock of assets, the question is whether it's law of one price, or supply and demand, that sets house prices.

[Blissex]

«the market for land is phenomenally illiquid and "thin"»

As to that I will only hint to a "politically incorrect" aspect of the housing market: many of the people who pay for all or half of the mortgage for a nice but expensive property differ in anatomical details from those who end up owning them, and that creates a huge asymmetry in price sensitivity and in political pressure. A specific category of men get the hint immediately. :-)

[Geographyjim]

Chris, you're quite right that changing the stock of a highly durable asset takes time, but that doesn't mean it's worth doing. By analogy, cutting carbon emissions for one year only wouldn't have much of an effect on climate change, but sustained cuts definitely would.

The fact that these changes are not immediate probably is a reason why it's hard to generate enough political support for them, but that's a different argument.

The fact that investment expectations seem to be an important factor in housing demand is reason to be sceptical about effects derived from comparing stock levels to prices. Investors expect prices to continue rising in part because supply is so constrained, but if government could suddenly and credibly commit to a much higher supply those expectations would be undermined and housing would look much less attractive an investment. Again, there are clear reasons why governments can't or won't make that kind of commitment, but that's very different from saying that "supply doesn't affect prices".

[Blissex]

««reversing the financialization of housing.»
This is the real point,»
«when houses have become "collectibles"»
«Financial assets don't obey supply/demand, they obey laws-of-one-price. Financialisation is the issue here.»

I think that those points are in agreement. The main issue is financialization, where property has become a "collectible", which is what a (modern style) "financial asset" is designed to be.

The claim that I was strongly objecting to is that it is total size of the stock of housing that matters not its liquidity, and that prices are set with reference to the total quantity, not the quantity available for trading.
The same applies, in a sane market, also to stocks: there is indeed in stock analysis a big regard as to whether the stock has a small or big "float". For housing the "float" is very small, and "coeteris paribus" :-) that means a high sensitivity of price to differences in quantities actually available for trade, as expected in illiquid markets of any type.
Indeed as to IPOs, share prices at IPO are often quite sensitive to supply; many IPOs are "delayed" when advising stockbrokers detect an oversold market and greater fool fatigue. When IPO shares become collectibles of course the issue largely disappears too.

"Because financialization", but even financialization eventually responds to increased liquidity, because the way financialization works is to create a market in derivatives (mortgages etc. instead of properties), and eventually derivative market prices must converge to underlying market prices (arbitrage!).

[Ahmed]

Luis,

As Blissex noted, most people live in their homes so they are unable to respond to house price changes. They have to live somewhere.

This is not true for stocks.

[Effem]

Markets are made on the margin. Shale oil, which most attribute for oil's fall by 50%, is a mere 6% of supply. What happens on the margin can matter a lot...especially if it's considered a permanent change.

[Blissex]

«'the goal of "governments" is much bigger much faster house prices in the south-east and London'
Until it looks like they will start losing votes because public opinion has changed»

I totally agree, but my implicit point is that "governments" are not interested in theoretical long term reversions to the mean, in "equilibriums", and neither are most voters:

* "Governments" 1983-2017 have not thought "Let's give up purchasing a large chunk of votes right now because in 40-50 years time we «will start losing votes because public opinion has changed»".
* Voters in the south-east and London have not thought during 1983-2017 "let's miss on collecting huge capital gains and rents right now because in 40-50 years time we shall find that «public opinion has changed»".

The people with a "let's make hay while the sun shines" attitude do not care much about long term equilibriums, especially when they can push reversion to the mean farther away because they have control of policy.

But I guess that LuisE knows very well the difference between contingent policy and long term equilibriums, just a reminder here.

[Dave Timoney]

I think you've underplayed the impact of expected earnings on house prices. The move towards later retirement had been matched by a growth in mortage terms (about 1/3rd are now 30+ years). The increase in the state pension age may turn out have had a much greater impact on house prices than Help to Buy or other government interventions.

Also, much of the house price inflation over the last decade has been focused on London and the South East, where there is an expectation (by foreign investors, as much as anyone) of above-average wage growth. Short of a recession, a sensible policy would probably seek to address the ever-elusive rebalancing of the economy between London and the regions, though that would mean a supply-side strategy to prompt demand-side growth.

I'm also not entirely convinced by D2's argument (cited by Luis) comparing house prices to IPOs. While shares are obviously bought in part with a view to capital appreciation (i.e. as an asset), there is also a calculation of the potential for future earnings (i.e. dividends) relative to GDP or index growth, which doesn't find an obvious parallel in the utility of housing services (i.e. shelter).

[Blissex]

«The increase in the state pension age may turn out have had a much greater impact on house prices»

Traditionally a large part of the rise in house prices has been attributed to working wives, with house prices rising in proportion to the combined incomes. Some people have argued that the *entire* increase in incomes caused by massively increased workforce participation by wives has been captured by higher property prices.
I haven't looked at the numbers that way, but right now hand-wavingly I would suspect that at least 1/3 and probably 1/2 of a working wife's lifetime earnings has gone into higher house prices. Lucky of course for those couples who bought in the 70s-80s in particular.

[Blissex]

«Markets are made on the margin. Shale oil, which most attribute for oil's fall by 50%, is a mere 6% of supply.»

Pedantic note: "on the margin" is not quite the same as "influence by the float".
In the case of oil and similar commodities most of the quantities trade are on fixed-price long term contracts.
The "spot" prices for oil and gas, which is what most people think oil and gas prices are, arise from a relatively small percentage of the "market", the spot market (e.g. for "brent" "sweet texan"), and shale gas or "liquids" are are a much larger part of the spot markets than the of the mostly illiquid total supply.

[Blissex]

«While shares are obviously bought in part with a view to capital appreciation (i.e. as an asset), there is also a calculation of the potential for future earnings (i.e. dividends)»

That's part of the asset vs. collectibles divide, and relates to the long term plans by the City/Wall Street supporters, starting with Thatcher and Reagan, to turn stocks mostly into collectibles by creating share-based pension accounts.

The idea is that "buy-and-hold" into long-term "pension accounts" will reduce/has reduced the liquidity of the stock markets, and will push up valuations a lot also by turning stocks, like property already is, into a collectible class.
Because "buy-and-hold" into share based pension accounts would at first create a tremendous buying pressure on stocks prices as people would build them up, and then tie up most stocks into pension accounts *forever*, because every retiree would sell their pension-account shares only after decades and to another future retiree.
Pretty much turning much of the stock market into what the property market looks like.

[Blissex]

OK, I feel compelled (this is one of my pet peeves) to mention an interesting book that partially underpins my own understanding: "All that is solid" by D Dorling, a professor of human geography (a demographer in particular).

His main point is simple: there is not undersupply of housing in the UK, there is no direct point in expanding the supply by building more, as demonstrated by this: there are more bedrooms in the UK than people.

There no shortage of *total* housing, so he says that the problem is its distribution.

That is the problem, in my terminology, is that a lot of total housing is entirely illiquid, e.g. on the sell side the 12 bedroom London flats owned by some greek tax evader, which are kept as a collectible like a gold bar in a safebox. Also there is plenty of cheap housing in places like Stoke, which are very illiquid on the buy side.

Therefore also my contention that an increase in supply would work even if it were entirely unnecessary and a small percent of the total stock of housing: because regardless it could have a large impact on the liquid part of the housing market. Of course it would have to be an increase in those areas that are illiquid (not necessarily undersupplied) on the buy side, building a million new houses around Stoke would change not much, unfortunately.

That is in part why tory governments are very keen to disband council housing, especially that for middle class people as opposed to distressed people: the availability of council house renting as an option for would-be buyers would make the actual private housing market much more liquid; while distressed people obviously are not themselves in the private housing market.

[Luis Enrique]

Ahmed I think that's missing the point that there are sufficient number (landlords) who treat housing as an investment so prices move until rental yields match other financial assets

[A.Reader]

@Blissex - I'll second that call for a blog of your own... Twitter handle even?

[Blissex]

«hand-wavingly I would suspect that at least 1/3 and probably 1/2 of a working wife's lifetime earnings has gone into higher house prices»

The very crude numbers:

* Average earnings: £25,000 or perhaps £17,000 after tax.
* For a wife working 20 years total lifetime after tax earnings: £340,000.
* Average house price outside London: £250,000.
* What the average house price should be: £120,000.
* Price excess: around £130,000 or 38% of £340,000.

For London it is probably close to 1/2 or more of a wife's lifetime earnings.

[ZahAlienRah]

. Houses are an asset, and the price of an asset depends upon the willingness and ability of people to hold the stock of it

So, given this, would a land value tax help?

[Tynnie Todgers]

Blissex : spot on, sir.

[Blissex]

«there are sufficient number (landlords) who treat housing as an investment so prices move until rental yields match other financial assets»

Investor compare total expected returns such as rental yields plus capital gains, and capital gains have been bigger for 35 years than rental yields for property. Also investors realize that property prices are effectively government guaranteed, because so many votes depend on them.

Clever USA and UK politicians have been trying to create a "property owning democracy" to make sure that share prices also have a voter-mandated government price guarantee, e.g. this from G Norquist:

«Now if you say we’re going to smash the big corporations, 60-plus percent of voters say “That’s my retirement you’re messing with. I don’t appreciate that”. And the Democrats have spent 50 years explaining that Republicans will pollute the earth and kill baby seals to get market caps higher. And in 2002, voters said, “We’re sorry about the seals and everything but we really got to get the stock market up.”»

If a plurality or majority of voters end up demanding that governments guarantee the price security of their investments in property and shares etc., that means that fluctuations in the economy must be absorbed mostly by employment and wages becoming far more volatile; and indeed voters who are rentiers, especially pensioners, have been voting enthusiastically for parties with programmes of destroying job security and pushing down wages and social insurance.

[Blissex]

«some people even in tory governments do worry about the housing shortage,»

Examples, first Vince Cable, in his excellent book "The Storm":

«Each of the key elements in the British ‘success story’ needs to be re-examined afresh.
Starting with the last, the great housing bubble has provided an illusion of wealth and fed a lie: that housing equity is a safe form of saving, a pension, a one-way-bet. Many have been complicit in that lie: politicians, bankers, financial adviserd and journalists. There are strong pressures to perpetuate the lie, to reflate property values through state-generated mortgage loans and other protections.»

And Grant Shapps:

«"I think it is horrendous that a first-time buyer would need to be 36 on average if they do not have the support of mum and dad," said Shapps. ... I think the answer is house-price stability. We had this crazy period from 1997 to 2007 when house prices almost tripled, which is fine if you have a house." For others, the boom meant their aspirations to own faded away, he added. Shapps gave the example of a "rational" market, where property prices rose by 2%, while earnings increased by 4% – meaning a real-terms drop over time.
"This government absolutely supports peoples' aspiration to own a home. But we also believe that [property] should be primarily thought of as a place to be your home."»
«Shapps's vision might not sit comfortably with home-owners – or those who think the young should have the same opportunities to make money on property as the baby-boomers before them.»

But then he also said once in government as housing minister of the relaunch of "Right To Buy" in 2012:

«Mr Shapps said: “This Government is unashamedly on the side of hardworking families who want to aspire to owning their own council homes. ... That is why the announcement that the discounts are quadrupling in London and tripling throughout the country will be welcomed by hard pressed families everywhere.”»

[rogerh]

The laws of supply and demand do not apply to housing? Plainly houses are not the same kind of thing as potatoes, too many in the market simply will not sell. So housebuilding rides a wall of fear. Just when is too many? Is too many today the same as too many next year? All we need is a shift in population statistics and a spot of Brexit slowdown and the estate agents will be weeping into their beer.

Just what is the shortfall, is it 10,000 or 100,000 or 1 million? In what region are these shortfalls and in what price bracket or kind of housing? A back of the envelope calculation suggests we are about 200,000 short every year just through natural growth let alone immigration. Add this to a long accumulated backlog and we look to be short about 1 million. There is almost certainly a pent up demand but not at today's price.

Then there is the price and affordability. At least part of that problem is that lower down the pile wages have not risen and are not likely to. A wage/price multiple of five to ten times is not surprising if wages are piss poor. But the UK is growing a long tail of people on high incomes. Not so many people but the incomes are high and allow the BTL phenomenon. I had thought BTL was a cunning ruse by HMG to grow a fat crop of punters ready for plucking, that may yet come to pass.

We seem to be going backwards, back through a de-industrial revolution and back into the Regency period. Here we find the very wealthy run the show, the middle class scrambles and fawns 'for a position' and the lower classes live in overcrowded slums. History does not repeat but it does rhyme.

Local councils tend to fight tooth and nail to refuse housing construction, votes depend on it. More importantly, new housing means nothing but trouble, not enough transport, not enough hospital space, not enough doctor's surgeries, not enough schools. These things never follow on, the incompetence and foot dragging and plain dishonesty of central government is legendary.

Next comes the Treasury and the banks. A big slab of the banks' money is invested in housing. A cut in house prices would not suit the banks at all and therefore would not suit the Treasury and therefore not suit the government. Therefore despite honeyed words about more housing not much actually happens - surprise surprise.

I am old and rattle around in a house too big. But there are very few modest houses in civilised small communities near a doctor and a shop around here. Few to be had and next to no bungalows at all. The housing statistics show an increasing number like me. I don't want to move miles away from my friends and relatives where nobody knows me. Worse, I fear being bunged off into some 'managed accommodation' that turns out to be a rip off encouraged by the government. So we all stick it out until wooden box time.

[chris]

Thanks for all those comments. I just want to address Blissex's point that "Most people live in their properties and don't sell them every year; it is the the people who do who create the housing market."
The problem here is that non-selling is endogenous - or if you prefer, the inactive home-owners are potential sellers. If mass housebuilding did cause an incipient dip in prices, some homeowners who might otherwise have sold might stay put, believing it not to be worth selling at the lower price; remember Thaler's endowment effect tells us that people overvalue their homes anyway. In this sense, there's a degree of substitutability between the supply of new homes and of existing ones. This limits the response of prices to new builds.
Note also that you can't have mass housebuilding in the shortish term without a liberal immigration policy; there aren't many unemployed British builders. But immigration would tend to raise demand...
I don't say this to oppose housebuilding. There's a case for modernizing the housing stock (assuming that new build standards are better than they in fact are!) and for ensuring the pattern of supply better matches the pattern of demand.

[MJW]

I tend to support the view that the 'housing problem' is primarily one of dysfunctional distribution, rather than absolute shortage of physical capacity. As per Ian Mulheirn's posts, there is more than an enough stock to host the population, it may not be used efficiently or be in ideal location, but it is there.

A few weeks ago I went to a presentation by David Lunts, Exec Dir Housing & Land at GLA. I took following points away that seem pertinent to this topic (my understanding, not verbatim transcription):
- 'Buy to Leave' investment has negligible effects on the overall market, high salience, but relates to small volume of capacity.
- London, especially the central areas, is much less densely populated than comparable world cities.
- The current mix of stock is out of sync with demand.
- There is public support/unfulfilled demand for more medium to high rise development in central areas e.g. more blocks in central London not rather than suburbs.
- More big institutional finance investment in the private rented sector needed e.g. pension funds investing in large, long-term, professionally managed, secure tenancy developments. This is not small scale buy to let stuff.
- More large scale, concentrated developments in (appropriate) locations combining retail and/or transport e.g. building large blocks over supermarkets or train/tube stations. See proposals for Southwark tube as example.
- There is a genuine problem with underutilized social housing stock, but lack of incentives make it difficult to get people to move on from subsidised properties which are now too large for their needs. He wasn't explicit on this, understandably, given how touchy some are about this issue, but whilst private owners consider downsizing when kids have flown the nest, people being subsidised in social stock tend to stay put. As a result some families struggle for suitable social housing whilst others get the benefit of inefficient subsidies.

[Blissex]

«a presentation by David Lunts, Exec Dir Housing & Land at GLA»

The reported summary is a list of tory talking points, ranging from dissembling to outrageous, for example as to dissembling:

«London, especially the central areas, is much less densely populated than comparable world cities.» «e.g. building large blocks over supermarkets or train/tube stations. See proposals for Southwark tube as example.»

This is based on the astute assumption that the governments should continue to subsidize massively jobs in London and the south-east to drive land prices up, and thus "densification" is the "best" answer to that. The much better alternative would be to invest in regions where currently there is an oversupply of housing and undersupply of jobs. After all with modern high speed travel and communications physical proximity is less important, and anyhow travelling across London is so slow.

As to outrageous, this is quite awful:

«lack of incentives make it difficult to get people to move on from subsidised properties which are now too large for their needs. ... but whilst private owners consider downsizing when kids have flown the nest, people being subsidised in social stock tend to stay put»

That's quite ridiculous on both sides, because a lot of "oldies in huge empty houses" situations happen in the private sector because:

* Good final salary pensions with survivor benefits (which are largely no longer available to younger people) mean that oldies in private properties not only no longer need to fund their retirement by downsizing, but no longer even need to take lodgers as they used to do as a rule.

* Hugely government subsidized lending means that private sector owner occupiers don't need to downsize, but they can just re-mortgage and continue living in empty large houses. Tory governments have proposed and created several schemes to favour this.

As to the council housing side:

* By far and away the largest reason why “families struggle for suitable social housing” is because a lot of social housing has been sold to tory voters for 70% discounts, not because oldies continue to occupy large flats that they no longer need.

* Most of today's oldies that lived in large nice council flats and houses bought them with a 70% discount and a 100% mortgage a long time ago to cash in on a fantastic gift from the tories; those who continue to live in “subsidised properties which are now too large for their needs” are very few and usually only in areas where the housing market has an oversupply, making Right-To-Buy less attractive.

[Maurits Pino]

"What can be done to help young people buy them?" Unless you take that question literally and design policies that would badly hurt the rest of the population, the main solution is to work on the housing stock - build more, even if that takes a while. If every young family should have its own decent house or apartment, the housing stock should be adjusted, not the number of families or the standard of what amounts to a decent dwelling.

Legislation to discourage houses left empty and to discourage people owning and living in multiple houses may help a bit as well (if it's crucial that young people buy rtaher than let, then for others to own many houses should be discouraged).

[Blissex]

«The claim that I was strongly objecting to is that it is total size of the stock of housing that matters not its liquidity, and that prices are set with reference to the total quantity, not the quantity available for trading.»

«the inactive home-owners are potential sellers.»

Trying to explain again why the housing market is not very liquid: rentiers like pensioners are not tied *economically* to a particular area; they can, in principle, buy or sell anywhere.
Indeed if a pensioner sees the valuation of her house in Richmond double, she may well want to put it on the market where previously it was not, and move to Costa del Sol.
But for most people housing is tied to jobs: they buy a house in the south-east and London because they have found a job in the south-east or London.
If they see their house valuation in Woolwich double also thanks to the government's investment in CrossRail, they are less likely than a pure rentier to put it on the market, because they know they would have to buy a new one nearby, if they want to keep their job, and its price would also have doubled.

«there's a degree of substitutability between the supply of new homes and of existing ones. This limits the response of prices to new builds.»

I agree that float/market liquidity is also a function of price movements, but my point is that is still quite inelastic, so total stocks matter but not that much. But to explain hopefully better my points:

* The effect in principle works both ways: if a little new supply had little effect on prices, because prices depend on the relationship between demand and total stocks, then a little new demand would also have little effect on prices, if prices depended on relationship of demand to total stocks. But valuations have gone up massively, tripling in the 10 golden Blair years, without that big an increase in marginal demand.

* Total stock effects are also limited by geography: total stocks in Coventry and Gateshead are very unlikely to have much of an influence on the south-east and London markets.

* Because governments have been aiming to push up prices and rents, they have used several techniques to reduce the liquidity on the sell side (e.g. cheap remortgages), and to make the liquidity on the buy side higher (subsidize jobs in the south, mass immigration to the south).

So still, on balance, my reckoning is that what matters most is local liquidity, not total stocks, local liquidity is usually small, and small increases in local new builds can result in large increases in local liquidity on the demand side.

[Nicholas Shaxson]

Focus on credit and debt. And read this IMF latest:
"In the short term, an increase in the ratio of household debt is likely to boost economic growth and employment, our study finds. But in three to five years, those effects are reversed; growth is slower than it would have been otherwise, and the odds of a financial crisis increase. These effects are stronger at the higher levels of debt typical of advanced economies." https://blogs.imf.org/2017/10/03/rising-household-debt-what-it-means-for-growth-and-stability/

[Tim Hammond]

You are making the basic error of seeing the housing market as one single, national commoditised entity. It is not. And consequently neither are all house prices "high."

Building 500,000 houses in say Newcastle will have no impact whatsoever on house prices in London, but will have a significant impact on house prices in Newcastle. The total of new builds may not seem much compared to the existing stock, but if it is built in the right places, it will have a significant effect because it will be meaningful in the local market. Similarly, there are plenty of areas where it is basically impossible to decrease house prices - parts of Chelsea say, where we cannot build any more large, Georgian villas or beautiful villages where we cannot build any more Georgian rectories.

But these areas and types of houses are largely irrelevant to most first-time buyers - another subset of the market. At this point, what is needed is for the price of a small section of the market in some areas to decrease, and that can be achieved by building new homes in those areas.

[PierreCaux]

If there are 24 million homes and 25 million households the price of housing has to rise until 1 million households are persuaded to stay at home with parents, share a flat, subdivide houses into flats etc. That is what has been happening. The average age at which people leave home and set up a new household had declined for decades but has been rising since the end of the last century. Unless we build more houses and/of scale back net immigration we condemn more people to stay at home, share or subdivide while those of us who are homeowners benefit from appreciating value of our asset.

[Anglo-Saxon]

Building more houses is what breaks the bubble. Get it people. The surge in prices comes first, then comes the credit allocated for these houses and it breaks the bubble in the end.