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Why the housing shortage won't stop the crash
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Why a housing shortage won't stop the crash
One of the most contentious issues in the debate on a house price crash is that of whether there is a shortage of homes and if there is will it stop a crash from occurring. Let's examine these issues one by one.
Is there a shortage of homes?
The facts:
- The number of new homes built in 2002 was the lowest ever since World War 2
- The population is at it's highest level ever.
- The number of people versus homes in the UK has fallen slightly
- However the fall in people vs homes has been more than offset by rapid rise of the number of single occupant homes and single parent homes.
Will it stop a crash
No, there were home shortages during both the previous crashes so it's pretty clear undersupply does not shore up prices.
In fact the evidence is it makes them worse. Even the government acknowledges this. Its own report into the housing market concludes that undersupply makes booms and crashes worst.
The Barker Review of Housing Supply examined the supply/demand situation in great detail and concluded that the lack of housing supply and reactiveness to market conditions were the main contributor to the volatility of the UK's housing market (i.e. why are booms and crashes are so much worse than other countries). It also concluded this is why we have the highest long term house price inflation compared to other European countries.
Some people have mistakenly claimed the Barker Review says undersupply is the only cause of the current house price boom and believe it is a government whitewash. This does it a great disservice and we'd suggest these people actually read the report.
Why do people think undersupply will mean house prices only every go up?
Because they are confusing the short term nature of house prices during the house price cycle, i.e. boom/crash, with the long term trend of house prices which is upward.
Long term effects
The most prominent effects the housing shortage has is on long term inflation (i.e. house price inflation when you factor out the house price cycle boom and busts).
The UK has the highest average of all it's neighbours 2.3% versus a European average of 1.1%.
This will only get worse if the housing shortage remains.
Summary
A housing shortage doesn't stop crashes, in fact it makes them worse.
Housing shortages do influence long term inflation trends once you factor out boom's and crashes.