Spectator: Bad News: No Housing Shortage

[BTLlivingthedream]

It's always struck me that supply and demand is entirely variable to the extent that demand is underpinned by 'enabling conditions'. In other words, demand will continue whilst credit can underpin it and allow it to 'actualise'. That's why it is so important to distinguish between the genuine demand of families, FTB, trader-uppers or downsizers and the rampant speculative demand that has so warped our housing market in recent years.

Prof Mile's predicted a housing crash that was around 18 months away in Jan 07. He also argued that around 40-50% of housing 'demand' was speculative and very susceptible to sentiment. I wonder how credit tightening, the fragility in debt markets and the steady bearish drumbeat of the UK press will play out over the next 6 months...we shall see.

----------------------

http://www.spectator.co.uk/the-magazine/bu...-shortage.thtml

Bad news: no housing shortage

More bad news: no housing shortage

Ross Clark

While all eyes were on the crash of Northern Rock last week, something even scarier was happening. Two of Britain’s many house price indices — there were eight competing in a crowded market last time I counted — reminded us that property prices can fall as well as rise. The Royal Institution of Chartered Surveyors reported that a net balance of 1.8 per cent of its members say house prices fell in August. Then Rightmove, the property website, reported that asking prices in England and Wales had fallen by an average of 2.6 per cent.

If you have just bought a job lot of buy-to-let apartments in Docklands on the never-never, no doubt this is worrying news. But not half so worrying as the figures I have had my eyes on. If you really want an idea of what lies ahead for Britain’s property market, it is auction results that you should watch: in particular the prices being fetched by the growing number of repossessed properties.

Take a look at this: a two-bedroom apartment in a luxury waterfront block in Ipswich, sold in April for £279,950, then repossessed and auctioned in July for just £140,000. Or a flat in a mansion block in Croydon, sold for £185,000 in April 2005 and auctioned as a repossession in July for £132,500. A dozen flats in Colchester, all selling for £100,000 less than the £250,000 paid for them in spring 2006. There are many more of these sales to come: according to the RICS, 45,000 properties are likely to be repossessed next year. Where do they fit in with house price indices produced by the likes of Halifax and Nationwide? They don’t. The main indices are based on mortgage approvals; most auctioned properties, by contrast, sell for cash, so are outside the indices.

Until last week, British property investors were blithely unconcerned by the sub-prime mortgage crisis in the US. In spite of predictions that two million US homeowners could lose their homes, there has been a firm belief that such a situation could never occur in Britain. Our lenders are not so irresponsible as to throw loans at toothless hicks with no income, to allow them to trade up from a trailer to a three-bedroom condo, are they? Actually, British lenders have been pushing sub-prime mortgages for several years; it’s just that in this country they are called ‘self-certification’ mortgages and ‘buy-to-let’ mortgages, neither of which require the borrower to prove he has sufficient income to pay his debt — or any income at all.With Northern Rock in intensive care, overenthusiastic home-buyers are going to lose one of their favourite sources of credit, famous for its mortgage advances of 130 per cent of the value of a property and loans of 5.9 times a buyer’s income. But a lot of property investors will still comfort themselves with the argument that has been employed throughout Britain’s 10-year property boom: how can prices ever fall when there’s such a shortage of property? Like the fad for investing in champagne as a result of a dire shortage of champagne at the millennium, there was a nugget of reason behind this argument when it was first advanced — although the property boom long ago spread outside the crowded south-east and reached parts of the country where there are row upon row of empty inner-city terraces. But the tales of a national housing shortage are based on out-of-date figures. In 2001/02 the construction of new homes fell to 141,651, frequently quoted at the time as the lowest since the 1920s. And not just that: it was far short of the 223,000 new households which government planners told us would be formed every year between 2001 and 2016. Result: prices had to rise as buyers, desperate to put a roof over their heads, outbid each other for the few homes available.

The government’s predictions for the growth in the number of households have been proved wrong, however. Between 2001 and 2006, according to the Office of National Statistics, the number of households in England and Wales grew from 23.8 million to 24.2 million — an average increase of 80,000 a year, far short of the 223,000 which planners at the Department for Communities and Local Government have been predicting. Their mistake was to fail to appreciate that high property prices act as a brake on household creation: the more expensive houses become, the greater the incentive for children to remain living with their parents and for warring couples to remain together.

Meanwhile, the rate of housebuilding has quietly recovered: in 2006/07, 173,369 new homes were completed. As more are repossessed and their unhappy occupants are forced to go back to living with mum and dad — and if all those Polish plumbers start to drift home, no longer required as London’s construction boom comes to an end — I foresee a frequent question that will be asked in response to the thousands of empty properties up for auction: whatever happened to the great British housing shortage?

[RichM]

Ross Clark is very good, and truly deserving of his house price crash hero status.

Dammit I can't believe I missed it - of course high property prices put people off creating new households! That is so obvious when you think about it.

[Harry Sacks]

The government’s predictions for the growth in the number of households have been proved wrong, however. Between 2001 and 2006, according to the Office of National Statistics, the number of households in England and Wales grew from 23.8 million to 24.2 million — an average increase of 80,000 a year, far short of the 223,000 which planners at the Department for Communities and Local Government have been predicting. Their mistake was to fail to appreciate that high property prices act as a brake on household creation: the more expensive houses become, the greater the incentive for children to remain living with their parents and for warring couples to remain together.

Meanwhile, the rate of housebuilding has quietly recovered: in 2006/07, 173,369 new homes were completed. As more are repossessed and their unhappy occupants are forced to go back to living with mum and dad — and if all those Polish plumbers start to drift home, no longer required as London’s construction boom comes to an end — I foresee a frequent question that will be asked in response to the thousands of empty properties up for auction: whatever happened to the great British housing shortage?

Bang!

[sossij]

Great find!

That's cheered me up no end!

[Moo]

...and if all those Polish plumbers start to drift home, no longer required as London’s construction boom comes to an end...

Minor point I know, but I'm rather glad it's been picked up on. When jobs get harder to come by, and if Sterling drops significantly against the Euro, the "economic" bit of economic migrant is likely to reverse fairly fast.

[Confounded]

It's always struck me that supply and demand is entirely variable to the extent that demand is underpinned by 'enabling conditions'. In other words, demand will continue whilst credit can underpin it and allow it to 'actualise'. That's why it is so important to distinguish between the genuine demand of families, FTB, trader-uppers or downsizers and the rampant speculative demand that has so warped our housing market in recent years.

Prof Mile's predicted a housing crash that was around 18 months away in Jan 07. He also argued that around 40-50% of housing 'demand' was speculative and very susceptible to sentiment. I wonder how credit tightening, the fragility in debt markets and the steady bearish drumbeat of the UK press will play out over the next 6 months...we shall see.

----------------------

http://www.spectator.co.uk/the-magazine/bu...-shortage.thtml

Bad news: no housing shortage

More bad news: no housing shortage

I foresee a frequent question that will be asked in response to the thousands of empty properties up for auction: whatever happened to the great British housing shortage?

Good find, people are going to get quite annoyed when this all shakes out because all they have heard from experts for the last 10 years is we have a lack of supply. Oh well, it may teach people to do more research on the subject before the commit to a lifetime of mortgage repayments.

I have been traveling all round the country over the summer for various reason and I have deliberately be looking for new development in the different towns I pass. To me it seems as if a significant amount of building have been built in the last 10 years. If someone had been telling me we have had a construction boom over the last 10 years I would struggle to argue with them!

[EssexFTB]

Does this take into account Immigration??

If not then its not worth the paper its written on is it!

[OnlyMe]

Minor point I know, but I'm rather glad it's been picked up on. When jobs get harder to come by, and if Sterling drops significantly against the Euro, the "economic" bit of economic migrant is likely to reverse fairly fast.

Not only that but the number of existing UK residents wanting to leave is stacking up, peolple really have had a gt full of the way this country and ecoomy is run.

There will be a rush for the exits if they perceive that a future falling sterling/markets/housing will not provide them with the necessary to make this happen (those retitring in particular, but also those with savings and equity).

[Fergie]

Their mistake was to fail to appreciate that high property prices act as a brake on household creation: the more expensive houses become, the greater the incentive for children to remain living with their parents and for warring couples to remain together.

This is exactly the point the "growing household" argument misses. And the supply/demand argument is stupidly skewed by HPI too. Back in the late 1990s, when I was working in retail, loads of my colleagues were buying. They were buying because there was a plentiful supply of starter flats at around £25-30,000. It was slightly more expensive to buy than rent a room by the time you factored in taxes, electricity, repairs etc. But it was cheaper than renting a similar flat - by a long way.

Now, there is vitrually no supply of these flats because, as prices have been rising so fast, no one wants to sell. Those who bought at £25,000 have watched it rise to £125,000 in ten years. The flats are all still there, they're just no longer coming onto the market at anything like the rate they were because they're worth holding onto instead now.

So you have two problems. One is that supply and demand is skewed because obviously everyone now wants one (or two or three) assets that are rising in price like that. But at the same time, the price is now massively out of the range of young people who work in retail. The choice was never between renting a one-bedroom flat or buying one 10 years ago - it was between renting a room in a shared flat, or taking the risks and responsibilities involved in buying to have your own little pad. That situation is long gone now and those who would have bought £30,000 flats to live in their own are with parents or sharing again. Hence, high prices seriously reduces the chance for people to create single households.

As soon as the high HPI stops, that skewing between supply and demand is likely to stop and at that point, it'll be interesting to see what happens.

[yaakov]

no one has ever provided an explaination as to how it is possible to have rapidly rising property prices but stable rents. If there was a housing shortage you would also expect rising rents.

This would appear to imply that a large part of the rising property prices is a speculative bubble.

You wouldn't expect Polish plumbers or other recent immigrants to be buying property but to be renting. The housing shortage explaination simply doesn't make sense to me.

Edited September 20, 2007 by JimmyMac

[council dweller]

It's always struck me that supply and demand is entirely variable to the extent that demand is underpinned by 'enabling conditions'. In other words, demand will continue whilst credit can underpin it and allow it to 'actualise'. That's why it is so important to distinguish between the genuine demand of families, FTB, trader-uppers or downsizers and the rampant speculative demand that has so warped our housing market in recent years.

Prof Mile's predicted a housing crash that was around 18 months away in Jan 07. He also argued that around 40-50% of housing 'demand' was speculative and very susceptible to sentiment. I wonder how credit tightening, the fragility in debt markets and the steady bearish drumbeat of the UK press will play out over the next 6 months...we shall see.

----------------------

http://www.spectator.co.uk/the-magazine/bu...-shortage.thtml

Bad news: no housing shortage

More bad news: no housing shortage

Ross Clark

While all eyes were on the crash of Northern Rock last week, something even scarier was happening. Two of Britain’s many house price indices — there were eight competing in a crowded market last time I counted — reminded us that property prices can fall as well as rise. The Royal Institution of Chartered Surveyors reported that a net balance of 1.8 per cent of its members say house prices fell in August. Then Rightmove, the property website, reported that asking prices in England and Wales had fallen by an average of 2.6 per cent.

Thanks BTL livingthedream.

I don't often use the 'W' word ...but WOW! It seems we've all been livingthelie!

Just 80,000 household formations per year! How could the government get it

so, so wrong? I've often wondered about their figures, I guess that they found

ones that suited them.

No housing shortage! Shout it from the rooftops!

Logically , a net increase of 80,000 would mean a population increase of 200,000 if

each new household contains 2.5 persons on average ....

[Confounded]

This is exactly the point the "growing household" argument misses. And the supply/demand argument is stupidly skewed by HPI too. Back in the late 1990s, when I was working in retail, loads of my colleagues were buying. They were buying because there was a plentiful supply of starter flats at around £25-30,000. It was slightly more expensive to buy than rent a room by the time you factored in taxes, electricity, repairs etc. But it was cheaper than renting a similar flat - by a long way.

Now, there is vitrually no supply of these flats because, as prices have been rising so fast, no one wants to sell. Those who bought at £25,000 have watched it rise to £125,000 in ten years. The flats are all still there, they're just no longer coming onto the market at anything like the rate they were because they're worth holding onto instead now.

So you have two problems. One is that supply and demand is skewed because obviously everyone now wants one (or two or three) assets that are rising in price like that.

This is the key point about the stae of the housing market. When we sold our house the buyers kept their old place as a buy to let. It makes no sense to sell this smaller properties because they are seen as a great investment for retirement. You can't blame people for thinking like that, we even considered it when we wanted to upsize until we realised the mess the whole housing market was in and decided to rent instead. This has had a big contribution to the shortage of supply to buy, not of homes for everyone to live in.

In the US there were stories of people buying one house moving all their stuff across and then get round to selling their old house when the dust settles and the previous house had risen in the mean time. They were very casual about it and it surely has to be a sign of something being wrong with the market.

The house we are renting is a friends who had to relocate with work for 2 years. They elected to keep the house empty rather than sell it, when you take into count selling fees, buying again above the 3% stamp duty threshold and the rises that have happened in the mean time it makes sense. It should not make sense and will not in the very near future.

[flapjack]

Great find - this should finally lay the 'housing shortage' argument to rest. So year on year there is a housing surplus which should in fact tend to push prices down. But due to BTL and speculative demand - demand has increased dramatically over this ten year period - thereby maintaining the housing 'boom'.

But this demand is now decreasing due to high house prices and changing economic conditions. Add to this the yearly increase in supply and there will shortly be a massive gap between supply and demand. This can only equalise if price are adjusted downwards. Prices will have to fall by quite a bit to stabilise the market. Oh, and there must be lots of empty properties out there - just as we suspected. Should be an interesting Autumn or Fall - as they call it in US.

[maxdiver]

I have been ranting about HPI and why you should buy for the last 10 years - and why you should sell for 3 of those.

(I'm only 25 by the way so this has been something that i have spent a lot of time thinking about.)

Original reasons I saw for an increase in the demand for flats was the demographic changes.

Reasons for the crash were the general bubble conditions of a glut in supply, falling demand and a schock to the system.

If the numbers that we have been given have been wrong/fudged/made-up then we could be in for a great deal of trouble.

The person who mentioned RENTS makes a good point - if there is so much demand (part. from EEuropeans) then why are rents (nationally) static.

[stormymonday_2011]

Does this take into account Immigration??

If not then its not worth the paper its written on is it!

Well as not even the government knows the full truth about immigration I doubt whether he can really be slagged off on that subject. Not all immigrants are likely to be forming households as some are transitory. For example, seasonal agricultural workers living in caravans etc in the Fens are not likely to have much impact on house prices. By contrast Britons selling up and emigrating abroad almost certainly are adding to the supply of property available. Having seen government planning in action at close quarters over the years I would not put too much faith in their figures. Often all they seem to do is map an existing trend on a map and then project it to infinity. If we do have a serious economic recession in the UK and it turns out to be far worse than elsewhere in Europe (very likely because of our higher level of debt) then the flow of workers could reverse from West to East. In the early 1980s many British construction workers did go off to work in Germany and elsewhere just as depicted in the series Auf Wiedersehen Pet. Given the choice do you think the 'Polish plumber' of legend is going to want to sit on the dole in the UK when our building industry collapses. As he had the capability to relocate himself once in another country I suspect he can manage the same trick for a second time.

[silver surfer]

It's always struck me that supply and demand is entirely variable to the extent that demand is underpinned by 'enabling conditions'. In other words, demand will continue whilst credit can underpin it and allow it to 'actualise'. That's why it is so important to distinguish between the genuine demand of families, FTB, trader-uppers or downsizers and the rampant speculative demand that has so warped our housing market in recent years.

Using supply and demand theory to evaluate the UK housing market has always been the mark of bull fundamentalism or know nothing pop economists. The UK housing market doesn't meet several of the conditions required to make supply and demand theory relevant, would the typical vendor sell more houses if prices rose? Barrett might, but housebuilders are only a fraction of the market.

The short-run explanation for UK house prices is to be found entirely in confidence, affordability, and credit.

[right_freds_dead]

due to the pressures on family costs in another 20 years time we will have a genuine TAXPAYER shortage.

[Benedict]

Using supply and demand theory to evaluate the UK housing market has always been the mark of bull fundamentalism or know nothing pop economists. The UK housing market doesn't meet several of the conditions required to make supply and demand theory relevant, would the typical vendor sell more houses if prices rose? Barrett might, but housebuilders are only a fraction of the market.

The short-run explanation for UK house prices is to be found entirely in confidence, affordability, and credit.

It does if you look at supply and demand theory in the right way. It's not that there's an imbalance, there is always a balance and the price is what moves to bring the two into balance. Overpriced properties won't sell until the price lowers to come into balance with the demand. Affordably priced properties would sell out in an instant with vicious bidding wars if anyone offered anything at an affordable price because there'd still be sufficient demand even at much higher price.

The typical vendor doesn't sell more if prices rise, he still sells his house. But as prices rise, the price at which there is demand for what he's supplying rises.

There isn't a supply / demand imbalance, things are in balance, just at bloody ridiculous prices. But while there's enough people able and willing to raise enough cash to pick up anything that does come on the market at current prices they won't drop.

I also don't think it's the right way to look at things to talk in terms of only 80k households being created because people are living with their parents or staying in multiple rented accommodation. Those people still want to buy their own place, and are willing to pay a certain amount for that privilege. Right now the premium on owning is high enough that only 80k new households get created, drop the prices and the premium's low enough that more than 80k households will be created. The people in the market aren't dropping their prices to the level where more than 80k households are created because right now there's not enough people in the market selling for them to need to do so.

Admittedly looks like it's all changing a bit now though

[gavp]

Minor point I know, but I'm rather glad it's been picked up on. When jobs get harder to come by, and if Sterling drops significantly against the Euro, the "economic" bit of economic migrant is likely to reverse fairly fast.

Even without a crash, those EU countries that haven't opened themselves up to migration from the 'new' European countries are supposed to do so by 2009, so immigration from the East is going to be spread round a much wider area instead of being concentrated in the UK & Ireland.

[pimperne1]

Ross Clark is very good, and truly deserving of his house price crash hero status.

Dammit I can't believe I missed it - of course high property prices put people off creating new households! That is so obvious when you think about it.

The figure of new households is quite amazing. With around 275k marriages and 150k divorces in the UK each year I would have thought that this alone would have accounted for more than an 80k increase. Appreciating that there are many other factors though I have no reason to doubt the Office of National Statistics figures.

[pimperne1]

Ross Clark is very good, and truly deserving of his house price crash hero status.

Dammit I can't believe I missed it - of course high property prices put people off creating new households! That is so obvious when you think about it.

Is it possible that he has his figures wrong? Admittedly this is not from the ONS website (as I cannot find his figures there) but I think these are from Department of the Environment. "In 2001 there were just over 22 million households in England and Wales. The Government predicts this number will increase by 7 per cent (1.60 million) by 2011 and 14 per cent (3.15 million) by 2021". I know there are many experts on site so I stand to be corrected.

[Benedict]

The government’s predictions for the growth in the number of households have been proved wrong, however. Between 2001 and 2006, according to the Office of National Statistics, the number of households in England and Wales grew from 23.8 million to 24.2 million — an average increase of 80,000 a year, far short of the 223,000 which planners at the Department for Communities and Local Government have been predicting. Their mistake was to fail to appreciate that high property prices act as a brake on household creation: the more expensive houses become, the greater the incentive for children to remain living with their parents and for warring couples to remain together.

I'm having difficulty finding any of these figures btw. http://www.statistics.gov.uk/census2001/pr...ies/housing.asp has the 2001 census but that has 22.5m households for 2001. If that 24.2m household figure for 2006 is right then that's a 1.7m household increase over 5 years, or a 340k increase in the number of households, far in excess of the 223k predicted.

I've found an interesting paper on it though, numbers are estimates using a particular calculation method for England only.

Dwellings and household accounting with the values in paragraphs 14 to 17 produces an average increase of 175,000 households a year between 2001 and 2006, 17,000 less than the projected increase. Larger reductions in vacant dwellings or larger increases in sharing households result in a higher estimate of the increase in householdsrelative to the increase in the dwelling stock. A larger increase in second homes would have the opposite effect

Makes a lot of sense for considering how households increase beyond increases in the dwelling stock. Seems to suggest that two couples sharing is in effect two households in one dwelling . . . EDIT - or not according to something else I've found if they share a living room. Seems to be various definitions.

http://www.lse.ac.uk/collections/BSPS/pdfs/Holman_jan07.pdf Well worth a read actually, sheds a lot of light on all the number of households statistics bandied around, where they come from, what the weaknesses are, what they actually mean by a household etc.

Edited September 20, 2007 by Benedict

[Benedict]

http://www.jrf.org.uk/knowledge/findings/housing/1933.asp is interesting too.

Some highlights:

For many decades, the number of households has been growing much more quickly than the number of people. Since 1971, the number of households in Great Britain has risen 35%, from 181/2 million to 25 million in 2006. Over the same period, the population has risen just 8%, from 541/2 million to 581/2 million. These trends are forecast by the Government to continue. These very different rates of growth are due to a big rise in the number of single-adult households, particularly among those of working age.

After taking account of vacant dwellings and second homes, there appears to be a net deficit of dwellings across the South of England.

There are, however, considerable uncertainties when measuring household/dwelling balances. This is partly because of imperfections in the data, particularly important when monitoring a small difference between two very large numbers. Furthermore, any shortages will mainly result in people continuing to live with their parents or sharing with others (typically meaning that they do not count as a separate ‘household’) rather than showing up as a clear deficit of dwellings compared with households.