Tuesday, Oct 13, 2015

Graduate share a bedroom scheme gathers pace

Guardian: Soaring London house prices sucking cash out of economy, study says

Soaring London house prices are costing the economy more than £1bn a year and preventing the creation of thousands of jobs, as individuals plough money into buying and renting instead of spending their cash elsewhere, a report has claimed.

Posted by jack c @ 11:31 AM (5414 views)
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28 Comments

1. sibley's b'stard child said...

So essentially what HPC has been saying for a decade. Do keep up at the back, please. Of course it's not a London-centric issue; it would have been far more accurate to say 'UK house prices suck cash out of the economy'. Still, nice to see the mainstream press finally get to the nub of the problem in that 'affordability' is a red herring; more that inflated prices are a drag on everything else.

Tuesday, October 13, 2015 12:19PM Report Comment
 

2. sibley's b'stard child said...

Oh, and congrats on your daughter's new home Jack.

Tuesday, October 13, 2015 12:20PM Report Comment
 

3. jack c said...

Hi Sib's thanks for your kind words - early days on the property purchase but if it goes through I think all things considered my Daughter will have a very nice place to live and at a reasonable price.

Hope all is well at your end.

Tuesday, October 13, 2015 01:08PM Report Comment
 

4. hpwatcher said...

It's a stunning heading.

The malignant tumor that is UK housing is sucking EVERYTHING out of the economy; the UK economy continues to die.

Tuesday, October 13, 2015 03:32PM Report Comment
 

5. icarus said...

Or, more generally, the malignant tumour that is asset-price and debt ramping is sucking life out of the world economy.

Tuesday, October 13, 2015 09:59PM Report Comment
 

6. libertas said...

What total tosh. It is actually sucking in VAST amounts of capital in house building, as anybody will see working in the industry and walking around London. Almost a crane on every corner.

Wednesday, October 14, 2015 12:14AM Report Comment
 

7. icarus said...

@6 - And where do you think that capital is coming from?

Wednesday, October 14, 2015 08:25AM Report Comment
 

8. mombers said...

@6 yes, housebuilding is at an all time high and is running at such a pace so that everyone can have a 5 bedroom house at non-monopoly prices...

Wednesday, October 14, 2015 09:11AM Report Comment
 

9. mombers said...

@6 you just need to look at a graph of housebuilding vs prices to see that higher prices don't lead to more being built.

Wednesday, October 14, 2015 09:14AM Report Comment
 

10. judgandury said...

@9 actually you just have to know what you are talking about. Data analysis is a learned skill. When you know how to - or why you have to- separate out government house building, it becomes clear that the private sector tends to respond to increasing prices by building more. It's just that the UK private sector are incapable of building sufficient housing and they always have been. I could tell you why but that's another topic.

For several decades the government was a big player in the house building business and then they stopped. Most people blame Thatcher for this but it actually came to a grinding halt under Blair. Thatcher built an average of 41,343 council houses per year and Blair built 562 council houses per year. Thatchers house building was itself far less than previous governments, so its a toss up whether you blame Thatcher or Blair. Either way, our housing crisis started building up under those two governments. The private sector invariably builds more when prices ramp up but they are hopelessly unable and unwilling to build remotely enough houses to bring the market back to equilibrium

Wednesday, October 14, 2015 10:13AM Report Comment
 

11. mombers said...

@10 https://www.gov.uk/government/uploads/system/uploads/attachment_data/file/428601/House_Building_Release_-_Mar_Qtr_2015.pdf
page 6 - this shows private sector vs public sector building, the data I presume you're talking about? I can't see any evidence of the private sector responding to higher prices by building more. Surely more houses would be being built now than ever before, instead of being well below its peak in the late 60s? Simple economic theory is that higher prices bring on more supply if the supply is elastic. Housing clearly isn't very elastic at all and therefore different solutions are needed to prevent people getting completely screwed over like they are being now. This is not a free market and the private sector will never serve our housing needs efficiently. Much like water - we would never dream of saying that an unregulated water market would work. Competition is just about impossible, you have to have water and sewerage and very few people can supply their own so you can't opt out of the market. It would be physically impossible to have multiple providers with parallel pipes, so instead we have one monopoly provider in each area and their profits are regulated to cost + a normal profit margin. People having to buy or rent a house in London for several multiples of its cost of production is a utter failure of the government to fulfil one its core (in my opinion) responsibilities to protect people from monopolies.
Agreed that it's not a Tory vs Labour issue - both have been utterly terrible at protecting us from having the worst value housing in the world...

Wednesday, October 14, 2015 11:08AM Report Comment
 

12. libertas said...

Icarus, the capital is coming from all around the world, durrrr.

And mombers, apparently you want housebuilding, but not what the market will demand, and I doubt you would accept tax hikes to fund council house building. What exactly do you stand for?

By the way, the private sector could build as many houses as we needed back in the 1970s, 1960's, etc. when we had far more planning permissions than today, by a large factor. What changed? Huge taxes on development, with them monkey hammered now by Community Infrastructure Levy. 20% VAT on improvements to existing stock is also devastating to those who want development that will build on areas of character, because full demolition provides a 20% discount. Very high employer contributions then also destroy the cost basis of employing unskilled labour at a decent rate.

Furthermore, the huge taxes brought on by LABOUR during the 1970s destroyed our productive capacity, hollowing out our industrial base, which yes, is used to build houses.

Wednesday, October 14, 2015 11:10AM Report Comment
 

13. mombers said...

@12 no need to raise taxes to build council housing. Simply take the 10bn+ paid in housing benefit and use it to build houses that cost the taxpayer approximately a third of what private landlords charge - done. This will bring aggregate rents down in the private sector, leaving money for people to spend on real economic activity. Not sure what you mean by 'what the market will demand'? The market is clearly demanding an enormous amount of housebuilding - just look at the vast difference between build cost, and the black market that exists due to artificial constraints, e.g. planning as you rightly point out. Unfortunately, building more houses will not reduce prices, so what exactly can we do to reduce the amount of money that gets sucked out of the economy by rents and mortgages?

Wednesday, October 14, 2015 11:23AM Report Comment
 

14. judgandury said...

@11 There is a link to a chart right now on the forums. It shows private sector building rates (for this purpose ignore the transaction line) . Building rates slowly ramp up along with prices until the house price crash of the late 80s to mid 90s when building rates duly fell along with prices. Then building rates generally ramp up along with prices until the recent financial crisis when both building rates and prices again fall. Then when prices began to rise again, so did building rates. It's pretty conclusive.

http://www.savills.co.uk/research_articles/141280/187750-0

Wednesday, October 14, 2015 11:25AM Report Comment
 

15. mombers said...

@14 it's all fine and well to say that when prices are increasing at a fair clip, a few more houses get built, and when there's a dip, fewer get built. The long term pattern is for the gap between selling prices and cost to build increasing and increasing. This indicates that in the medium term, rising prices do not result in more supply coming on board to bring prices back down to build cost + a normal profit margin, to use the economic term for what exists in a competitive market. If supply responded to prices, we would be in a situation where all houses in the country cost the same - build cost + a normal profit. A house does not cost double to build in London than elsewhere. My flat's insured value is 147k. If god forbid it burnt down, builders from far and wide could tender to rebuild it, competing the price down in a way that is not possible when a poor sod is looking to rent or buy rather than build.

Wednesday, October 14, 2015 11:40AM Report Comment
 

16. judgandury said...

"Unfortunately, building more houses will not reduce price"

???? That sentence needs finishing

Here's what actually happens. When there is a housing shortage, new building does not at first reduce the price. However if house building is on a large enough scale and is persistent enough, the backlog shortage eventually gets satisfied and current demand met. At that point prices will fall. It's so obvious that it shouldn't need explaining. Unfortunately the current backlog shortage is too large to be met this decade, so all increased house building will achieve is a moderating of house price growth. Obviously other factors could moderate house price growth but that is again another topic

Wednesday, October 14, 2015 11:45AM Report Comment
 

17. judgandury said...

"@14 it's all fine and well to say that when prices are increasing at a fair clip, a few more houses get built, and when there's a dip, fewer get built"

You said the opposite and I showed you a graph that proved you wrong. That's all

Wednesday, October 14, 2015 11:47AM Report Comment
 

18. mombers said...

@16 again, all you need to do to find evidence of this is look at where the most housing is - high density cities. Is this cheaper than where the least housing is, i.e. rural areas? No. You would have to build so many houses that you completely overwhelm the population for prices to drop. This is what was done in Ireland, Spain, the US, etc. But to address high house prices in London by building more isn't going to work. A house next door to me was knocked down and 7 flats were built. My paper 'profit' on my flat hasn't been dented, unfortunately as this means that my very real loss of not being able to afford to move to a now even more expensive next step up the 'ladder'. Building more in London might slightly reduce prices in other parts of the country as people would leave there to come to where the action is.

Here's an article to back this up: http://www.ft.com/cms/s/0/f5b7cb3a-0b91-11e5-994d-00144feabdc0.html#axzz3oXgn46U7

More anecdotal evidence - near me in Mill Hill, hundreds of new houses have been built. Yet the area keeps getting less and less affordable. The economics of housing is very, very different due to the nature of supply and demand, and the agglomeration effects of more people living closer together and being able to produce more output for landlords and housesellers to pilfer.

Wednesday, October 14, 2015 11:58AM Report Comment
 

19. mombers said...

@17 Prices up several hundred percent over the last few decades, private sector housebuilding down in absolute numbers and down even more as a percentage of total stock. The ups and downs are just noise in the irrefutable trend. How much higher do prices have to go until the private sector starts building the same absolute number of homes that it did in 1987?

Wednesday, October 14, 2015 12:04PM Report Comment
 

20. icarus said...

@12 libertas - anything that isn't from Mars is "from around the world", What kind of an answer is that? And it certainly doesn't negate what I posted @5 or what hpw posted @4. Words like 'total tosh' and 'durrr' don't help your case, whatever that may be.

Wednesday, October 14, 2015 12:14PM Report Comment
 

21. mombers said...

@20 I would also say that capital coming in from around the world is not a good thing even if it was going into pure housebuilding instead of buying existing houses and land. When the flow of this capital from around the world reverses or dries up, it wreaks havoc on the financial system, e.g. bank failures, etc. We've plenty of local capital, it's just tied up in unproductive housing.

Wednesday, October 14, 2015 12:18PM Report Comment
 

22. icarus said...

@21 - yes, capital sloshing around the world, pumping up asset prices to dump those assets at a profit (pump and dump), has wreaked havoc from Latin America to China over the last few years. But hey, where's the problem as long as the money ends up here and speculators pump up property markets in London/Enfield and parts of the US?

Wednesday, October 14, 2015 12:38PM Report Comment
 

23. judgandury said...

@18 and @19

You: "1 plus 1 = 3"

Me: "No, 1 plus 1 =2 and here's a screen shot of a calculator that shows it"

You: "Ah yes but marmalade is better than jam"



"you just need to look at a graph of housebuilding vs prices to see that higher prices don't lead to more being built"

Well I did look at a graph, showed the graph and you were wrong.

"You would have to build so many houses that you completely overwhelm the population for prices to drop"

That's an unsubstantiated, unquantified comment that I suspect stems from some sort of dogma rather than rational thought. When a market with a chronic shortage becomes a balanced market then prices tend to fall from their shortage induced levels. It's economics 101. Don't confuse yourself with credit fuelled house building crazes in simpler places with no prior shortages. Even if we went completely crazy with house building, it would be many years before we reached an equilibrium, so your somewhat hysterical comment about overwhelming the population is a red herring

Wednesday, October 14, 2015 01:38PM Report Comment
 

24. libertas said...

"no need to raise taxes to build council housing. Simply take the 10bn+ paid in housing benefit and use it to build houses that cost the taxpayer approximately a third of what private landlords charge - done."

Very good idea, though I am not convinced that 10bn would bring enough housing, and it would need to be phased in, but if leveraged with private investment and treasury borrowing, that 10bn could end up yielding 100bn of house building. But that is what new rail infrastructure can achieve. Why do it directly, when putting half that amount of that annual sum into HS2, which should drive many billions into new houses in Birmingham, whilst transferring demand from land strapped London.

Wednesday, October 14, 2015 02:30PM Report Comment
 

25. mombers said...

@23, you said that higher prices encouraged more building by the private sector. For this to be true, over the long term, higher prices would lead to more houses being built. We have the highest prices in history, way above build cost. Private sector house building remains at a lower level than it was when prices were a fraction of what they are now. As I said, there is noise in the graph, i.e. prices spike, a small increase occurs and vice versa but I'm not sure how you can possibly think that prices multiplying yet production decreasing over the long term is evidence that higher prices lead to more houses being built. But I suspect that we won't agree here ever... Higher prices = more house building, no there is no evidence in that graph apart from a few isolated cases that are dwarfed by the slow downward trend of private sector building and the soul destroying upward march of prices. If prices are higher than ever, why oh why are more houses not being built than ever? That's what I'd like answered. If an increase in x (price) leads to an increase in y (houses built) why has x quadrupled and y gone down over the long term? Let's talk about the whole graph. One swallow doesn't make a summer.
I think you misunderstood my point about how many houses you would need to build in London to bring prices down though. I am referring to the ghost estates in Ireland, Spain, etc. There was no demand for houses there, they were built speculatively without a market signal of high prices and lo and behold they are worth nothing because there was no demand. Build houses where prices are already high and the demand increases along with the supply as agglomeration effects lead to more economic activity, more and jobs and hence more money to chance the supply of housing. Again, explain prices being highest where the supply, i.e. density, is highest. How on earth can your economics 101 explain that? Maybe it's a random, worldwide one off thing and the next time density increases the trend will somehow reverse?

Wednesday, October 14, 2015 02:42PM Report Comment
 

26. judgandury said...

"you said that higher prices encouraged more building by the private sector".

No, you said the opposite and I proved that it was essentially an incorrect statement. That's all. Incidentally, I also stretched out the time frame and you were still wrong.

You are getting confused by extraneous factors. Planning permissions and land availability gradually became more scarce over the decades. That obviously led to a overall trend of reduced private building. However if you want to see if building follows price increases in isolation, you have to filter out that extraneous trend (because it is caused by another causal factor - scarcity of permissions etc). One way of doing that is to increase the resolution of individual episodes of rising and falling markets. When the resolution is large enough it effectively removes the extraneous trend from view and when we do that, we get what you saw on that chart. The overall loops may have been been decreasing because of a gradually decreasing supply of permissions and land but the synchronised building/price loops are clearly still intact.

Wednesday, October 14, 2015 03:15PM Report Comment
 

27. mombers said...

OK here's your quote:

"The private sector invariably builds more when prices ramp up but they are hopelessly unable and unwilling to build remotely enough houses to bring the market back to equilibrium"

Not sure how this does not mean price goes up, number of houses built goes up? Surely this means that more houses should be springing up now than ever before? Simple question: if high prices lead to more building, why are we not seeing record building? There are so many theories as to why this irrefutably hasn't happened but the fact that housebuilding is lower now than when prices were much lower. A spike in prices might lead to a small rise in building but the general trend has been irrefutably down. The highest number of houses built by the private sector was around 1970 when prices were a tiny fraction of what they are now.

I think you mean in a perfect world, with no planning constraints, no differences in locations, no preference for people to be near jobs, etc, economics 101 rules would apply and any increase in price would lead to a competitor entering and building a home in a different location that could compete down the price of the one whose price had gone up. We don't live in that world and even in areas with very lax planning laws, e.g. Houston, houses are more expensive in higher density areas near the centre of town.

Please clarify stretching out the timeframe - how are dramatically lower prices in 1970 congruent with record numbers of houses being built?

Wednesday, October 14, 2015 03:47PM Report Comment
 

28. judgandury said...

"Not sure how this does not mean price goes up, number of houses built goes up? Surely this means that more houses should be springing up now than ever before?"

You either did not read my post or did not come close to understanding it. Read the comment again about extraneous factors, decreasing loops and data filtering. Start by focusing on the bit about the decades long gradually decreasing supply of permissions and building land.

In any case, the chart link I provided clearly showed that house building started increasing again after the last crisis in lock step with prices starting to increase. Obviously it also shows that building reduced when prices fell in aftermath of the crisis. The same pattern can clearly be seen before and after the late 1980s to early 90s crisis and in almost every episode of since the last war. Obviously more houses are not "springing up ... than ever before" because as explained to you variously, permissions etc are constrained. It really is simple stuff.

To be honest, I am struggling to fathom how someone could not have noticed or understood that people get encouraged to supply stuff when they see that prices are increasing. It's really basic stuff and it applies to almost everything (as per the charts,including housing). What I'm telling you is not much more controversial that night follows day. I think the problem here might be that you are trying to view everything through a very narrow dogma designed prism. Unfortunately, not everything can be made to fit such a narrow field of vision. It wasn't long ago that you lot got yourself into a pickle claiming that there was no increase in population and no need for more house building. A surplus of housing was even claimed at one stage. I think that clownish position was a consequence of peering through the same narrow dogma prism and there were all sorts of tantrums when the evidence and incredulity built up to such an extent that the bizarre stance had to be dropped like an old tu*rd and conveniently forgotten. You now all go on about the urgent need for new housing which is at least something.

Wednesday, October 14, 2015 04:50PM Report Comment
 

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