Will building more homes solve the housing crisis?

Do we have a housing crisis of under-supply, or a crisis of affordability?

We seem to be confusing the two things.

The current government target of building 300,000 new homes a year depends on the assumption that increasing supply will make housing more affordable.

But what is the evidence for that?

In her review of housing supply in 2004, economist Kate Barker argued that doubling the production of private-sector house building would reduce the rate at which house prices increase. However, to bring about a real fall in house prices would require so many homes to be built it would be ‘undesirable and unachievable’.

New build is only around 1 per cent of the existing housing stock so Barker explained that any change in house prices would be very slow and require very large increases in construction. If rates of private house-building were doubled, an additional 5000 households a year would be ‘priced-in’ to homeownership .

But Kate Barker explained that there would be no effect on house prices at all unless the house-building industry became more responsive to changes in demand. It was the weak response of house building to increases in demand that Barker was asked by government to investigate.

The operation of supply and demand is measured by something economists call ‘supply elasticity’. The UK housing market is relatively unresponsive to demand, and it has an elasticity of supply rating of less than 1. 

Only if the house-building industry became much faster to respond to demand – if its elasticity of supply went up from 1 to 10 – would building more homes have any impact on house prices. And the effect on house prices would not be felt until after 10 years, when they would finally start to slow.

Barker took her figures from a report by housing economist Geoffrey Meen in 1998. Meen added that the UK housebuilding industry had never achieved the necessary levels of responsiveness. He concluded that: ‘there is no necessary reason why any increase in housing demand should be met with a corresponding increase in supply.’ Instead, he expected to see any increase in house building lead to an increase in prices to ‘choke-off excess demand’.

This entry was posted in Housing. Bookmark the permalink.