Why do we keep saying there is a housing shortage?

The real housing crisis is an affordability crisis, so why do we keep saying there is a housing shortage?

When we talk about a housing crisis, we always talk about a crisis of under-supply. We all know the mantra: we need to build more homes.

We know the argument – we are not building enough homes to keep up with household growth and house-building is at its lowest point since before the First World War (and we started saying that back in the 1990s, so this has been going on for a while).

But there is another side to this story. There are more than enough homes to go around, according to Census data, and enough surplus housing space to give everyone in the country their own bedroom, and we now seem to be building more homes than the official projections suggest are actually needed.

Why did we ever think the problem was an under-supply of new homes?

The answer is that a lack of supply is the stock answer of classical economists to problems of affordability.

Our current fetish with housing numbers dates back to the report commissioned by government by economist Kate Barker in 2004. 

Barker pointed to rising house prices and a worsening crisis of affordability. She argued that this was evidence of a failure of supply and demand in the housing market. She diagnosed the problem as an under-supply of housing.

What was Barker’s evidence of under-supply? It was the fact that housing was getting unaffordable. 

So, Kate Barker’s report starts with what seems to me to be a category error – the problem was seen as an effect. In the classical liberal economic tradition in an ideal market supply increases to meet demand and prices fall. So, if prices are too high, the problem must be too little supply.

But there are many other causes of a crisis of affordability in housing – not just a shortage of supply. Writing in 2016, housing academic Nick Gallent points to a problem with the classical view of supply and demand in the housing market.

Gallent argues that demand for housing and need for housing are two separate things. The market is not dysfunctional because of a lack of supply, but rather because it cannot provide housing as an investment and as a basic need at the same time. If it supplies demand for an investment asset, it needs to maintain high house prices. If it is supposed to provide for housing need, it needs to lower prices, but then it can’t meet demand.

We used to have a solution for this. It was called council housing.

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