Monday, 19 March 2007

More media lies about the UK housing market

Across the world, the media has played a central role in housing bubbles. That nefarious role has taken various forms. Sometimes, the media has encouraged an unhealthy and obsessive interest in home improvements. Other times, it has fermented the dangerous idea that ordinary individuals can become rich through speculation. Then there are occasions when the media has frightened people through alarmist stories about forever increasing home prices and the danger of being shut out of the market forever.

Today, the UK based guardian newspaper provided a classic example of media inspired fear-mongering. It carried an article with a screaming headline that “Britain likely to need 5 million new homes by 2027”. Five million sounds like a very large number. Well, it is; the current housing stock in the UK is about 22 million, so 5 million represents about 23 percent of the total stock.

Since the UK residential building industry, due to excessive planning regulations, has built virtually nothing since the 1980s, the idea that housing demand will continue remorselessly for the next twenty years is a shocking one. Higher demand with only a limited increase in supply can only mean one thing – even higher prices in a housing market that is probably the most overvalued in the world.

So how realistic is the claim that the UK will need additional 23 percent new homes in the next 20 years? Well, when you need the truth, there is one source that we can all look to for reliable information; the CIA world fact book. What does it tell us about UK demographics? Something very simple – the UK has a demographic problem. The population is ageing, fertility is going down, and over the medium term – i.e. the next twenty years – the UK population will fall.

So, lets have a look at a few demographic numbers. Currently, the median age in the UK is 40 years. Therefore, the UK is a middle-aged country; a point make forcefully by the chart above, which shows the age distribution for both males and females. Do you see the bulge around 40? That is the baby-boomers who are now looking into the abyss of old age and decrepitude.
The middle age bulge is largely due to extremely low female fertility. On average, a woman in the UK produces about 1.7 children. As a rule of thumb, a society needs an average of 2.1 children per woman to maintain the current level of population. More worryingly , the UK fertility rate is falling fast, as the median age for women increases.

The only thing that is keeping the UK population marginally growing is migration. Currently, the UK is growing at around 0.2 percent a year. However, the ratio of deaths relative to births in the UK will start to increase. Unless, the UK is prepared to accept literally millions of additional migrants, the population will fall. Given the rise of right wing anti-immigration parties in the UK, it seems safe to think that the electorate is in no mood to accept that solution to keeping housing demand high.

Nevertheless, let us assume for a moment that the current rate of population continues what the population of the UK will be in 2027. Roughly speaking, the UK will have about 63.5 million people, or approximately an additional 5.5 percent; in other words, nothing like a 23 percent population increase suggested by the guardian.

Perhaps, the additional housing demand will come from a break-up of marriage and more people living alone. Unfortunately, that has already happened. The UK has one of the highest divorce rates in the world. Currently, the average occupancy of a home in the UK is just 2.7. At the risk of simplification, the UK is a nation of property obsessed, middle-aged single people, who occasionally might share a house with someone.

Over the medium term, as the population ages further, housing demand will start to decrease. It will fall because there will be fewer people. It will fall because people in Britain have failed to make adequate pension provisions. It will fall as soon as people understand that this housing bubble has conned them into paying more for their property than it is worth.

However, here is the strangest thing about the guardian article. It cites a government forecast - from the Office of National Statistics - as the basis of the article. Here is the link for this particular government agency. See if you can find this alarmist report.

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