Sunday, 6 January 2008
The UK housing shortage - busting the myth
There is an almost universial belief that the UK suffers from a shortage of houses. This belief, or more accurately myth, is invariably thrown out as the ultimate justification for the unprecedented growth of property prices over the last ten years.
It is not true - there are plenty of homes in the UK. In fact, there are millions of houses - about 28 million to be a little more precise.
Recent trends in rents provides some of the most compelling evidence refuting the housing shortage myth. Over the last ten years, rents have increased by an average of 2.9 percent. This is fractionally above the CPI inflation rate, and and somewhat lower than the RPI inflation rate. It is also about the same rate of growth as wages.
If there was a general shortage of houses in the UK, then rents should have increased sharply. That is what supply and demand is all about. If something is in short supply, then the price - i.e. rents - should increase. As the chart above clearly demonstrates, that simply has not happened.
Rather than suffering from a chronic shortage of homes, the UK has suffered from a terrible speculative bubble. People have been misled into thinking that houses are in short supply and they have speculated on continuing price appreciation. The banks have gone along with this scam and provided the financing for this madness. The result has been an explosion in household indebtedness.
Bubbles can not continue for ever, and the UK housing bubble has only recently begun to evaporate. Interestingly, 2007 was the first year in a decade where rents and house prices increased by the same rate.
(For those interested in the data souces, rents are from the ONS CPI rental index - the ONS code is D7CE. Data for 2007 is for the 12 month increase up to November. The Halifax provided the housing index. Again, data for 2007 is the 12 month increase up to November.)