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.)


trraderboy said...

i reckon the rent numbers are about right in your chart. rents haven't really done much since i moved to london in the late 90's, going on one of my first places back then, a central london flat, the rent on that has increased about 2.8% per annum over the last 8-9 years, or 25% total. meanwhile i estimate the price has probably just over doubled.

anyway back to the main point of your story...yes there are plenty of houses, and they just keep on building them, especially outside london. if you don't think there is enough land in the UK, just take a train or car ride across the country, or even a flight on a clear day, all you can see is grassland/farmland, and it's rapidly being built up.

Markbaldy said...

True - I bought a place back in 1996 as an investment and the rental income has gone up by a total of about 13% total.
The value of the property has almost trebled however.
Luckily I bought it cheap and have no mortgage so it is still viable as a form of income. Buy to let investors who bought in the last few years are definitely in for a rough ride however.

PhilBest said...

That is someone in the UK saying that....? Are you MAD? The UK is insanely short of houses by anyone's measure.

The thing with rentals, is that they are artificially low precisely because there are huge numbers of houses that have been bought by speculators looking for capital gains; the amount of rental these people can get is of low importance to them.

PhilBest said...

Land supply issues are absolutely crucial.

Wendell Cox and Ronald Utt: "Don't Regulate the Suburbs: America Needs a Housing Policy that Works".

It has a chapter on the UK situation.

The research of Oliver Marc Hartwich is also very instructive regarding the approach to housing development that prevented Germany and some other European nations from having a housing price bubble.

The "Demographia Institute" annual surveys are also vital.