Debate Magazine

But is It Really "the Supply, Stupid"?

Posted on the 11 October 2013 by Markwadsworth @Mark_Wadsworth
From the FTIf one wanted to increase supply [of housing], the solution is evident, but politically unthinkable: make a large quantity of land available for development and impose a swingeing site value tax, to compel building.(1)  Back in the 1970s, the UK built an average of 300,000 houses a year. (2) But between 2001 and 2011, building averaged 188,000 a year, even though the population rose by some 3.5m.(3)  It is the supply, stupid! The reason this point is not made the focus of policy is that doing so would be too unpopular and too dangerous.(4) 1) Hooray. The tax costs the actual builder nothing - the tax pushes down the upfront cost of the land by an equal and opposite amount, so the interest saved is always enough to cover the tax.  2) Yup, that was the twilight of the pre-Home-Owner-Ist era - the aim of Home-Owner-Ism being of course to reduce the supply of housing; to push up rents and prices and ultimately reduce the number of owner-occupiers.  3) Maths time: Ten years @ 188,000 = 1.88 million new homes. 3.5 million population increase ÷ 1.88 million new homes = 1.86. In other words, as long as new households are on average two or more people (and they are), then that would be enough new housing (assuming it were allocated efficiently, which it isn't, separate topic). -------------------------------------------- Fact of the matter is, house prices increase for the following reasons: a) Credit fueled speculation, pushing up prices as a multiple of rents.  And rents increase for the following reasons: b)The tendency of rents to soak up a larger share of the economy as the economy grows. c) Let's assume that new homes are built where people want to live; and most people want to live near urban centres (or within easy travel distance thereof).  Urbanisation (or specialisation or agglomeration or whatever you want to call it) itself boosts the size of the economy. For example, the population of Greater London is approximately equal to the population of Scotland and Wales combined - but because London is relatively densely populated, the total value of land and buildings in London is three or four times as much as the total value of land and buildings in Scotland and Wales.  d) Multiply up a), b) and c) and there is a massively exaggerated effect on selling prices.

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