Debate Magazine

Economic Myths - High House Prices Are Down to Lack of Supply

Posted on the 29 January 2018 by Markwadsworth @Mark_Wadsworth

Further to Bayard's post of the weekend, another way of illustrating the (lack of) effect of additional supply on house prices is to look at the new build premium.
Countrywide do a detailed quarterly report on the topic:
Last year the average new home sold for 17% more than a comparable second-hand one, up from 15% a decade ago. This figure is an average from the thousands of developments up and down the country, each of which is competing for buyers in their local market. Breaking down this headline number shows that the level of premium developers are able to achieve depends on what, how and where they’ve been building....
So in fact, averages prices go up when more homes are built. Aha, cry the supply numpties, that's because they aren't building enough.
Here's the impact of subsidies on house and ultimately land prices:
Developments offering Help to Buy tend to achieve above average premiums.
Moving on...
Over the last decade large housebuilders have steadily increased their share of the homes built in the UK. These developers tend to focus on big sites, generally places where they can build at least 50 homes to achieve economies of scale. Last year these sorts of sites delivered just shy of half the properties built.
Smaller developments, those with less than 10 homes, carry the largest premiums. Over the last five years, homes in developments of less than 10 properties have carried an average premium of 20%, over and above comparable homes in the surrounding area. This compares to a 16% premium for sites with between 20 and 49 homes and a 14% premium for sites containing 100 homes or more.
The premiums achieved by small developments tend to be driven by their rarity. Often they’re refurbishments of old buildings or bespoke designs for small plots. In other cases they bring something to a neighbourhood which hadn’t previously been available – like flats in a town of terraces.
Small developments also avoid competition from later phases of the same scheme. Builders of bigger schemes often find their new homes competing with almost identical ones being sold by sellers who bought into the first phase.

This fits in with the reasonable assumption that the 'large housebuilders' are profit maximisers and just dribble new homes on to the market in such a way as to maximise the prices they can achieve and/or minimise costs.
Continuing with their incorrect assumption, the right wingers blame the planning system and the lefties blame the land bankers. For once, the lefties are closer to the mark. Either way, you can give them as much planning permission as you want, there's no reason to assume that they would build more - why would they?
And how do you force them to build more if they don't want to? Questions which the numpties don't even address, except I suppose the more hard-left who say "We can't leave it to the land bankers, the way forward is more council housing", which again is the better answer to a question which we shouldn't be asking.
Then there's a nod to agglomeration benefits, which knocks the argument that "they should build even more to get prices down" on the head:
However in the cheapest parts of towns and cities, often where its flats rather than houses being built, big developments tend to carry larger premiums than smaller ones. Here the ability of a large development to regenerate a neighbourhood by providing better quality housing and new infrastructure outweighs the effects of competition from the scheme itself.
They then calculate that on average, the new build premium erodes down to nothing over the next ten years.
That's only a relative value though. It is not so much that the price of new homes falls over the next ten years. They go up and the selling prices of existing homes in the same area increase even faster. It's partly because of agglomeration benefits and partly because people want to buy in 'up and coming' areas, so they build more in 'up and coming areas' so inevitably, overall, prices in the areas where they are/were building will go up. Maybe faster than they would have done, maybe slower...  but probably faster.
The report provides more evidence for this.
The average person who sold their new home for the first time in 2017 had bought it brand new from the developer seven years ago.
They then provide a map and table showing that about 80% of these sellers made a profit, and the average profit is still huge, not that much less than house prices generally.

Back to Featured Articles on Logo Paperblog