Debate Magazine

.. When an Insurance Company Puff Piece Makes More Sense Than an Ivory Tower Economics Professor.

Posted on the 19 October 2018 by Markwadsworth @Mark_Wadsworth

From Moneywise (emailed in by Mike W):
The actual cost of rebuilding a house only accounts for three-fifths (59%) of its market value, with the remainder based on factors such as its location, according to Direct Line.
While the cost of rebuilding the average property in the UK stands at around £114,000, according to data from the Royal Institution of Chartered Surveyors, this only accounts for 59% of its value, with the remaining 41% derived from factors such as good local amenities, transport links and schools.

Insurance companies overstate rebuild costs (to justify higher premiums) and the cost of rebuilding one individual house (effectively an infill site, with all the complications and restrictions) is far higher than the actual cost of that a house when it was built as part of a larger development. And Direct Line's table at the end showing wildly different rebuild costs in different parts of the country is clearly wrong.
But their overall point stands, a large chunk of the value of a home is "location, location, location".
Enter Josh-Ryan Collins of the UCL, with a fine article in City AM from a couple of days ago:
For those on the left, there is a lack of public housing due to decades of underinvestment by the state. For the right, the problem is excessively restrictive planning preventing the market from doing its job...
... since the turn of the century, [interest] rates have been falling. More and more loose credit has flowed in to an inherently finite supply of desirable locations, pumping up house prices at a much faster rate than incomes. As prices are driven up, so more financing is required for home purchase, creating a feedback cycle that eventually leads to a bust, as in the crisis of 2007-2008.
Rather than pushing against this feedback cycle, successive British governments have supported it by repeatedly reducing taxes on property, enabling windfall capital gains for those lucky enough to have bought at the right time, as well as fueling demand with subsidies on mortgage debt and for first-time buyers...
Policymakers and financial regulators must recognize that banks will always be able to create credit at a faster rate than new homes can be built if they are allowed to. In the lead-up to the financial crisis, there were huge construction booms in Spain and Ireland, but prices kept going up as banks poured more credit in to the system. When it finally came, the bust was actually worse than in the UK.
To break the housing-finance cycle, demand as well as supply side policies need a rethink. Fiscal and financial policy needs to do the heavy lifting here. First, regressive council tax should be abolished and replaced with a tax on the annual increase in the value of the land underneath a property.
Second, banks need to be gradually weaned off domestic property and return to their traditional model of business lending.

So far so good (except for his weird suggestion for taxing land value increases).
Finally, here is the ivory tower nonsense (emailed in by Lola):
Strangely, building more homes does reduce a housing shortage
Clearly it does. But the UK does not have a housing shortage, it has a crass misallocation of the housing that is available. I have put this to him and his ilk many a time: "There are more buildings inside the M25 than in the whole of Scotland. So why are prices so much higher inside the M25?". They never answer that.
The idea the UK has a shortage of land to build on is completely bogus
Clearly, the UK has no shortage of actual undeveloped land. But, as JRC points out, it has a limited supply of "desirable locations".
Some of the prettiest places in Britain also have some of the densest housing
This is a nod to agglomeration benefits. It is a self-reinforcing cycle, more buildings -> more people and businesses -> higher wages and amenity value -> more buildings etc. But like most Faux Lib/YIMBYs, he is actually in denial about this. He can't bring himself to admit that denser areas tend to be more expensive, so he uses the bizarre euphemism "pretty".
Tax reform will not end the shortage of housing, any more than taxing water in a drought
Price rationing is the best form of rationing, whether that's "desirable locations" or water -> Land Value Tax.
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The rest of his article is feeble and failed takedowns of JRC's much better explanation of real life. He sticks in a KLN for good measure:
Good luck imposing swingeing taxes not matched to cash flows on a homeowner majority.
The majority of owner-occupiers, i.e. those in work, would be paying a lot less tax if they paid tax on the value of public services at their location instead of paying taxes on earnings and output/consumption. I fail to see how a tax cut is "swingeing". So he knows fuck all about maths, that's for sure.
Even if you did, most people would still have less housing than they would like.
Quite possibly so. But every household having 'a bit less' than it would like instead of some having twice the space they need and others having only half; or pensioners in high wages areas swapping places with workers currently forced to commute long distances, has got to be an improvement.
He rounds off with this evidence-free platitude:
There are easy ways to improve the planning system that would lead to vastly better places and more homes over time.
Can we please stop blaming house builders for high house prices? They are ruthlessly exploiting high prices, not actually causing them. In their defence, they have consistently increased the supply of housing faster than population growth in any particular period (apart from 2009 to 2012).
Like any sane business, they just stick to the profit maximising level of output, which happens to be slightly faster than population growth (= approx. one new home for every one-and- a-half additional people). It is quite clear that if you give them more planning permission than this level, they will simply stockpile it. Which is why UK home builders have a decade's worth of plots with planning in reserve.
And I know that home builders do not have a formal or even informal cartel, it is just that they all do the same profit-maximisation calculations and have the same input costs, so they all make exactly the same decisions and move in tandem, as evidenced by Neal Hudson's fine chart showing that in the short term, they build one new home for each nine existing homes which are bought and sold in any year (scroll down to Fig 5 here).


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