Wednesday, 21 June 2017
Economics prof tries to write article on high UK house prices.
That’s this Financial Times article entitled “Outrage at Grenfell Tower is a chance to fix housing policy.” It’s written by Diane Coyle: economics prof at Manchester University, UK.
Her professional colleagues were getting all excited about this article on the internet yesterday. I’m less than impressed.
Essentially her explanation for high house prices is in this passage of hers: “The reason is simple: private developers, on the whole, will never want to increase housing supply enough to bring prices down. They sell too many properties on the promise of capital gains.”
Well Prof Coyle’s first year students ought to be able to spot the flaw there. In case you haven’t spotted it, the flaw is thus.
It’s blindingly obvious that “private developers, on the whole, will never want to increase housing supply enough to bring prices down.” By the same token, used car dealers don’t want the number of cars for sale to increase dramatically: that would cause the price of used cars to fall too quickly for their liking. And fruit sellers don’t want the price of fruit to fall.
But that does not explain, as Prof Coyle suggests it does, why house prices in the UK do not fall. That is, if competitive forces are working properly, they certainly ought to fall.
Moreover private developers didn’t want house prices to fall twenty or forty years ago. Thus the Coyle’s “don’t want prices to fall” theory does not explain the 200% rise in UK house prices in REAL TERMS over the last twenty years compared to Germany where prices have remained stable and even fallen slightly according to some sources. (See The Economist house price index for details.)
One of obvious explanations is that land with permission for house building sells for roughly a HUNDRED TIMES the price of agricultural land. That’s because of artificial restrictions put on such land by the bureaucracy, not because of free markets.
As this Forbes article put it in relation to the relatively low cost of housing in Germany, “A key to the story is that German municipal authorities consistently increase housing supply by releasing land for development on a regular basis.”
Incidentally, I’m not advocating a TOTAL free market in land usage. On the other hand the above mentioned hundred to one ratio is ridiculous.
To make the Coyle “don’t want prices to fall” theory stick, it has to be shown that house builders can actually ENFORCE their desire, e.g. by indulging in monopoly or cartel type practices. Indeed, the idea that builders do engage in such practices is quite popular. But Coyle doesn’t even mention that idea!
Now the first problem with that cartel idea is that it does not at least on the face of it explain the above mentioned 200% rise in real UK house prices in the last 20 years. That is, if these cartels exist, why are much more prevalent now than 20 or 40 years ago? There’s no obvious explanation.
Second, cartels if they exist, must be organised in each locality. For example a big oversupply of houses in Edinburgh will not have much influence on house prices in London, 300 miles away. Thus there must be hundreds of cartels for the cartel theory to work, as others have pointed out. Plus cartels do need to be ORGANISED. For example there are regular reports in the press about what the OPEC cartel is doing. Their meetings are perfectly open and publicised beforehand.
But in the case of the above mysterious house building cartels, we never hear of any prosecutions. I don’t remember reading about a single such cartel meeting. Strange, given that there are allegedly hundreds of them!! You’d think a few of them would slip up occasionally and send a letter or email that gets uncovered and reveals what they’re up to!
The reality I suggest, is that these mysterious cartels just don’t exist. I also suggest that the explanation for the UK’s high house prices is not “simple”, as Prof Coyle claims it is and in particular, her above mentioned “simple” explanation for the problem is badly flawed.
Unlike Prof Coyle I don’t have a “simple” explanation. But there are probably half a dozen factors which have much to do with it, e.g. the following.
1. Population increase which itself is caused largely by immigration.
2. An increase in the number of people who want to and can afford to live alone.
3. The above mentioned artificial restriction on the supply of land with permission for house building.
4. The fall in interest rates over the last 20 years.
5. Increase in the number of interest only mortgages. That increase seems to have more or less come to a halt since the crisis, but interest only mortgages certainly help explain house price increases UP TO the 2008 crisis.
6. The fact that the building industry just cannot be expanded quickly: it takes at least ten years to produce an experienced building site manager.
7. The collapse of social housing construction around 1980.
It’s not at all clear which the main culprits are here, but certainly the UK could make big inroads into high house prices by making more land available for house building.