August 21, 2017

When the price of an asset class hits a record high one might expect trading in those assets to be correspondingly frenetic. But, the Economist reports, Britain’s housing market – often described as ‘over-heated’ – is remarkably inactive:

“Britons are buying and selling houses less frequently than they once did. Official data suggest that the rate of residential transactions this year is set to be the lowest since 2013. The number of sales in parts of London is approaching an all-time low as home-buyers become more cautious about their personal finances.

“The post-referendum stagnation in the number of sales merely reinforces a long-term trend. Few have noticed, but in recent decades Britons have become markedly less inclined to move house…”

Unaffordable housing is bad enough already, but the reluctance – or inability – of Britons to up sticks adds a further layer of dysfunction:

“When people find it hard to offload a house or to acquire a new one, they are less likely to move to a better job or a more productive part of the country. Instead they waste time on long commutes… All this hits labour productivity, which in Britain has seen measly growth in recent years.

“Another consequence is inefficient use of the housing stock. One in three of Britain’s houses has two or more spare bedrooms. Yet overcrowding (as measured by the number of people relative to the number of bedrooms) is rising. With grandparents hogging the bigger, better properties, their children struggle to move up the housing ladder.”

Getting people into the homes that suit them best is the mother (or grandmother) of all coordination problems. For one household to move into a suitable property, the current occupants have to move out. However, that requires those people to also find a suitable property to move into… and so on and so forth. Note that this chain effect doesn’t just manifest itself in the actual process of buying and selling homes (in which a problem with one transaction can cause sales to fall through all the way down the chain), it also impacts on the decision to move in the first place. If there are so few properties for sale that it’s hard to find somewhere that satisfies basic criteria of size, location etc, then people are more likely to stay put – thus further restricting the size of the market.

New build properties have a vital role to play in easing the coordination problem. They provide homes for people to move into without relying on anyone moving out. They’re akin to the empty spaces on a shelf when you’re re-organising your stuff. Space you don’t have to free-up first makes the job much easier.

So, to get the British housing market moving, we just need to build more houses, right? Unfortunately, there’s a catch – indeed a catch-22:

“For reasons that economists do not yet understand, there is a tight correlation between the number of property transactions and the number of homes built each year (at a ratio of about 10:1)… A low rate of property transactions, therefore, leads to few houses being built.”

Whether economists understand it or not, the cause of this tight correlation is abundantly clear: the whole thing is a fix by big housing developers. Because these businesses are about speculation first and construction second, they carefully ration the release of homes from new developments so as not to ‘over supply’ (i.e. reduce prices in) the local housing market. And what do they use to gauge the level of demand in these markets? The overall level of transactions, of course!

This sets up a vicious circle: the shortage of new build impeding transactions; and the shortage of transactions impeding new build.

The way out out of this bind is equally clear – the developers’ choke-hold on new build must be broken. Freeing-up more land is not enough. Granting more planning permissions is not enough. The houses themselves must be finished and sold.

If that’s a job for government then so be it. After all, as the whole point is to get the houses on the market, the state’s role would be a temporary one.

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