Why are politicians ignoring what housing markets are telling them?
Credit: Klaus Ohlenschlger/DPA/PA Images   

In the paranoiac’s dictionary, ‘consensus’ is a synonym of ‘conspiracy’.

However, that doesn’t mean that one shouldn’t question widely agreed assumptions – especially when they provide a foundation for government policy. It’s worth checking just how broad a basis of evidence the whole edifice rests upon.

Via Medium, there’s a great example from Ian Mulheirn, who scrutinises the widely accepted narrative for why we’re not building enough new houses. His focus is on the UK – England in particular – where he says that estimates for the number of new houses needed each year depend on projections of average household size.

Mulheirn explains why these projections are so important:

“The origins of the UK’s mythical housing shortage lie in the methodology used to forecast household formation. Only at census time do we really know how many households there are in England, and in between censuses we have to rely on forecasts based on past trends in the size of households of different types, combined with population estimates. The household size projection is the crucial element: the smaller the average household, the more homes are needed for any given population.”

Unfortunately, the UK Government keeps getting these projections wrong – assuming a continued decline in household size that has long since halted:

“During the last third of the 20th century, household size shrank rapidly. DCLG implicitly assumes that this trend is set to continue, basing their projections on census data starting in 1971.”

But the evidence we have suggests that English households — in keeping with most other developed OECD countries — stopped shrinking around the start of this century.

The UK Government does not deny that this has happened. It’s in the 2011 census data, so they could hardly do otherwise. However, according to Mulheirn, the Government is projecting a resumption of the downward trend.

Might this be a reasonable assumption? Could it be that the upward spiral in house prices has had an inhibitory – but temporary – effect on the formation of new households? Perhaps, but as Mulheirn points out, the halt in the trend towards smaller households goes far beyond the UK and its peculiarly overheated housing market.

In any case, one can hardly expect the decline in household sizes to go on for ever. There are natural limits – like the proportion of couples who actually want to split up or the average age at which young people want to leave the family home.

I’ve met some of the government analysts responsible for these projections. They are perceptive and conscientious professionals and I’d be surprised if they hadn’t recommended reforms to the methodology.

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The problem, however, is that the current approach, though statistically flawed, is politically convenient. After all, the argument that we need to match the number of new houses to the number of new families is seemingly unanswerable. Of course, what the politicians really want to do is restrain house prices – but that’s not something they’d dare say to the millions of voters who already own their homes.

Another reason why the politicians don’t want to get into a discussion about house prices, is that they reveal where housing is in greatest demand – i.e. usually where the most dynamic local economies are. It would make sense to allow as many people as possible to move to where they can use their talents most productively and hence earn the most money, but that would require the Government to ease key restrictions on new development – another politically contentious issue. It might even require the Government to have an explicit spatial policy – i.e. a geographically-literate economic policy.

Whether in Britain, America or elsewhere in the western world, housing markets are deeply dysfunctional. But there is one way in which they work exactly as markets ought to: through the price mechanism they provide a remarkably rich and detailed source of data about exactly where new housing capacity is most needed.

This is about as close to the economic concept of perfect information as we’re likely to get; unfortunately our politicians seem determined to ignore it.