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Robert Irving Burns

Will Increasing Supply Solve the Housing Crisis?

May 23, 2018    |   Panny Antoniou

With the government announcing plans to increase their house building target by 100,000 in the Autumn 2017 budget, we examine whether more housing will help solve the crisis.

However, relative to household income, the average rent has fallen since 2005. This has led some analysts to state that the issue with house prices is not due to a shortage of housing but as a result of other factors such as historically low interest rates. Most experts do agree that significantly cheaper credit which is also more easily available is partly to blame for the increase in house prices. Although, it is important to note that this rise in house prices has not been consistent across the whole country, more sought-after areas such as Cambridge, and Greater London have seen far more rapid price increases than properties in less desirable urban areas. A prime example of this is Barnsley which has only seen a price rise of 2% compared to a 76% price rise in Cambridge.

Indeed, prices have risen fastest in the UK’s most successful urban areas and many experts have noted that there is a risk that ordinary workers will be priced out of living near their place of work. This focus on rental values, however, does not consider other factors when analysing whether a shortage of housing is to blame for the housing crisis. Rental prices reflect supply and demand for housing than prices and neglect other factors.

For example, there has been an increase in average household size in areas with high demand for housing such as London and the South East which is indicative of suppressed household formation due to lack of supply. In addition, the number of people occupying a room in the least affordable locations has increased within the private rented sector. This is indicative of a lack of supply of housing in some of the most in demand areas.

Government projections on the issue predict that if housing stock increases by 1% then house prices would fall by around 2%. The target of 300,000 homes set by the government would only increase housing stock by a projected 1.3% meaning that the impact on overall house prices would be minimal and it would take some time for housebuilding at this rate to have a significant effect on pricing, this is significantly acute when counterbalanced with the projected growth of wages.

Between 1991 and 2016, housing stock increased by about 4.1 million, however, the deflationary income of higher supply was significantly mitigated by rising incomes in the same period which had an upward pressure on house prices. Many analysts believe that the factor which would have the biggest effect on house prices is interest rates. Historical analysis indicated that a 1% increase in interest rate would result in a 3% fall in house prices. However, it is unclear what impact this will have today due to historically low interest rates.

Our Board Director Damien Field had the following to say on the topic “We strongly believe that an increase in housing stock will have a positive impact on choice for residents which could in turn lead to a fall in house prices. However, there needs to be a significant amount of new homes being built as well as a change in interest rates for the most highly coveted areas to see a meaningful change in valuation.”

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