Expensive homes with weak supply

For experts, UK housing policy failures exacerbate inequality and adversely affect productivity and growth, as well as increase the risk of financial instability.

Article by Schrder, an asset management company Occupancy of owners increased from 33% in 1939 to 70% in 2001, but decreased to 64% in 2018-2019.

In addition, from 1997 to 2017, the proportion of older people The number of people aged 35 to 44 living in rental housing in the UK rose from 9 to 28 per cent.

According to the Financial Times, an increase in the price of a home can help explain the reduction in homeowners’ occupation because it increases the amount of deposits needed to make a purchase.

But what is the explanation for this price increase? One real explanation is the fall in real interest rates, especially since it explains the low increase in rents and not in prices, but this is not the full explanation.

First, the fall in real interest rates is a global phenomenon. However, system data Economic Cooperation and Development (OECD) shows that house prices in the UK have risen by 93% between 2000 and 2020, but only by 29% in Germany.

Second, real interest rates for the whole of England fell, but the rate of house prices in London rose from 1.2 in 2005 to 1.7 in 2019, relative to the country average, and thus, the particular problem in the UK was, in London and the Southeast, the weakness of supply.

If the number of completed homes from 2000 to 2019 averaged from 1950 to 1970, a further 2.9 million homes would have been completed, most of them in areas under high economic pressure, Says the newspaper of British descent.

This should have increased the supply of housing in the country by 13% and changed the dynamics of housing prices. Those who argue that the supply shortfall is inappropriate cite evidence that rent has risen less than the price of a home.

But in more energetic areas like London, rents will increase rapidly, with discounted rental value So house prices will rise, especially under lower real interest rates. Therefore, it is not surprising that prices increase compared to rent.

In short, the fall in real interest rates has made these long-term real assets more valuable, especially in high-growth areas. This should have increased the distribution a lot. This did not happen because the supply response to the price was too weak. It is a market failure.

In this sense, it is assumed that there are many embarrassments. For one thing, anything that significantly lowers house prices can put a large number of households in negative equity and create a large amount of bad debt.

Another is that it is difficult to expand supply where demand is strong. The argument is that this will allow more people to live where jobs are available.

The argument against this is that it may strengthen the already existing wide imbalances between the regions. Undoubtedly, high supply in high pressure areas should be part of the solution.

The UK authorities need to be more concerned about ensuring the availability of land and its development. Serious land tax reform is also important for the UK.