Economic Theory

How to define Britain’s housing shortage away

Ian Mulheirn, the Director of Consulting at Oxford Economics and a former HM Treasury economist, has published an article arguing that high property prices are not the result of an excess of demand over supply of housing.

This surprising claim for an economist is justified primarily by a comparison between the rate of change in the stock of dwellings, and the rate of change in the number of households.

In most of England (all but the East and West Midlands), the number of dwellings is rising faster than the number of households. QED, there cannot be a shortage of dwellings in which households can be established.

But how can you tell from the statistics how many households have not been formed because houses are neither available in sufficient numbers nor affordable on typical household incomes?

Mulheirn compares only these two data sets. He does not consider a third relevant figure – the population level. Population tells a different story. From 2004 to 2016, the population of London increased by around 113,000 per year. The number of households increased by around 25,000 per year. And the number of dwellings increased by around 27,000 per year.

These figures would square if the average household size were just over 4. Unfortunately for Mulheirn’s theory, although London has the highest household size in England, and that figure is rising, it is still only around 2.5.

At that average household size, London needs over 45,000 new dwellings per year to keep pace with its increasing population. The small discrepancy between the numbers of dwellings and households is dwarfed by the large discrepancy between the number of dwellings required and the number added to the stock.

The small increases (2,000 per year) in the number of unoccupied dwellings should be compared with the total of 3,200,000 households in London. It is a drop in the ocean, and can easily be accounted for by the well-noted phenomenon of unoccupied properties bought as financial investments in a rapidly-inflating market. The 2,000 discrepancy on this account cannot account for the 20,000 discrepancy between the numbers of dwellings or households added each year and the numbers required to match the rising population at typical occupancy levels.

The 2011 census from which the average household size is drawn notes that the average occupancy levels are increasing in London, faster than in the rest of the country. That provides the easiest, indeed the only credible explanation for the discrepancy between the increases in population and dwellings.

Are we to assume that the increasing household sizes reflect changing preferences in favour of larger households, unrelated to the shortage and high cost of property? People have simply decided that they like living together in larger numbers? Or is it more likely that property prices that are unaffordable to many are making larger household sizes inevitable?

For instance, another well-noted phenomenon is the increasing age at which children are moving out of their parents’ homes. Is this simply because today’s twenty- and thirty-somethings don’t want to leave the nest? Or is it because it takes them longer to save for the deposit and/or reach the necessary earnings level to be approved for mortgages that will cover the cost of inflated London prices, even with low interest rates and rising multiples? Mulheirn’s theory requires us to believe that it is the former. Perhaps he needs to talk to more young(ish) people.

Following Mulheirn’s approach, demand can never exceed supply. The amount of goods bought can never exceed the amount of goods offered on the market. If demand is quantified by the amount bought and supply by the amount offered, demand cannot exceed supply. In fact, as there will always be some spoilage and transactional friction, supply must always exceed demand, by this definition. Rising prices can never be a function of excess demand over supply, because excess demand cannot exist. If an earthquake destroyed half of London, we would probably still not have a housing shortage under Mulheirn’s definition.

“Ce qu’on voit et ce qu’on ne voit pas”. What Mulheirn does not see is the transactions that would have happened had prices or availability been different. The fact that 25,000 households are formed each year does not tell us that only 25,000 families want to form households, but that only 25,000 families can afford to form households given the availability and cost of housing. That it is just over half the household-formation rate that one would expect for the rate of population growth tells us that there is indeed a shortage of housing. Anyone familiar with aspiring homeowners’ real-world experiences rather than abstract and partial data sets would not think to dispute that reality.

This is not to deny Mulheirn’s point that monetary policy has played an important role in property-price inflation. But it reasserts the fundamental role of supply and demand in pricing. The excess of demand over supply created the upwards pressure on pricing. The artificially-low interest rates elevated the level to which that pressure could drive prices. In a world of more-normal interest rates, but facing the same disparity between properties available and properties required by the rising population, housing would have been equally unaffordable. The composition of those costs would change: you would pay less to the previous owner of the house, and more to the bank, in the form of higher interest payments. But there is no reason why the overall level of housing costs, either in absolute terms or as multiples of income, would have been any lower.



Bruno Prior is a trustee of the Institute of Economic Affairs and a Director of Summerleaze Ltd, which is involved in the construction materials, property, waste management and energy sectors. For most of his thirty years with the company, Bruno's main focus has been renewable energy, such as the generation of electricity from landfill gas, and the supply of wood pellets for heating.

3 thoughts on “How to define Britain’s housing shortage away”

  1. Posted 22/10/2017 at 18:24 | Permalink

    Wonderful work Bruno! Particularly like the methodological take down.

    Liberalising land use law ought to be the government’s priority. Instead, having erected barriers to private development, they claim that a “market failure” requires them to launch a massive new programme of state home building.

  2. Posted 25/10/2017 at 19:53 | Permalink

    Pull the other one mate, it’s got bells on. I bet you agree with Greenspan and Bernanke that there’s no such things as bubbles too.

    You talk about the excess of demand over supply of housing. But if you’re such a strong believer in demand and supply arguments, what about the demand and supply of credit? People borrow money to buy houses yet you don’t see the fundamental link between the price of that borrowed money and the amount they can afford to spend on a house? (we can both agree that ‘demand’ for ‘property’ is effectively inexhaustible)

    You’re arguing that property prices are fundamentally driven by the balance of population / households & the amount of housing stock.

    So how would you explain the collapse in US, Irish, or Spanish property prices post 2008? Did the number of households collapse? Did housing stock magically disappear?

    You put a latin quote in there which to be honest I couldn’t be bothered looking up on google translate. But I doubt that singular quote in an archaic language covered the massive holes in your threadbare argument.

  3. Posted 08/05/2020 at 01:50 | Permalink

    T problem here is that it assumes housing is a good and therefore normal laws of supply and demand apply. This is flawed because homes are not simply goods but assets. Moreover, the author says that the only explanation for young people not wanting to move is because of affordability (as if that is the only possible explanation). That is undoubtedly part of it but if you have fewer young people getting married or forming long-term relationships then that could also be a factor not simply affordability of housing – for eg. you may be able to afford to buy if you had a spouse. Or it is a simple cost-benefit decision to stay at home if you live in the capital because you may prefer saving up than spending on rent (even though in theory it is perfectly feasible to do so). That does not prove, however, that a lack of supply is the cause.

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