Two weeks ago, Tim Gurner, an Australian property developer, caused a wave of social media outrage. Gurner had suggested that the reason why so many young people cannot afford to buy a home is that they spend too much money on fancy stuff – he specifically mentioned ‘smashed avocado’ and ‘four coffees’ – rather than saving for a deposit.

During social media witch hunts, I normally instinctively side with the witches. They are often right, and even when they are not, there is something repulsive about the mob psychology and the mass virtue-signalling that is on display on those occasions. Gurner, however, was just plain wrong. The problem with his comments is not that they were ‘insensitive’ or ‘out of touch’, but that they represent bad economics, at least insofar as the British housing market is concerned.[1]

Gurner’s critics pointed out that deposits in the UK have reached levels which are just not realistically attainable for a lot of people, even if they live very frugally. That is correct. The average deposit for first-time buyers in the UK is now over £37,000, and in London, it is almost £88,000. Meanwhile, the median annual gross salary for full-time employees is about £28,000, or £35,000 in London. The median rent for a one-bedroom flat is over £7,000 per year in the East of England, over £8,000 in the South East, and over £15,000 in London. You do the maths.

But that’s not even the main problem. Let’s suppose all private renters, who wanted to get on the housing ladder, adopted a lifestyle more ascetic than that of a Tibetan monk. Let’s suppose they save every penny they don’t need for physical survival towards their deposit. Would that deliver a nation of homeowners?

It wouldn’t. Or rather, if only a handful of individuals adopted this strategy, it would work for that handful of individuals. But if everybody did it, it would not work for everybody.

In terms of its impact on the market for owner-occupied housing, a higher savings rate among potential homebuyers would have the same effect as rising incomes, falling interest rates, immigration or a mortgage subsidy programme: it would shift the demand curve to the right. And in a market where supply is largely fixed, an increase in demand only leads to an increase in price, not quantity.

Unfortunately, the British housing market is such a market. Between 1995 and 2007, house prices increased two and a half fold, over and above the rate of inflation, and yet house building rates remained almost flat. Due to tight planning constraints and well-organised ‘Nimby’ resistance to development, housing supply in the UK is almost completely unresponsive to changes in price.

In a sense, Gurner’s logic is the flipside of the logic behind the government’s Help To Buy programme, under which the state underwrites part of the mortgage default risk, thus making it less risky for banks to approve mortgages with a high loan-to-value ratio. The government’s version sounds nicer, it uses a language of help and support, while Gurner’s adopts a more Tebbit-like stop-munching-avocado-toast-and-get-on-yer-bike tone. But both try to solve a supply-side problem through changes on the demand side. And that is why neither can work.

Imagine a popular rock star can, for whatever reason, only give one concert per year, and they cannot find a venue which can accommodate more than 1,000 fans. Let’s say that the market-clearing price which corresponds to a volume of 1,000 tickets is £200. Let’s also assume that there are armies of fans who would have been willing, and able, to pay a fair amount, but just not that much. This means that many fans will be disappointed.

Our current government would probably launch a ‘Help To Rock’ programme, a guaranteed, subsidised low-interest loan for fans who cannot quite get on the ‘ticket ladder’ on their own. Tim Gurner would tell them to stop stuffing themselves with avocado and coffee, and save money for a ticket instead. Both approaches would lead to the same result. They would help some fans to get a ticket, namely those who qualify for the support programme, or those who follow Gurner’s advice. But since the concert venue has not got any bigger, this must necessarily be a zero-sum game, in which these new ticketholders are crowding somebody else out of the market by pushing up the ticket price.

If it is true that young people spend obscene amounts of money on avocado toast and coffee, I am rather glad that they do. Our housing market resembles a game of musical chairs, with a very low chair-to-player ratio, in which many players are set up to lose. And if they are set up to lose anyway, it is a good thing if they do not take the game too seriously.

 

---

[1] I don’t know whether Gurner actually did refer to the British housing market, but his comments were interpreted that way, and in any case, the Australian situation is not that different from the British situation.