Review of the Resolution Foundation’s “Housing Outlook” report
26 March 2024
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The Resolution Foundation has published a report entitled Housing Outlook, written by their Research Director Lindsay Judge and their Principal Economist Adam Corlett, which looks at UK housing costs in an international comparison.
There have, of course, been previous cross-country comparisons, which show what proportion of their total household budget an average household spends on housing costs. The problem with such comparisons is that they sometimes tell us more about the housing market conditions of the past than about today’s housing market conditions. Suppose three neighbours, all owner-occupiers, live in three identical houses. You might expect their housing cost situations to be similar, and if they all bought their respective houses at around the same time, they probably will be. But now let’s suppose one of them bought their house recently, one bought theirs 20 years ago, and the other one bought theirs 30 years ago. Their housing costs will not be remotely similar. House prices in the UK have more than trebled in real terms over that period, so your housing cost situation will crucially depend on the timing of the purchase.
To control for such differences, the authors simulate a situation where everyone rents the home they currently live in at current market rates. This also controls for the fact that social housing accounts for 16.7% of the UK housing stock, which is more than double the EU average (7.5%) and the OECD average (7%).
Done in this way, housing costs in the UK would account for 22% of the average household budget. That is the second-highest proportion in the OECD, and five percentage points above the OECD average (17%).
Is that a problem? Is it automatically better (worse) if households spend less (more) on housing?
The answer is: it depends on what causes the difference. To the extent that it merely reflects different choices and preferences, it is not a problem. Suppose citizens of country A spend a lot more on cars than the citizens of country B. If that is because country A imposes high tariffs on cars, it is a bad thing. But if it is because A is a country of car aficionados, who demand the biggest, the newest, and the most luxurious car models, it is not a problem at all. What we need to look at is what people are getting in return – and that is what this report does.
So what do British households get in return for spending so much more on housing?
We certainly don’t get more spacious housing. Floorspace per capita is not just below American, French or German levels, which most people would probably expect, but also below Japanese and Taiwanese ones. (The figures on floorspace that I have seen look even worse. I don’t know what explains the difference, but either way, it is safe to say that British housing is more crammed.)
Nor do we get more modern housing. The British housing stock is the oldest in Europe. 38% of it was built before 1946, when in most of Europe, that proportion is less than a quarter. Of course, “old” does not automatically mean “bad”: some old housing is highly desirable, and sought-after. But at least on measures like energy efficiency, newer homes are clearly superior to older ones.
We don’t get more conveniently located housing either. Other things equal, you would expect housing expenditure to be lower in a country where people are prepared to move further out, and accept longer commutes. Yet the UK also has longer commuting times: 43% of UK commuters spend an hour or more each day on the way to and from work, which is six percentage points above the EU average.
Housing expenditure could be higher in some countries because lots of people own holiday homes or weekend homes. But that is clearly not the case in the UK. Only 4% of British households own a second home for their own use, which is the third-lowest second homeownership rate in the EU. Nor is it the case that we pay for underused or spare housing: we have the lowest housing vacancy rate in the OECD.
It would be one thing if we spent more on housing than everyone else because we want the biggest and the most modern housing in the best possible locations. But that is very much not what we are getting. To go back to the car analogy, we pay BMW prices, but we are driving around in old Trabants.
The purpose of the Resolution Foundation’s report is to document the scale of the problem, not to explain its causes, or to come up with solutions. But whether that is intended by the authors or not, the data they present points clearly at the supply side. If we have less floorspace per capita than other countries, then that is just a different way of saying that we have a smaller housing stock: a lower level of housing supply.
Anti-housing campaigners often claim that the British housing stock is more than adequate: it is just badly distributed and/or underused. The data in this report comprehensively rubbishes such claims, again, irrespective of whether that’s intended by the authors are not. (I don’t want to put arguments into the authors’ mouths. It is just that, if you give me a report which says that the average annual temperature is less than 0°C in Iceland, and more than 20°C in Australia, then I think it’s fair to say that your report shows that Australia has a warmer climate than Iceland. Even if your report never explicitly says that.)
One final observation. The authors also compare different countries’ housing price levels to their overall price levels. Here, Britain is the outlier, with housing costs that are 40% higher than you would expect given the country’s general price level. There are three other countries where that problem is also quite bad, if not as bad as in Britain: Australia, New Zealand and Ireland. As it happens, these are among the few high-income countries where housing supply is similarly low.
It has become fashionable to deride “simplistic” “Econ 101” explanations for Britain’s housing crisis, and to pretend that the issue is infinitely more complex, subtle and nuanced than that. It’s really, really not. Econ 101 is all you need to make sense of Britain’s housing crisis. When it comes to housing supply, graph goes up means world more gooder.
There have, of course, been previous cross-country comparisons, which show what proportion of their total household budget an average household spends on housing costs. The problem with such comparisons is that they sometimes tell us more about the housing market conditions of the past than about today’s housing market conditions. Suppose three neighbours, all owner-occupiers, live in three identical houses. You might expect their housing cost situations to be similar, and if they all bought their respective houses at around the same time, they probably will be. But now let’s suppose one of them bought their house recently, one bought theirs 20 years ago, and the other one bought theirs 30 years ago. Their housing costs will not be remotely similar. House prices in the UK have more than trebled in real terms over that period, so your housing cost situation will crucially depend on the timing of the purchase.
To control for such differences, the authors simulate a situation where everyone rents the home they currently live in at current market rates. This also controls for the fact that social housing accounts for 16.7% of the UK housing stock, which is more than double the EU average (7.5%) and the OECD average (7%).
Done in this way, housing costs in the UK would account for 22% of the average household budget. That is the second-highest proportion in the OECD, and five percentage points above the OECD average (17%).
Is that a problem? Is it automatically better (worse) if households spend less (more) on housing?
The answer is: it depends on what causes the difference. To the extent that it merely reflects different choices and preferences, it is not a problem. Suppose citizens of country A spend a lot more on cars than the citizens of country B. If that is because country A imposes high tariffs on cars, it is a bad thing. But if it is because A is a country of car aficionados, who demand the biggest, the newest, and the most luxurious car models, it is not a problem at all. What we need to look at is what people are getting in return – and that is what this report does.
So what do British households get in return for spending so much more on housing?
We certainly don’t get more spacious housing. Floorspace per capita is not just below American, French or German levels, which most people would probably expect, but also below Japanese and Taiwanese ones. (The figures on floorspace that I have seen look even worse. I don’t know what explains the difference, but either way, it is safe to say that British housing is more crammed.)
Nor do we get more modern housing. The British housing stock is the oldest in Europe. 38% of it was built before 1946, when in most of Europe, that proportion is less than a quarter. Of course, “old” does not automatically mean “bad”: some old housing is highly desirable, and sought-after. But at least on measures like energy efficiency, newer homes are clearly superior to older ones.
We don’t get more conveniently located housing either. Other things equal, you would expect housing expenditure to be lower in a country where people are prepared to move further out, and accept longer commutes. Yet the UK also has longer commuting times: 43% of UK commuters spend an hour or more each day on the way to and from work, which is six percentage points above the EU average.
Housing expenditure could be higher in some countries because lots of people own holiday homes or weekend homes. But that is clearly not the case in the UK. Only 4% of British households own a second home for their own use, which is the third-lowest second homeownership rate in the EU. Nor is it the case that we pay for underused or spare housing: we have the lowest housing vacancy rate in the OECD.
It would be one thing if we spent more on housing than everyone else because we want the biggest and the most modern housing in the best possible locations. But that is very much not what we are getting. To go back to the car analogy, we pay BMW prices, but we are driving around in old Trabants.
The purpose of the Resolution Foundation’s report is to document the scale of the problem, not to explain its causes, or to come up with solutions. But whether that is intended by the authors or not, the data they present points clearly at the supply side. If we have less floorspace per capita than other countries, then that is just a different way of saying that we have a smaller housing stock: a lower level of housing supply.
Anti-housing campaigners often claim that the British housing stock is more than adequate: it is just badly distributed and/or underused. The data in this report comprehensively rubbishes such claims, again, irrespective of whether that’s intended by the authors are not. (I don’t want to put arguments into the authors’ mouths. It is just that, if you give me a report which says that the average annual temperature is less than 0°C in Iceland, and more than 20°C in Australia, then I think it’s fair to say that your report shows that Australia has a warmer climate than Iceland. Even if your report never explicitly says that.)
One final observation. The authors also compare different countries’ housing price levels to their overall price levels. Here, Britain is the outlier, with housing costs that are 40% higher than you would expect given the country’s general price level. There are three other countries where that problem is also quite bad, if not as bad as in Britain: Australia, New Zealand and Ireland. As it happens, these are among the few high-income countries where housing supply is similarly low.
It has become fashionable to deride “simplistic” “Econ 101” explanations for Britain’s housing crisis, and to pretend that the issue is infinitely more complex, subtle and nuanced than that. It’s really, really not. Econ 101 is all you need to make sense of Britain’s housing crisis. When it comes to housing supply, graph goes up means world more gooder.
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I am a huge fan of the IEA but this report is too shallow and misses several important aspects to be taken at face value. The first point is that the UK, and particularly its South East part, is already far more densely populated than any of the countries used for comparison in the article. Density drives small, more expensive dwellings and reduces the ability to drive ahead with improved commuting options. The reason the UK has older buildings than northern European countries is partly because our buildings were less damaged during the two major European wars of the 20th century which required rebuilding and re-planning on the continent.
On top of this excess density the UK has experienced very significant population growth which has confounded its ability to provide housing and infrastructure without resulting in increasing the risk that our economy and independence is unsustainable.
There are many alternative responses to our challenges which do not entail such population growth and it is the failure to address them that is the reason that we get such poor value for our house pounds. Excess demand, not insufficient supply is the cause.