The Harvey files 2: housing market part 4

It is often said that the shortage of housing in Britain is confined to what is called the affordable sector. That is just another way of saying that an increasing number of people are unable to buy homes at current prices. Is an end to the housing shortage possible?

With households forming at the rate of over 220,000 a year, and the number of new dwellings built each year numbering around 150,000 since 2000, it is obvious that the shortfall must be increasing by around 70,000 annually, before taking account of the loss of existing homes and the fact that many properties are in places where the population is decreasing for economic and other reasons.

The housebuilding industry would therefore need to increase its output by at least 50 per cent for ten years to eliminate the shortage—and to concentrate its efforts in the lower end of the market. The industry regularly blames planning delays and restrictions for the situation but this is simply not true. Planning permissions are valid for three years after being granted, and enough are outstanding to support rates of building well in excess of actual completions: the nine leading companies had, in 2006, almost 225,000 full permissions, but built between them only 83,400 homes.

Not only does the housebuilding industry react apprehensively to any hint that the market may be softening, by reducing output and sitting on its (continually appreciating) landbanks, but it is doubtful that it has the capacity to produce a sustained increase in homes built even if it wanted to. There is a severe shortage of virtually every skilled and semi-skilled trade in the industry, with unfilled places for 90,000 trainees and apprentices. (Short-term recruitment from East European countries cannot fill the gap over the longer term.)

The real problem however is the inexorable law of supply and demand. Increasing supply will lower prices. A continuing need for more homes will not generate a greater supply. But sufficient new housing could be produced by the waving of some magic wand, either by enormous subsidies to so-called affordable dwellings—involving big rises in taxation—or by flooding the market. That would provoke such a fall in prices as to enable those now priced out of the market to pay their way in. The consequence would be for tens of thousands of pounds to be wiped off the market value of the 18 million or so existing owner-occupied homes. Any government that presided over such an event would have signed its own death warrant.