supply and demand in housing markets

FT columnist John Kay drafted a useful analysis of the UK housing crisis, a portion of which I copy and paste below.

“Teach a parrot the terms supply and demand and you have an economist,” said Thomas Carlyle, who also coined the phrase “the dismal science”. And the parrot’s insight is the key to housing policy. Housing demand is driven by population. Over the past century, population growth in the UK has averaged a little less than one-half per cent a year. But after a marked dip between 1970 and 1990, that figure has recently risen towards the upper end of its historic level, with immigration a major cause; net migration contributed more than half of the rise in population between the 2001 and 2011 censuses.

The average size of household has also declined over the long term — from over four at the beginning of the 20th century to around two and a half at the start of the 21st. This trend has both social and demographic causes. Young people leave home earlier, while older people live longer and occupy empty nests. Such a decline in household size raises underlying demand for housing by around a further half per cent per year.

Taking these two factors together, equilibrium in the UK housing market would require that supply should rise by about 1 per cent a year. …. So we would need to build at least 300,000 houses per year to meet the underlying growth of demand.

…. But 300,000 completions a year have never been achieved during the last 40 years, and in the last decade new construction has been around half that figure. ….

So who should take the lead in expanding house building? The least bad solution is probably to give the job to local authorities, with funding by central government borrowing.

John Kay, “UK needs to expand house building”, 8 November 2017.

 

UK needs to expand house building

The Financial Times published a version of this article in its November 8th edition with the title “How to solve the UK housing crisis”. A reader from Haslemere, Surrey (UK) writes that Mr Kay confuses need for housing with demand for housing. Demand depends not only on growth in the number and size of households, but also on the affordability of housing.

Sir, John Kay’s article … covers some interesting points, and ends with what many view as a sensible solution: build more houses, and via local authorities.

On one issue, however, he falls into the trap of confusing housing demand with housing need (“housing demand is driven by population”).

Housing demand refers to the willingness and ability to purchase a house. Housing need refers to the number of houses required, given growth in households, itself derived from household size and population growth.

Essentially housing need is a number, derived from population and household size projections, that makes no allowance for affordability. If those who need houses are unable to afford houses, they don’t buy or demand them.

A friend returned from overseas, needed a house, and bought one. Another friend needs a house, is low skilled, has no funds, he thus lives with his brother. Both need a house, only one “demands” a house.

Martin Hewes, “Housing need is different to housing demand“, Financial Times, 11 December 2017 (gated paywall).

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