Lack of New Supply
The most popular explanation for many of the issues facing housing is that we have not been building enough new homes. A typical argument is that new-build supply has consistently failed to meet the projected rate of household formation and this has caused high house prices, falling home-ownership, and constrained household formation (chart below). Increasing new housing supply to meet projected household formation rates or above is widely seen as the solution. This approach characterises central government’s housing policy with a target of 300,000 net new homes per year in England.
Unfortunately, this explanation does not reflect the realities of the housing market. Housing supply and demand is more than just new build and net household formation. Available supply is predominantly the second-hand market as new-build sales are a relatively small proportion of total transactions and less than 1% of the existing dwelling stock. Housing demand is the number of people or companies willing and financially able to buy. That is determined by many different factors, but the cost and availability of mortgage debt are perhaps the most important. Meanwhile, household projections are not an indicator of demand but, at best, a crude indicator of housing need.
The evidence for a lack of supply at a national level is limited and open to interpretation. High house prices and recent falls in home-ownership have more to do with the cost and availability of mortgage debt than the lack of supply. Meanwhile, housing costs are high for renters but do not appear to have risen significantly. Demographics show constrained household formation relative to previous trends and so it appears new supply has been too low to meet housing aspirations and probably too low to meet housing need in recent decades. However, there are other factors that have also played a part in suppressing household formation including larger migrant household sizes and, in the circular nature of the housing market, high house prices.
There may be limited evidence for a national lack of supply but it does appear to be an important factor in London and its surrounding commuter areas. There may also be localised housing shortages elsewhere, particularly of specific property types or tenure of homes. Ideally, there would be local cost of housing (rents) data to show this but no such series exists.
Given that a lack of supply is not the biggest driver of house price rises, it is not surprising that academic evidence shows increasing new supply (within realistically deliverable levels) will probably only prevent future price rises rather than significantly improve current levels of house price affordability. Even then it will take many years, possibly even decades to have a lasting effect on the market. Increasing housing supply may not significantly improve house price affordability or increase home-ownership but it is still an essential part of the overall solution to many of the issues facing housing, and not just in areas with the highest house prices. Building new homes, particularly affordable homes, can help reduce the cost of housing for renters. It can also be used to better match the existing housing stock to local need, demand, and affordability. Although new supply typically only accounts for 1% of the existing housing stock each, it can over time be used to improve the quality of housing in a local market, deal with shortages of specific property types, or help deal with demographic changes such as students or the ageing population.