In 1965 there were 3.5 people per house in the UK. In 2015 there were 2.6 people per house. In the last fifty years the supply of houses per person has risen abundantly by 23%. Population has grown but supply of houses has grown more.
The number of people living in each household has fallen by about 27% in the last fifty years to 2.3 per household in 2015, mostly because there are more people living alone now than there were in the past.
The combined effect of these two factors of increasing numbers of houses per person and shrinking families (households) is that the ratio of houses to households has not changed at all since 1965. In 1965 there were 11% more households than houses and there still are today.
These facts prove that the belief that house prices have risen because of overcrowding in the UK exacerbated by immigration is rubbish. It is a popular myth but no less false for that. It is not the explanation for why house prices have gone up in the last 50 years by a factor of 66 instead of the factor of 17 that inflation alone would account for.
Relative to income houses have become dramatically less affordable in the last 50 years for the average person. Meanwhile credit markets have got much deeper. As a result, despite the fact houses are four times more expensive by ratio to income, 49% more people owned houses in 2013 (64%) than in 1965 (circa 43%). Not only is there less overcrowding than there was fifty years ago, there is also more security of tenure.
If the basics of supply and demand and security of tenure are not putting pressure on house prices then why have UK house prices gone up by a factor of 66 in the last 50 years?
The reason is that the residential land and buildings market in the UK is not a free market.
Capital gains on the sale of a primary residence are exempt from tax. Interest rates are artificially low. Then there is the planning system; these are three reasons.
In their 2010 report for the Department of Communities and Local Government, Doctors Hilber and Vermuelen calculate that between 15% and 25% of the price of a building is a function of builders being constrained by the planning system.
I calculate that 22% of the price of land and buildings in 2015 is a consequence of easy borrowing and 25% is a result of capital gains tax exemptions, only 33% of the price of land and buildings being a result of supply and demand.
Had the market been free the average price of a house in 2015 would not be the £190,000 it is (Nationwide Building Society) but would be £63,000 instead. If so, house prices over the last fifty years would still have risen faster than inflation but only by 30%, not by 200%. This would have meant that by now, say, 88% of households would have been able to afford to own their own house. For those who could not, renting would be extremely cheap.
It might be thought that if no public housing had been built in the last fifty years we would have fewer houses per person than we had in 1965. This view takes no account of publicly subsidized building crowding out the private sector. With a combination of more private supply, and costs of 67% less, only a fraction of the 17% now in subsidized housing would need to be. The public purse could pay for this group to be housed in private housing without needing council tax and business rates to pay to build that housing.
Since 1965 residential land and buildings have acted like a gravitational force upon the nation’s capital which now tends, all other things being equal, to flow towards them. This is bad. Primarily, because it distorts the free market in capital and so makes the economy inefficient. In recent years it has also meant that land and buildings, even with deeper credit markets, are becoming beyond more people’s means (64% of households were owner occupiers in 2013 as opposed to 68% in 2001).
A free market in private property would systematically expel capital out of land and buildings into the general economy but in a gradual manner not catastrophic for most owners.
An arbitrary and inefficient land economy has survived and thrived because it serves two powerful vested interests: the 64% of Britons who live in owner occupied housing and the government who has kept the cost of paying the interest on its borrowing down by artificially low interest rates and quantitative easing.
1) A free market in land and buildings would reduce our exposure to debt inflated bubbles because borrowing would be harder to get.
2) A free market in land and buildings would lower the real price of land and buildings, making them hugely less expensive relative to people’s incomes over the next fifty years.
3) A free market in land and building would result in more efficient use of the nation’s capital and so make the nation richer.
Where do the political parties stand on setting the land and buildings market free?
Labour’s anti-little-old-lady policy aims to tighten the shackles on the property market even further by controlling rents. Controlling rents will push buildings to be withdrawn from the rental market as renting becomes uneconomic. This will cause the price of buildings to rise (as there will now be fewer of them on the market worth investing in) with the especially arbitrary twist that profits from capital gains will therefore increase relative to profits from renting, accelerating the shrinking of the rental market further. The net effect will be that the poorest 20% of people, who typically rent, will find it harder to do so and perversely some will end up on the street. Labour’s policy is to protect the poor but it will have the reverse effect.
The Conservatives are also enemies of a free land economy. They have, for example, allowed social housing tenants to buy their own houses at a massive discount under the “Right to Buy Scheme”. Sadly, all these Conservative pounds showered on the housing market (in the form of discounts) will only drive up prices as will the ever tightening Conservative screws of regulatory control over property managers and landladies.
Conservatives, Labour, Liberals and Greens are all competing with each other to promise to build hundreds of thousands of houses at immense cost to the Public Purse of, say, £7 billion per hundred thousand homes.
I call on UKIP to instead get behind a free market in land and buildings (by repeal of the 1947 Town and Country Act, by abolition of capital gains tax relief on the sale of primary residences and by reform of the Bank of England and the mechanisms of monetary policy) so as to strike off the land economy’s chains.