Here's today's piece of unalloyed great news for Britain's under-housed. Over the weekend, the following headline appeared in the Financial Times:
Housebuilding does not drive down prices, research says
The story (£) tells of a pilot study conducted by the London School of Economics, which examined eight different developments of nearly 300 homes apiece. In each case, these had been opposed by local homeowners – in part, one assumes, because they were worried about what the new homes would do for their own fragile housing wealth.
But, in an unexpected happy ending, it turned out they were worrying about nothing:
Yet in none of the cases did house prices fall once construction was completed, although in some cases prices went down slightly during construction...
In some cases prices even went up in the surrounding area after the scheme was built.
Well thank goodness for that. For a moment we were worried that there was some mechanism by which we could plausibly end the insanity of ever-rising house prices. But now, it seems, despite all the laws of supply and demand, building houses can actually increase the price of other houses. Phew. All is right with the universe.
There's a temptation at this point for anyone who thinks house prices in certain parts of the country have gotten just a tad silly to give up and go and live behind some bins or something. Actually, though, the lessons of this research are not quite as clear as one might suspect. Here are four reasons.
1) Prices are set by regional and national trends, not just local ones
The report looks at the impact of a couple of thousand extra homes, built over a five year period. That probably seems like a lot, if they suddenly appear in the field opposite your kitchen.
In national terms, though, it’s tiny, and this country is not building anything like the number of homes it needs to keep up with demand. In theory, it might be possible to build enough new homes in one location to crash the price of other houses nearby; in practice, there's so much pent-up demand, that you’ll just attract buyers from elsewhere. Despite the paranoia of the anti-development lobby, it’ll take a lot more homes than this to start eating into their personal housing wealth.
2) Maybe prices were affected by local trends – just, not by very much
Just because house prices in these locations continued to rise, that doesn't mean that building more homes has had no effect. Maybe, without the extra supply, they would have risen more.
3) In the short term, markets are not perfectly efficient
Even if Britain did suddenly build enough homes to meet demand, it's not clear how quickly prices would fall: housing is prone to bubbles and bubbles, by definition, are irrational.
As Neal Hudson, a residential property analyst with Savills, told me: “You saw an awful lot of supply in Ireland and Spain in the boom times there. But prices still went up.” Those bubbles burst eventually, of course; but prices didn't fall the moment there were too many homes on the market. There was a time lag, in which prices were driven by all sorts of factors, including mortgage lending and market sentiment.
So even if Britain was building enough homes, you wouldn’t necessarily expect that to immediately start eating into prices. But it’s not anywhere close, so the point is moot.
4) Remember who paid for this thing
This report was funded by Barratt Homes and the National House Building Council (NHBC): two organisations with a very obvious interest in persuading existing homeowners not to be frightened of new housing developments.
By pointing this out, I don't mean to cast aspersions: Professor Christine Whitehead, who led the work for the LSE, is about as respected as housing economists come. We have to assume the report’s conclusions are valid.
But – it's reasonable to assume that Barratt and the NHBC knew these would be the conclusions, or they wouldn't have funded the work in the first place. And that's a bet they can make with some confidence, because of the nature of the standard developer business model.
Here’s how it works. When deciding how much to bid for a patch of land, developers will calculate roughly how much they can make from developing it. But once they've made that bid, they're locked in: they have to achieve a certain sales price, or they’ll see their margins tumble. Consequently, they won’t build homes fast enough to risk bringing prices down.
Or, as Neal Hudson puts it: “It's in developers' interests not to undermine local house prices. They have a sale price, priced into their model.”
So, yes. As things stand, housebuilding doesn't drive down house prices. But that is, quite literally, deliberate. If Britain was building enough homes in the first place, things might look very different.