A study has found that new homes don't lower house prices. But things aren't quite that simple

This child already knows that he will never own his own home. Image: public domain.

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.

 
 
 
 

What does the fate of Detroit tell us about the future of Silicon Valley?

Detroit, 2008. Image: Getty.

There was a time when California’s Santa Clara Valley, bucolic home to orchards and vineyards, was known as “the valley of heart’s delight”. The same area was later dubbed “Silicon Valley,” shorthand for the high-tech combination of creativity, capital and California cool. However, a backlash is now well underway – even from the loyal gadget-reviewing press. Silicon Valley increasingly conjures something very different: exploitation, excess, and elitist detachment.

Today there are 23 active Superfund toxic waste cleanup sites in Santa Clara County, California. Its culture is equally unhealthy: Think of the Gamergate misogynist harassment campaigns, the entitled “tech bros” and rampant sexism and racism in Silicon Valley firms. These same companies demean the online public with privacy breaches and unauthorised sharing of users’ data. Thanks to the companies’ influences, it’s extremely expensive to live in the area. And transportation is so clogged that there are special buses bringing tech-sector workers to and from their jobs. Some critics even perceive threats to democracy itself.

In a word, Silicon Valley has become toxic.

Silicon Valley’s rise is well documented, but the backlash against its distinctive culture and unscrupulous corporations hints at an imminent twist in its fate. As historians of technology and industry, we find it helpful to step back from the breathless champions and critics of Silicon Valley and think about the long term. The rise and fall of another American economic powerhouse – Detroit – can help explain how regional reputations change over time.

The rise and fall of Detroit

The city of Detroit became a famous node of industrial capitalism thanks to the pioneers of the automotive age. Men such as Henry Ford, Horace and John Dodge, and William Durant cultivated Detroit’s image as a centre of technical novelty in the early 20th century.

The very name “Detroit” soon became a metonym for the industrial might of the American automotive industry and the source of American military power. General Motors president Charles E. Wilson’s remark that, “For years I thought what was good for our country was good for General Motors, and vice versa,” was an arrogant but accurate account of Detroit’s place at the heart of American prosperity and global leadership.

The public’s view changed after the 1950s. The auto industry’s leading firms slid into bloated bureaucratic rigidity and lost ground to foreign competitors. By the 1980s, Detroit was the image of blown-out, depopulated post-industrialism.

In retrospect – and perhaps as a cautionary tale for Silicon Valley – the moral decline of Detroit’s elite was evident long before its economic decline. Henry Ford became famous in the pre-war era for the cars and trucks that carried his name, but he was also an anti-Semite, proto-fascist and notorious enemy of organised labor. Detroit also was the source of defective and deadly products that Ralph Nader criticized in 1965 as “unsafe at any speed”. Residents of the region now bear the costs of its amoral industrial past, beset with high unemployment and poisonous drinking water.


A new chapter for Silicon Valley

If the story of Detroit can be simplified as industrial prowess and national prestige, followed by moral and economic decay, what does that say about Silicon Valley? The term “Silicon Valley” first appeared in print in the early 1970s and gained widespread use throughout the decade. It combined both place and activity. The Santa Clara Valley, a relatively small area south of the San Francisco Bay, home to San Jose and a few other small cities, was the base for a computing revolution based on silicon chips. Companies and workers flocked to the Bay Area, seeking a pleasant climate, beautiful surroundings and affordable land.

By the 1980s, venture capitalists and companies in the Valley had mastered the silicon arts and were getting filthy, stinking rich. This was when “Silicon Valley” became shorthand for an industrial cluster where universities, entrepreneurs and capital markets fuelled technology-based economic development. Journalists fawned over successful companies like Intel, Cisco and Google, and analysts filled shelves with books and reports about how other regions could become the “next Silicon Valley”.

Many concluded that its culture set it apart. Boosters and publications like Wired magazine celebrated the combination of the Bay Area hippie legacy with the libertarian individualism embodied by the late Grateful Dead lyricist John Perry Barlow. The libertarian myth masked some crucial elements of Silicon Valley’s success – especially public funds dispersed through the U.S. Defense Department and Stanford University.

The ConversationIn retrospect, perhaps that ever-expanding gap between Californian dreams and American realities led to the undoing of Silicon Valley. Its detachment from the lives and concerns of ordinary Americans can be seen today in the unhinged Twitter rants of automaker Elon Musk, the extreme politics of PayPal co-founder Peter Thiel, and the fatuous dreams of immortality of Google’s vitamin-popping director of engineering, Ray Kurzweil. Silicon Valley’s moral decline has never been clearer, and it now struggles to survive the toxic mess it has created.

Andrew L. Russell, Dean, College of Arts & Sciences; Professor of History, SUNY Polytechnic Institute and Lee Vinsel, Assistant Professor of Science and Technology Studies, Virginia Tech.

This article was originally published on The Conversation. Read the original article.