Would Brexit really make house prices more affordable?

“So how did you come by that name?” A man looks at an estate agent in Newport, Wales. Image: Getty.

Paul Cheshire, Professor Emeritus of Economic Geography at the London School of Economics & Political Science, on campaigners' claims that Brexit would help – or hinder – young people trying to get onto the housing ladder.

“If we remain in the EU, if we have uncontrolled migration year after year after year after year, you will find it harder to get a home of your own.

Liam Fox MP, former defence secretary and Vote Leave campaigner speaking on 2 June.

“A vote to leave Europe will destroy young people’s hopes of getting on the housing ladder … First-time buyers are better off in Europe and leaving would be a leap in the dark leaving young people worse off.

Tim Farron MP, leader of the Liberal Democrats, and Stronger In campaigner, responding to Fox.

Both Fox’s claim and the counter claim by Farron focus on the effects of EU membership on the demand side of the housing market. But the reason why housing is so unaffordable and young people are falling like flies in the struggle to become house owners – even renters – has almost nothing to do with the demand side of the market. The percentage of 25 to 34-year-olds owning their own houses has fallen from 59 per cent to 36 per cent in little more than ten years.

Rents and house prices do not go exactly step-in-step, but both have risen relative to incomes over the past 20 years, and risen very significantly by international standards. This is because Britain does not build enough houses. I have argued that the accumulated building shortfall in England over the period 1994 to 2012 was between 1.6m and 2.3m houses and that we need to build some 260,000 houses a year. Since 2012 we have averaged about 121,000.

This lack of supply is a problem entirely made in Britain. It has nothing whatsoever to do with the European Union because the policies which restrict house building (planning, local government finance – to name two important ones) are specifically national, even local.

Of course, the prices and rents of houses reflect demand as well as supply, particularly in the short term. Demand is most importantly driven by real incomes but also by interest rates – the cost of mortgages – and the number of people.


The role of the economy

So assessing the claims of both sides in the EU campaign comes down to the issue of what the impact of leaving the EU on the UK economy would be. If incomes and economic output are likely to take a knock, we should expect house prices to fall. If staying in boosts economic growth then – given that we will not build many more houses – demand will go up and so will prices.

I, like the great majority of economists, expect that leaving the EU would cause at least a short-term negative shock (of up to ten years perhaps) – not just to the UK economy, but to that of Europe as a whole.

So, yes, leaving the EU, by reducing output and incomes – and immigration because Britain would be a less-attractive destination economically – would reduce the price of housing, at least in the short term. But that would not be a good thing, nor would it make young people more able to buy houses: their incomes and employment prospects would have suffered.

And still, that is too simple. The demand for houses is related to the number of people (and so by extension – immigration) much less than most people realise. By far the most important determinant is real incomes. As people get richer they try to buy bigger and better houses and if we do not build them, the real price of all houses goes up.

There is even evidence that immigrants demand less housing than long-term residents, given their incomes.

But equally, if Farron is right, and the economy does take a hit in the event of a Brexit, that still would not help young people to buy a house. And if the UK remains in the EU, we have not built anything like enough houses for at least a generation. So if staying in means young people get higher incomes they will still be faced with even higher houses prices making them no more able to get on the housing ladder.

The ability of young people to get on the housing ladder has almost nothing to do with whether or not we are members of the EU. By using the issue of housing in the EU referendum campaign, both sides are missing the point.

Review

Kenneth Gibb, professor of housing economics, University of Glasgow

There is a good reason why the EU does not rule on the housing policy of its member states. The author is right to focus on home-grown problems with the UK’s housing system, where supply is highly unresponsive compared to other countries.

While net immigration will undoubtedly influence the demand for housing, it is the failure of successive governments to grasp the nettle of supply (and I would argue housing taxation) that really matters. And there are binding constraints on banks on the level of deposit they must get to secure a mortgage.

London is where the pressure is greatest but it is a world city and, uniquely for the UK, is subject to and distorted by, large-scale international speculative investment: another area that government has not acted on.The Conversation

Paul Cheshire is professor emeritus of economic geography at LSE. Kenneth Gibb is professor of housing economics at the University of Glasgow.

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

 
 
 
 

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