Britain’s weekend media was packed with stories reporting how a housing shortage is fueling surging property prices.
Most newspapers cited the International Monetary Fund’s warning that house prices pose a risk to the economy. The Mail on Sunday said U.K. Chancellor of the Exchequer George Osborne will hit a “home run” by outlining plans this week to ease red tape for construction. The Sunday Times declared May’s 3.9 percent jump in prices a “humdinger.”
Deputy Prime Minister Nick Clegg joined the worrywarts today by committing to investing to end what he called a “chronic lack of housing.”
But what if there is no housing shortage after all? That would undermine the conventional wisdom. It’s the case made by Andrew Brigden, chief economist at Fathom Consulting in London and a former Bank of England economist.
He echoes Nobel laureate Robert Solow’s quip of the 1980s that “you can see the computer age everywhere but in the productivity statistics.” Brigden said in a May 29 report that the shortage of housing is “evident everywhere but the data.” He attributes the surging prices to historically low mortgage rates and government subsidies for borrowers.
The firm’s analysis shows that the number of dwellings rose by 0.6 percent in 2012, the most recent year for which data are available, maintaining pace with population growth. Indeed, the amount of housing per capita has been broadly stable for the past 15 years.
A lack of homes would also push up inflation-adjusted rents, and they’re not. Instead, they gained just 2.2 percent in the year to the first quarter with house-price inflation at 8 percent, Brigden said. He also suggested that the quality of the houses that are being built may be rising to meet the needs of buyers, favoring four-bedroom houses over two-bedroom flats.
If there isn’t a shortage then the government should do away with its program aimed at easing affordability and prices will correct anyhow once interest rates begin rising, said Brigden. Better that than tweak lending rules.
“While we are not advocating a rapid tightening of monetary policy -- far from it -- any attempt now to use macroprudential policy to mitigate against the consequences for house prices of a prolonged period of exceptionally low mortgage rates is likely to be too little too late,” he said. “Policy makers should not use a perceived shortage in the supply of housing as a smoke screen.”
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