In this week's blog, we look at a fundamental principle we have frequently proposed: building more houses will resolve the housing crisis. Interestingly, only some people believe this; after some brief research in what can only be dubbed a "lethargic news cycle pre-bank holiday" within the housing domain this week, we aspire to examine two robust contentions that both advocate and oppose the pursuit of an escalation in housing supply. The objective here is to subject our prevailing thesis and suppositions to rigorous scrutiny while entertaining the prospect that we may be wrong.
A fundamental fact everyone can agree on is that surging interest rates have made it harder for people to buy homes. At the time of writing, Reuters had reported that Halifax, a constituent of the Lloyds Banking Group, has disclosed that the financial outlay associated with a standard 25-year mortgage, featuring a fixed interest rate over the initial five-year period coupled with a 25% down payment, has presently escalated to 35% of the mean remuneration for a full-time occupation. This is a noticeable ascent from the preceding year's benchmark of 30%. Evidencing the influence of amplified buyer requisition driving housing market inflation amid the COVID-19 pandemic, the comparative mortgage scenario from the outset of 2020, before the price surge in real estate, reflected a more modest 23% of the mean salary. This transition underscores the evolving dynamics of the real estate and mortgage landscape.
If we unpack this on a macro level, the consequences of an unbalanced society where housing becomes unaffordable are more extensive than we may imagine; the escalation of housing unaffordability poses multifaceted challenges with far-reaching societal implications. As housing costs surge beyond the means of the workforce, several intricate issues materialize, adversely impacting both individuals and the broader economy. A workforce burdened by exorbitant housing expenses encounters reduced disposable income, impeding their capacity to allocate resources to other sectors of the economy. This, in turn, constrains consumer spending and curtails economic growth. Furthermore, heightened housing costs foster socioeconomic disparities, inhibiting social mobility and exacerbating inequality. Businesses will then have to contend with talent acquisition and retention difficulties as employees grapple with prolonged commutes or choose to relocate, disturbing operational efficiency.
This leads us to alternative political argument number one: It's not housing supply; it's inequality. In a fascinating article posted online in The Land Magazine, the author draws some stark and slightly excessive comparisons with famines and how, often, the victims of that terrible situation are often relatively close to food sources, and it's the inability to buy rather than supply that's the issue. The argument presented is that the sheer number of houses isn't the issue; it's the distribution, and even though this has left-leaning undertones and we are committed to being neutral and apolitical, from a mathematical perspective at the point of writing, there are over a million houses in England alone standing empty, so there is a strong argument for correcting the imbalance. The debate centres around a research piece from the London School of Economics that discovered that new developments increase house prices in local areas rather than reducing value by diluting the supply, an interesting fact that would potentially be useful when arguing a case at a village planning committee - one imagines.
So, making the counterargument, and perhaps the one we lean towards in our thinking, is Christian Hilber, Professor of Economic Geography at the London School of Economics and an affiliate at the Centre for Economic Performance. He has written extensively regarding reforming the planning and tax systems to increase the housing supply. He believes that rising real incomes and severe supply constraints over the last decade have created the affordability crisis. He theorizes that the key to unlocking the issue is to "Reform the planning system away from the extraordinarily restrictive and idiosyncratic development control system towards a rule-based zoning system." The interesting thing about his argument is that he outlines the two main issues to tackle: the fact that these changes will be massively unpopular with two sets of people who will need to be convinced, government policymakers who need to win votes from the median average voter, and median average voter who already owns a home and will benefit from endlessly continued price appreciation.
The conclusion to this debate is complicated; it's a mixture of both rather than a binary right or wrong answer. We believe that the median average voter referenced above will benefit enormously from sustainably and positively developed communities. That, in turn, will create jobs and opportunities around the housing developments that are built, with the added benefit of starting to address some of the inequality at the heart of the problem.
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