Generation Spent

House prices have very little to do with supply or demand. House prices are determined by the availability of credit. Everyone in the media however, and most of our politicians etc, when writing about housing now seem to have settled on supply as the main problem. It's a start, of sorts. However, commentators and politicians alike now seem to conflate housing supply with new houses being built. Hence the fixation on Cameron’s recent pledge to build 200,000 starter homes by 2020 (by which time the population is projected to have grown by at least by another 2,000,000).

But most housing supply is actually provided by houses that are already built. There are about 100,000 housing transactions a month, and currently about 1,200,000 housing transactions a year, down from the historically normal approx. 1,600,000 annually; and only 10% of these are new builds. 

Cameron wants to provide 200,000 starter homes by 2020. This would be an extra 40,000 homes annually for sale. So he wants to increase the number of homes for sale every year by from a current 1,200,000 to 1,240,000, or an increase of just 3% of the supply. Will that really make that much of a difference, given houses are currently rising by 10% a year? No. It is neither here nor there.

There is a backlog of, roughly, about a million homes from the past few years of undersupply, so as a rule of thumb taking these into account and from the figures produced by the ONS there are now approx. 250,000 potential first time buyers  every year as a result of new household formation, although the ratio of bedrooms to people is actually near historic lows (ie we're not that short of houses in aggregate, we just use our stock very inefficiently). 

Providing 40,000 of these FTBs with the opportunity to buy discounted homes would mean that Cameron would potentially be helping about 16% of them, and possible making things worse for the other 210,000, or 84%, by reducing the social housing stock dramatically in the same period.

So Cameron is very keen on keeping house prices elevated, whilst pretending to do something about it, but doing very little other than sleight of hand.

QED: other impediments to keeping the credit bubble on the road? Worry no. 1 was the fact that the people that own all the housing wealth - ie baby boomers - are just coming up to retirement, and were going to start putting all their impossibly expensive houses on the market. Result: vastly increased supply, house prices dropping rapidly, panic, all is lost....

...action by the Tories: increase inheritance tax on everything, but exclude the main home up to a £1,000,000.

Result: houses no longer coming onto the market en masse, as they are the only asset that the moderately wealthy will hang on to at all costs, liquidating pensions etc.

Conclusion: credit bubble rumbles on...

Interest rates and the availability of credit are a key - in fact, the key - determinant of housing cost, and building another million homes, even if they were all built in a month, will not necessarily bring down house prices, especially if they are all snapped up by BTL landlords and foreign investors: Ireland, for example, built 2,000,000 houses in a decade before the great financial crash humbled their banks, and house prices doubled during that period. And as interest rates remain at historic lows, and QE has injected billions into asset markets and all policies point to maintaining house prices, prices will remain elevated until something goes terribly wrong, and people start to panic that a new financial crisis is on its way...which it is, clearly, given that every problem that caused the last financial crisis has not only not gone away, but has in fact become significantly worse (public debt has doubled, etc, etc, etc...).

My only conclusion is that Cameron isn’t interested in actually helping Generation Rent, but he has now grasped that he needs to use smoke and mirrors to convince Generation Rent’s worried parents that he is doing something for their 20 and 30-something children, but without actually affecting the house of cards that constitutes the housing equity wealth of the over-55 demographic, who are his main voting block.