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Thursday, 5 March 2020

Part 2 of my commentary on Liam Halligan’s excellent book HOME TRUTHS
           As I wearily had to point out to my students, time after time, Supply in the housing Market is not just or even mainly about new-built housing. Eighty per cent, four out of every five houses on the market are second hand, pre-owned, have a single owner-occupying vendor behind them. I’m afraid Liam falls into this trap throughout the book. He is not alone.

This is such an easy trap especially for economists. ‘Supply’ of lavatory paper is (hopefully!) only about freshly manufactured stuff. Most household goods are single use these days — there is virtually no second-hand market for toasters, shavers or iPhones. We have been seduced by the throw-away society.

Cars are a bit different. There may be a lively second-hand market. In fact most cars will go through several re-sales before being scrapped. But the likes of Ford and Toyota drive the market through constant innovation, such that new cars always command a premium.

And so we come to houses. Most purchasers are fairly indifferent between new and existing. New-built houses may have some advantages, and the house-builders would love to increase the premium for new over old, but they haven’t been very successful. And indeed the horror stories that Liam relates, mainly in Chapter 7, might be enough to make most buyers choose to buy an existing 10, 20 or even 50 year-old house for preference.

This matters intensely. If the buying public (Demand in the jargon) see new and old houses as inter-changeable, the Supply in the market must include both. Since most houses on the market are second-hand, they set the price. New-build producers (or spec builders as they are sometimes called) can only be price followers.

This explains one of the characteristics of the spec builders — the strategy of first, waiting for a spell of rising house-prices, and then drip-feeding their products onto the market. A sudden on-rush of an estate of hundreds of new houses would have a depressing effect on the local market, the last thing the spec-builders want.

But what provokes the owner-occupiers to put their houses on the market? Since this is the main source of supply, Liam should have been asking this question, too. He didn’t, so his proposals to fix the housing market are similarly deficient. Let me explain.

Who puts their house on the Market? There are those who must sell because of circumstances and then there are those who have a choice. They would sell to trade up or move to somewhere nicer if they wanted to, and could afford it.  Let’s call these the MustSells and the Traders.  

The MustSells: Estate agents talk of the three D’s which force people to put their houses on the market: they are Death, Divorce and Displacement (moving for job or retirement reasons to somewhere new). 

The rates of Supply caused by the three D’s are fairly steady, but not immutable. Death rates are falling, we are living longer (hurrah, but austerity seems to have stopped increased longevity for now). Fewer couples are divorcing, but is that because  marital harmony is increasing?  Or is it something to do with the unaffordability of housing?

Moving because of jobs or retirement continues apace, but with a surprisingly large new factor. Job-movers don’t sell their old house, but become landlords there instead. In the post-2008 Crash era this was forced on job-movers who found they couldn’t sell at an acceptable price. [A note on human psychology: The pain of making a loss is three times more significant than the joy of an equal gain. We hate owning up to being losers!]

It has long been the case, as well, that Londoners job-moving to a less expensive housing area like to retain their toe-hold in the Metropolitan market. The easiest way to do that is not to put the London house on the market, but rent instead. 

Like all the previous motivations for owner-occupiers to put their houses on the market, it is straightforward rational calculation guides the choices. Expecting altruistic behaviour — “We must sell up to make our house available for a deserving young couple with children” — is not the sort of thing you are likely to hear! Nor should you. 

The Traders:  When the time is right and incomes increase, there will be a strong desire to trade-up. As well as the obvious reasons of finding a bigger house to accommodate an expanding family, there is also the speculative motive. Trading up regularly is often the road to wealth beyond the dreams of avarice. It’s not only the house-builders who are speculating on sales. It has long been appreciated that speculation by home-owners — borrowing to trade up — works particularly well in an ever-rising market. The animal spirits of the owner-occupiers are well served by housing markets where prices are said to ‘always rise, never fall’.

This avaricious buying and selling activity does create a supply of house to the market. When the animal spirits are stilled, as in the current now 12-year-long post-Crash slump, this trading activity lessens, and with it a significant source of Supply. 

It also discourages many who would benefit from a move to stay put. The classic example is the older couple with children flown the nest, who would be better served by trading down. They don’t because they see the market price of their over-large house increasing by twice as much as a potential down-trade. Again, this is perfectly rational. If your investment is continuing to rise, hold on to it.

Incentives: Liam throughout his book rightly talks of the overwhelming need for more housing, but only sees supply coming from new-build. It is obvious that since four-fifths of the current supply to the housing market comes from existing owner-occupiers, we need to think about ways to encourage (incentivise) more homeowners to put their house on the market. 

True, eventually all houses must start as new-build, and our present housing market crisis does require many more new and better, and cheaper houses. But for now, there is a major snag:

Currently much of the new-built supply is under-occupied, while owners wait for their capital gains. To to create a properly functioning market ways must be found to avoid this dysfunctional market. This means incentivising owners to sell and move to a better home, and discouraging staying put in a big, badly functioning, crafty home just for the sake of the  capital gains.  

The statistics bit:

What is the actual supply of housing (and its demand) in the market? It’s NOT all about new housing. The majority of houses bought and sold are second-hand. So…

In 2007 1.7 million houses were sold which is the Supply to the market. Less than 10% of these were new-build. They were all bought by customers who could afford them at that price, which defines Demand. Note the halving of transactions post the 2008 Financial Crash.

By 2008 demand/supply had halved  to 0.8 million, and remained there for the next five years. By 2019 turnover had struggled up to 1.1 million,  still 35% below its pre-crash level. Remember that new-build was about 10 or 15% of total market supply

What has happened to the NINE million homes that were NOT put on the market during the period 2008-2019? Has trading up ceased? Is the death rate plummeting, leading to lots of lingering grannies? Has the divorce rate gone down? (Yes 1985-2004 average of 150,000 p.a. then a steady decline to 90,000 in 2018. That might account for ONE million less movers, assuming one divorce = two house transactions.)(Cause or effect? Can’t divorce, because can’t afford new housing!)(Happy days, thanks to the Bankers’ Crash)

Clearly transactions have slumped so not enough movement in the housing market. This suggests a massive and growing mis-match in the houses that many are forced to live in and the places they would like to move to.


è DEMAND The case for lots of new, many different kinds of housing. Today’s housing is not fit-for-purpose, is not a good fit for the people who use the homes:

The problem is that the houses we have are an increasingly bad fit for the way people live today. We’re living longer, marrying less or later, and having fewer children – if any. In the UK, two-thirds of us live in one-person (29%) or two-person (35%) households - yet six in 10 of our houses have three-plus bedrooms, and only 12% are one-beds. Almost 90% of our housing was built before this century, and it’s designed for a nuclear family (“master bedrooms”) and car ownership (garages and parking spaces), both of which are declining trends.” (Gdn 22.2.2020 on Airbnb)



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