Housing Supply and Demand

Amidst all the talk of falling house prices, it is easy to forget that there is a shortage of new housing starts in the UK.

Recently, the Government’s key adviser on housebuilding, Steve Nickell expressed his concern about the disappointing level of new houses being built in the UK. Steve Nickell who chairs the government backed National housing and Planning Unit NHPAU, used to a be a member of the Bank of England policymaker committee.

In 2007, the number of new housing starts fell to just 166,820 new homes. This is a decrease of 11% on 2006.

Government’s Target for New Housing

Gordon Brown has made a promise to build 3 million new homes by 2020. This involves an annual rate of just under 250,000 a year. However, it is not clear where this extra houses are going to be built. At the current rate there is a shortfall of 70,000 houses a year. Currently, planning permissions for new houses is quite strict. There is the usual problem that people want new houses to be built, but, just not ‘in my backyard’

One guaranteed way for an increase in home building is for the government to restart a programme of building council funded houses. But, currently there seems little political will to make this investment.

Long Term House Price Predictions

In an ominous warning Steve Nickell, suggests that if the rate of homebuilding remains as low as it is now, house prices could rise to equal 10 times people’s earnings by 2020.

The importance of supply in determining house prices, is one reason why house price to incomes ratios are not necessarily a guide to whether house prices are overvalued. If the UK keeps having a growing population and restricted supply the ratio of house prices to earnings will definitely increase in the long term

Related 

• Why House Prices set to fall in short term
• National Housing and Planning Advice Bureau
• UK Housing Market