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How to bring down London house prices (LSE Blog)
mobfant
Posts: 293 Forumite
This is a thoughtful piece that goes a little bit wider than just build houses on brownfield/greenfield etc. Implication is that house price reductions are still more likely in the medium than in the short term.
http://blogs.lse.ac.uk/politicsandpolicy/how-to-bring-down-house-prices-in-london/
The London property market is potentially in bubble territory with demand clearly outstripping supply, causing prices to rise to eye-watering levels. What can be done to bring prices down? Kath Scanlon explores the possible policy routes in detail. She argues that local authorities can make it a condition of planning permission that dwellings remain in private rental for a specified period, encouraging the supply of new build housing that London desperately needs. But since new homes will only ever be a tiny proportion of transactions, she writes that we also need to persuade older ‘over-occupiers’ to downsize.
The jury is still out on whether there is a housing bubble in London, but we’re certainly approaching bubble territory in terms of the number of discussions, seminars and debates on the subject. The key issue is clear: London house prices have been rising fast—much faster than incomes. Why is this happening—and what can be done about it?
Let’s look at the basics; at supply and demand. Demand for housing in London has been growing but supply is stagnant. Demand is up because London’s permanent population is growing through natural increase and migration (from abroad and elsewhere in the UK) and there’s an increasing group of part-timers: wealthy foreigners who want a London base. Mortgage conditions, tightened in the wake of the Global Financial Crisis, have now begun to relax and loans covering 95 per cent of property value are again available. Underpinning these is London’s pre-eminent position as a national and global centre of governance, finance, education and culture.
There is less agreement about the reasons for the stagnation of supply. Discussions about supply can be confusing because in popular usage the term can mean two things: the net addition to the housing stock (that is, new construction), and the number of homes offered for sale at any given time—of which the vast majority are existing dwellings. Let’s take new construction first. The rate of new build has increased, but still doesn’t come close to match the number of new households in London—so in pure numbers term the housing deficit is growing, which tends to push up prices. There are many reasons for this, and each commentator has his or her favourite. They include the greenbelt, NIMBYism and ‘land hoarding’ by developers.
In terms of housing transactions, though, the overwhelming bulk of supply is not new build but existing homes. And while house prices have risen strongly in the last five years, the number of transactions has risen much more slowly, and is still well below the peak reached in 2006—so in that sense, the supply response has been disappointing.
What can be done to bring prices down? There are three broad possibilities, alone or in combination: control prices administratively, increase supply or reduce demand. There are proponents of administrative control of prices in one part of the housing market, in the form of rent control. Interestingly, though perhaps not surprisingly, they never advocate capping house prices. There are, however, ways of exercising indirect influence on house prices through regulation. One is to limit the size of mortgage loans by capping loan-to-value or loan-to-income ratios, which would reduce effective demand.
Houses-London
Another possibility is to increase supply. In terms of new construction, there is a huge amount of housing in the pipeline in London. But even (or perhaps especially) on the biggest sites, new homes are produced very slowly—even though there are few technical barriers to faster production. One reason is that house builders have learned that putting many houses on the market at the same time reduces the price of individual homes. But that doesn’t seem to apply to rented housing—even if hundreds of properties are leased at once, it doesn’t affect rents much. This means that developers could be willing to build rental-only homes at a faster rate than homes for sale. This wouldn’t directly bring down the price of homes for purchase, but would have an indirect effect by increasing overall housing supply.
Why aren’t they doing so already? There are several reasons, but the most important has to do with the cost of land. The price that developers can pay for land is the difference between the eventual sales value of the houses and the cost of development. Envision a block of two-bedroom flats—the kind of rented housing typically found in New York or Berlin. If the flats are sold individually to owner-occupiers, as normally happens in the UK, the sales price will be higher than if the developer sold the block as a whole to a landlord. That means that a developer building for owner-occupation or to individual buy-to-let investors will always be able to pay more for land than one who wants to build blocks for private rental—so the rental-only blocks just don’t get built.
There is a way around this. If the development has to be for private rental the overall value will be lower—and this brings down the price of the land. Under the British planning system there’s no special treatment of private rented housing—it doesn’t have a separate ‘use class’ or zoning. But the same effect can be achieved another way: local authorities can make it a condition of planning permission that dwellings remain in private rental for a specified period (say 10 or 20 years). This is known as ‘covenanted private rental’ and is one approach advocated in the Mayor’s Draft London Housing Strategy. Widespread adoption of this could help accelerate the supply of new build housing that London desperately needs.
But new homes will only ever be a tiny proportion of transactions. How could we increase the number of existing homes coming onto the market? If older ‘over-occupiers’—single people or couples living in family homes—could be persuaded to downsize, this would release their properties for younger families. Of course, not everyone agrees that this should be a policy goal: Mrs Thatcher famously campaigned for the poll tax by invoking the example of elderly widows unable to pay rates on their long-time homes. But we have to ask whether it is a sensible use of London’s housing stock to have older people living alone in large houses while families with small children are crammed into too-small flats.
One of the reasons that many older ‘over-occupiers’ remain in their large homes is that the alternatives are so grim. Many would never move into a retirement home, however tidy and well-run, unless forced to do so by ill health or dementia. We need to create positive, attractive living arrangements for later life—homes that active older people would genuinely prefer to live in. There are some innovative projects that may suggest a way forward—for example, a new co-housing community for over-50s currently being created at Featherstone Lodge in South London could provide a model for that could be replicated elsewhere.
Finally, a few words about demand. The UK’s house-price surge is centred on London; north of Watford might as well be another country. Demand is strong in London in part because of the massive over-centralisation of the country’s economic and public life. In the USA, by contrast, New York is the country’s financial capital, Washington its political capital, Boston its capital of higher education and San Francisco its tech capital—but in the UK London plays all of those roles. Re-balancing this would reduce pressure on London house prices and contribute to a healthier country overall.
Note: This article gives the views of the author, and not the position of the British Politics and Policy blog, nor of the London School of Economics. Please read our comments policy before posting. Image credit: Klovovi
About the Author
Kath ScanlonKathleen Scanlon – London School of Economics
Kathleen Scanlon is a Research Fellow at LSE London. She has a wide range of research interests including comparative housing policy (across all tenures–social and private rented housing as well as owner-occupation), comparative mortgage finance, and migration.
http://blogs.lse.ac.uk/politicsandpolicy/how-to-bring-down-house-prices-in-london/
The London property market is potentially in bubble territory with demand clearly outstripping supply, causing prices to rise to eye-watering levels. What can be done to bring prices down? Kath Scanlon explores the possible policy routes in detail. She argues that local authorities can make it a condition of planning permission that dwellings remain in private rental for a specified period, encouraging the supply of new build housing that London desperately needs. But since new homes will only ever be a tiny proportion of transactions, she writes that we also need to persuade older ‘over-occupiers’ to downsize.
The jury is still out on whether there is a housing bubble in London, but we’re certainly approaching bubble territory in terms of the number of discussions, seminars and debates on the subject. The key issue is clear: London house prices have been rising fast—much faster than incomes. Why is this happening—and what can be done about it?
Let’s look at the basics; at supply and demand. Demand for housing in London has been growing but supply is stagnant. Demand is up because London’s permanent population is growing through natural increase and migration (from abroad and elsewhere in the UK) and there’s an increasing group of part-timers: wealthy foreigners who want a London base. Mortgage conditions, tightened in the wake of the Global Financial Crisis, have now begun to relax and loans covering 95 per cent of property value are again available. Underpinning these is London’s pre-eminent position as a national and global centre of governance, finance, education and culture.
There is less agreement about the reasons for the stagnation of supply. Discussions about supply can be confusing because in popular usage the term can mean two things: the net addition to the housing stock (that is, new construction), and the number of homes offered for sale at any given time—of which the vast majority are existing dwellings. Let’s take new construction first. The rate of new build has increased, but still doesn’t come close to match the number of new households in London—so in pure numbers term the housing deficit is growing, which tends to push up prices. There are many reasons for this, and each commentator has his or her favourite. They include the greenbelt, NIMBYism and ‘land hoarding’ by developers.
In terms of housing transactions, though, the overwhelming bulk of supply is not new build but existing homes. And while house prices have risen strongly in the last five years, the number of transactions has risen much more slowly, and is still well below the peak reached in 2006—so in that sense, the supply response has been disappointing.
What can be done to bring prices down? There are three broad possibilities, alone or in combination: control prices administratively, increase supply or reduce demand. There are proponents of administrative control of prices in one part of the housing market, in the form of rent control. Interestingly, though perhaps not surprisingly, they never advocate capping house prices. There are, however, ways of exercising indirect influence on house prices through regulation. One is to limit the size of mortgage loans by capping loan-to-value or loan-to-income ratios, which would reduce effective demand.
Houses-London
Another possibility is to increase supply. In terms of new construction, there is a huge amount of housing in the pipeline in London. But even (or perhaps especially) on the biggest sites, new homes are produced very slowly—even though there are few technical barriers to faster production. One reason is that house builders have learned that putting many houses on the market at the same time reduces the price of individual homes. But that doesn’t seem to apply to rented housing—even if hundreds of properties are leased at once, it doesn’t affect rents much. This means that developers could be willing to build rental-only homes at a faster rate than homes for sale. This wouldn’t directly bring down the price of homes for purchase, but would have an indirect effect by increasing overall housing supply.
Why aren’t they doing so already? There are several reasons, but the most important has to do with the cost of land. The price that developers can pay for land is the difference between the eventual sales value of the houses and the cost of development. Envision a block of two-bedroom flats—the kind of rented housing typically found in New York or Berlin. If the flats are sold individually to owner-occupiers, as normally happens in the UK, the sales price will be higher than if the developer sold the block as a whole to a landlord. That means that a developer building for owner-occupation or to individual buy-to-let investors will always be able to pay more for land than one who wants to build blocks for private rental—so the rental-only blocks just don’t get built.
There is a way around this. If the development has to be for private rental the overall value will be lower—and this brings down the price of the land. Under the British planning system there’s no special treatment of private rented housing—it doesn’t have a separate ‘use class’ or zoning. But the same effect can be achieved another way: local authorities can make it a condition of planning permission that dwellings remain in private rental for a specified period (say 10 or 20 years). This is known as ‘covenanted private rental’ and is one approach advocated in the Mayor’s Draft London Housing Strategy. Widespread adoption of this could help accelerate the supply of new build housing that London desperately needs.
But new homes will only ever be a tiny proportion of transactions. How could we increase the number of existing homes coming onto the market? If older ‘over-occupiers’—single people or couples living in family homes—could be persuaded to downsize, this would release their properties for younger families. Of course, not everyone agrees that this should be a policy goal: Mrs Thatcher famously campaigned for the poll tax by invoking the example of elderly widows unable to pay rates on their long-time homes. But we have to ask whether it is a sensible use of London’s housing stock to have older people living alone in large houses while families with small children are crammed into too-small flats.
One of the reasons that many older ‘over-occupiers’ remain in their large homes is that the alternatives are so grim. Many would never move into a retirement home, however tidy and well-run, unless forced to do so by ill health or dementia. We need to create positive, attractive living arrangements for later life—homes that active older people would genuinely prefer to live in. There are some innovative projects that may suggest a way forward—for example, a new co-housing community for over-50s currently being created at Featherstone Lodge in South London could provide a model for that could be replicated elsewhere.
Finally, a few words about demand. The UK’s house-price surge is centred on London; north of Watford might as well be another country. Demand is strong in London in part because of the massive over-centralisation of the country’s economic and public life. In the USA, by contrast, New York is the country’s financial capital, Washington its political capital, Boston its capital of higher education and San Francisco its tech capital—but in the UK London plays all of those roles. Re-balancing this would reduce pressure on London house prices and contribute to a healthier country overall.
Note: This article gives the views of the author, and not the position of the British Politics and Policy blog, nor of the London School of Economics. Please read our comments policy before posting. Image credit: Klovovi
About the Author
Kath ScanlonKathleen Scanlon – London School of Economics
Kathleen Scanlon is a Research Fellow at LSE London. She has a wide range of research interests including comparative housing policy (across all tenures–social and private rented housing as well as owner-occupation), comparative mortgage finance, and migration.
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Comments
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I don't see how the "rental only" planning permission thing would work. It would decrease the price of the land, yes, but only that land. It wouldn't decrease the price of land that didn't have that kind of covenanted planning permission, so I don't see that it would make much difference to other house prices unless they built so many rental properties that rents started to come down, making BTL less attractive, and deposits easier to save for. They'd have to build vast numbers of them to achieve that, though, wouldn't they? Furthermore, if rental covenant land was developed, OK, the developer might put the flats up more quickly, but would it actuallybe developed? Wouldn't there be a big incentive for whoever owned it to hang onto it in the hope that the next government/mayor or whatever would reverse the policy so that they'd be able to get full price for the land? And given that a large part of the demand problem is the competition between would-be owner occupiers and individual BTL investors, do we really want to try to solve the problem by specifying that a whole load of new build properties can't be sold to either of these categories???
Happy to be informed, corrected and educated, of course, and the first to admit that since I've never lived in London, my views on the specifics of the London housing market aren't particularly well informed.Do you know anyone who's bereaved? Point them to https://www.AtaLoss.org which does for bereavement support what MSE does for financial services, providing links to support organisations relevant to the circumstances of the loss & the local area. (Link permitted by forum team)
Tyre performance in the wet deteriorates rapidly below about 3mm tread - change yours when they get dangerous, not just when they are nearly illegal (1.6mm).
Oh, and wear your seatbelt. My kids are only alive because they were wearing theirs when somebody else was driving in wet weather with worn tyres.
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Council tax revaluation with 3 or 4 added top bands.
And government to incentivise job relocation out to the regions
Should have a negative effect on London house prices.
Problem is, do the government want to tackle the problem due to self interest of being London property owners0 -
stop overseas investors buying up mayfair0
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Council tax revaluation with 3 or 4 added top bands.
And government to incentivise job relocation out to the regions
Should have a negative effect on London house prices.
Problem is, do the government want to tackle the problem due to self interest of being London property owners
the government does incentivise job creation outside London by setting up enterprise zones (and has done for at least 30 years)0 -
the government does incentivise job creation outside London by setting up enterprise zones (and has done for at least 30 years)
No it doesn't. All EZ do is move jobs from a few miles outside the EZ to inside the EZ as they get tax benefits.
I live in the NE, unemployment is still rising, people are moving away to get jobs.
Look at house prices
http://www.bbc.co.uk/news/business-26844488
18% in London, 1% in Sunderland
Says it all. Governments have for years been far too Londoncentric.0 -
No it doesn't. All EZ do is move jobs from a few miles outside the EZ to inside the EZ as they get tax benefits.
I live in the NE, unemployment is still rising, people are moving away to get jobs.
Look at house prices
http://www.bbc.co.uk/news/business-26844488
18% in London, 1% in Sunderland
Says it all. Governments have for years been far too Londoncentric.
For decades, Governments have been taking billions from London and spending it in the rest of the UK.
It was the people of the North that destroyed industry in the 1960s and the 1970s by voting for the disastrous Labour Governments of the time and then striking for more and more money until entire industries were bankrupted.
Without the vast subsidy from London, GDP in the North East would be approximately that of Poland or the Czech Republic.0 -
These are all good candidate ideas, but is their any reason to believe that there is the political will to regulate the free market that is creating this bubble?Few people are capable of expressing with equanimity opinions which differ from the prejudices of their social environment. Most people are incapable of forming such opinions.0
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For decades, Governments have been taking billions from London and spending it in the rest of the UK.
It was the people of the North that destroyed industry in the 1960s and the 1970s by voting for the disastrous Labour Governments of the time and then striking for more and more money until entire industries were bankrupted.
Without the vast subsidy from London, GDP in the North East would be approximately that of Poland or the Czech Republic.
Nonsense. For starters Labour does well in London.
London public transport gets subsidised £2,600 per head of population. The NE gets £5. Thats an obscene inequality which is only adding to the problem0 -
Without the vast subsidy from London, GDP in the North East would be approximately that of Poland or the Czech Republic.
And without the North we'd not have had the Industrial Revolution, and London would have zero chance of having its current wealth...
If an interest rate and central government policy is set in a way that benefits the country overall, but damages some regions, then it makes no sense at all to then claim, when some readjustment is done, that London is "subsidising" the regions.
It is about as incorrect as claiming that London is empoverishing the regions by taking people such as me from the North. I'm a northeasterner, but working in London, and paying the best part of a million pound a year in PAYE taxes, and more like fifty million a year through the business that I run. If some of that pays for my region, it is not subsidising anyone. London took the resource from my region, it is only right that some of the gain is returned to the area which produced me.0 -
The proposals in this article would only move the problem, e.g. administratively favouring rental properties at the expense of owner-occupied properties would reduce rents or total building, while increasing purchase prices of houses not affected by these administrative controls. That wouldn't reduce the overall cost of housing, it would just shift Britain slightly from an owner-occupier to a renter society.
The only way to reduce total costs without rationing is to increase supply. That means either building on land that is currently not built on, increasing the density of land currently used for housing (knock down terraces and build skyscrapers), or changing the use of built-up land that isn't currently used for housing.
All of those things are impeded or prevented by planning controls, not by exogenous factors or market failures.0
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