Are high house prices distorting the economy and reducing GDP?

michaels

Here is my example:
https://www.auction.co.uk/residential/LotDetails.asp?A=1028&MP=24&ID=1028000160&S=L&O=A


A modern office block about 15 miles outside the M25. For sale, the price driven by the fact it has permission to be converted into flats.

So what is going on here? An office block that is probably producing a decent return will be knocked down and replaced with flats because the housing shortage means the return on housing is greater - towns like Stevenage that are a reasonable commute to London are particularly badly impacted.

What will happen is the office space will shrink at the expanse of the housing sock until prices for offices are so high that the conversion no longer makes sense.

This will in turn price out the less profitable business who had been using the lost offices. Thus the shortage of housing is not just making houses too expensive it is also directly damaging the economy by destroying jobs.

GreatApe

Why do you think an office building creates jobs? If it were that easy we would just build more and more offices.

All buildings should be permitted to be converted to all other types of building within a certain zonings.

Thrugelmir

Plenty of buildings exist that no longer meet current requirements. Better to convert than demolish.

michaels

GreatApe wrote: »

Why do you think an office building creates jobs? If it were that easy we would just build more and more offices.

All buildings should be permitted to be converted to all other types of building within a certain zonings.

A company might be viable based on paying enough rent to cover the build cost of an office building. However to compete with residential use of the same site the rent would need to be twice as high, thus the viable company is priced out of business but the overvalued housing market. If there were no restrictions on land use both the housing and the offices would be economic to build but the restriction on the supply of land would result in only the housing, probably with govt subsidies via housing benefit or help-2 buy.

System

michaels wrote: »

A company might be viable based on paying enough rent to cover the build cost of an office building. However to compete with residential use of the same site the rent would need to be twice as high,

An extreme comparison would be the use of land either for housing or producing food.

For agricultural use it might be worth £10,000 per acre, for housing as high as £1m.

GreatApe

michaels wrote: »

A company might be viable based on paying enough rent to cover the build cost of an office building. However to compete with residential use of the same site the rent would need to be twice as high, thus the viable company is priced out of business but the overvalued housing market. If there were no restrictions on land use both the housing and the offices would be economic to build but the restriction on the supply of land would result in only the housing, probably with govt subsidies via housing benefit or help-2 buy.

I think you are thinking about this the wrong way
Buildings themselves add value to the economy via rent and imputed rent.

The conversion of an office to flats add value to the economy in both conversion and the higher value of the building post conversion

So a 10,000 sqm office might be purchased for say £3 million
£10 million spent on the conversion to 100 flats
The flats sold for £15 million

As an office it might have fetched £150,000 annual rent
As 100 flats it might fetch £750,000 annual rent

Post conversion you have added £10 million in GDP in the actual conversion
Plus an additional £600,000 annually in rent/imputed-rent


I am struggling to see how the old office, probably empty for a number of years, would do better than that. I think the idea that the lost office space will lose jobs is just wrong. Demand creates jobs jobs do not create demand. If I open a factory baking a million loafs of bread per day its highly unlikely any more bread will be consumed. I will probably just displace multiple bread bakeries elsewhere.

The old office should be free to convert to retail or warehouses or stay as offices whichever one is the most productive and housing should also be in that list. Of course sticking to some sort of zoning rules as you probably do not want an industrial site in the middle of houses nor converted flats in the middle of a sewerage reprocessing area etc

GreatApe

michaels wrote: »

A company might be viable based on paying enough rent to cover the build cost of an office building. However to compete with residential use of the same site the rent would need to be twice as high, thus the viable company is priced out of business but the overvalued housing market. If there were no restrictions on land use both the housing and the offices would be economic to build but the restriction on the supply of land would result in only the housing, probably with govt subsidies via housing benefit or help-2 buy.

We also do not really want just viable companies, those are imo problems to be solved not things to be encouraged.

michaels

But aren't you missing the bit that the govt via housing benefit, help-2-buy etc is subsidizing the hosing market by multi-billion pounds each year (based on housing being a necessity not a nice to have) whilst simultaneously restricting supply through planning rules and thus housing can outbid other productive use of most building sites?

So a double intervention in the market by the govt resulting in housing forcing out other productive land uses.

GreatApe

michaels wrote: »

But aren't you missing the bit that the govt via housing benefit, help-2-buy etc is subsidizing the hosing market by multi-billion pounds each year (based on housing being a necessity not a nice to have) whilst simultaneously restricting supply through planning rules and thus housing can outbid other productive use of most building sites?

So a double intervention in the market by the govt resulting in housing forcing out other productive land uses.

But there is a huge conversion cost. If you could just click your fingers and turn offices into flats at zero cost instantly then the cost of offices and residential land would be largely correlated but there are huge costs involved in converting

Also if you think offices or factories or warehouses create jobs, rather than demand, why dont we write into law that none of them can be converted and impose a price cap of £1/sqm max rent. So many marginal business will be saved!

I suppose what I am trying to say is, if there is a shortage of offices then the price and rents of offices will reflect that and converting into homes will be nonviable as the cost of building an apartment or an office per sqm is similar. So conversions will only be possible in areas of very weak office demand.

Herzlos

Presumably the office unit is up for sale/rent because it's not filled?

With a lot more people working from home, or using shared office spaces etc, is there really a demand for office spaces that we're not satisfying?

I see an awful lot more empty commercial properties than residential.

michaels

117k pa current rental income. Sure if we get rid of wnough offices the rent of those remaining will be bid up until enough companies have gone out of business that the returns on the small number of offices left match those from housing.

Does this really make sense for the economy as a whole?