The boom & bust of British housing

By Leith van Onselen

In Monday’s PowerPoint Presentation on Housing supply & price volatility, I included a chart showing the extreme price volatility of housing in the UK, where prices have experienced four boom and bust cycles since 1970. (see next chart).

As noted previously, tight planning restrictions have been in place in the UK since the passage of the Town and Country Planning Act 1947, which established that planning permission was required for land development and that ownership alone no longer conferred the right to develop the land.

The passage of this Act also saw the establishment of greenbelts around UK cities, which excluded large swathes of agricultural land from urban development (see below graphic).

In the 1990s, the Central Government tightened land supply even further by explicitly requiring that 60% of all new land for housing must be brownfield land – i.e. land which has already been developed for some other purpose.

A final related roadblock to housing supply in the UK is its centralised fiscal system, whereby local authorities – which are the primary decision makers on development and have statutory obligations to provide services for new houses – receive very little revenue from increased population and housing. As such, these local authorities tend to be biased against development.

Combined, these regulatory constraints on new housing construction have meant that housing supply in the UK has been incapable of responding quickly and efficiently to changes in demand, thus placing upward pressure on prices and creating expectations of future capital growth.

This view received strong support in a recent study by the London School of Economics (LSE) Spatial Economics Research Centre (SERC), which attempted to quantify the role that the planning system plays in driving-up housing prices in the UK, as well as price volatility, by examining 35 English Local Planning Authorities (LPAs) using 35-years of data.

The key extracts from the study are as follows:

A new-build house is 38 percent smaller in the UK than in densely populated Germany and 40 percent smaller than in the even more densely populated Netherlands…

Real house prices – but not real incomes – have grown faster in the UK over the last 40 years than in any other OECD country. As a consequence of this, a genuine ‘housing affordability crisis’ has been developing. Young households are particularly strongly affected; they increasingly struggle to get their feet on the owner-occupied housing ladder…
Price volatility is similarly extraordinary. During the last full real estate cycle real house values in the UK as a whole first rose by 83 percent during the upswing of the 1980s; they subsequently declined by 38 percent during the downturn of the first half of the 1990s. This swing is substantially larger than that of the most volatile metro area in the US during the same cycle period: real values in Los Angeles rose by 67 percent and declined by 33 percent…
The proposition that the English planning system impacts house prices is not far-fetched. The planning system is widely viewed as inflexible. Historically, it ignored market signals and has failed adequately to cope with changing socio-economic conditions. This rigid supply regime has been suggested – but not tested – to be an important cause of England’s excessively high level and volatility of house prices…
According to our baseline estimate, house prices would be around 35 percent lower if, hypothetically, all regulatory constraints were removed. More pragmatically: had the South East, the most regulated English region, the regulatory restrictiveness of the North East, still highly regulated in an international context, house prices in the South East would be roughly 25 percent lower. The effect of constraints due to local scarcity of developable land is largely confined to highly urbanised areas. The local impact of uneven topography is quantitatively less important. Hypothetically removing both types of physical supply constraints, again according to our baseline estimate, would reduce house prices by 15 percent.
We also find that the effects of the various supply constraints on the price earnings elasticity are greater during boom than bust periods. The year fixed effects in our estimates imply cyclical behaviour also at the aggregate level. However, most of the cyclicality can be explained by local demand fluctuations in conjunction with local supply constraints…
An increase in house price volatility, through the consumption channel, also has important negative consequences for the macro-economy. A higher degree of house price volatility may lead to increased volatility of consumption and reduced macro-economic stability. It was these types of considerations that lead the UK government to scrutinise the planning system and its relationship with the wider economy in the first instance.
The full SERC study is provided below.

The Impact of Supply Constraints on House Prices in England (SERC Sept 2012) by leithvanonselen

 

 

 

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Comments

  1. Yep – but they don’t come remotely close to the post-easy credit price movements.

    Housing is mostly debt financed – buyers can’t spend what they can’t borrow, regardless of planning restrictions.

    Are you saying that it’s too difficult to reverse easy housing credit, we should just ease planning restrictions instead.

      • Leith, note that that study says:

        “…..According to our baseline estimate, house prices would be around 35 percent lower if, hypothetically, all regulatory constraints were removed…..”

        Their baseline is 1970, when prices already WERE inflated considerably by the supply restrictions.

      • But then how would the baby boomers transfer all the Australian mortgage debt they’ve built up, in order to live the high life off the back of booming asset prices, onto the next generation?

        Inflated land and house prices is the easiest mechanism for them to do so.. of course they could opt (and may well end up doing so) for the Irish model, and transfer it all straight out to the govt when the land/debt bubble starts to deflate and Mega Bank gets in trouble.

    • Reversing easy credit, just means that a similar cohort of people will never own their own home. They will be unable to save money as fast as house prices rise, and house prices will still rise to around the same level as they are anyway – if the underlying problem is the supply of housing.

        • My 2 chopsticks would be easy credit for first home buyers AND plenty of freedom of “supply”. This is what was laid on for the post-WW2 generation, and it worked pretty well.

          BTW the combination of easy credit WITH freedom of “supply”, in the famous US examples, has meant, in our time, very rapid payoff of (small) mortgage debt and massive household discretionary spending going forward. As I keep saying, these cities are going to “pwn” the economic future of not just the USA, but the world.

          • I don’t think that the buyers in 1960 had easy credit. Pretty sure that 80% LVR was the maximum. There was LMI in the seventies, but it was very rarely used except by Building Societies.

            Land subdivisions were not all done by developers then, and the statutory fees and charges were significantly less when they were.

            Totally different era – it was when “can do” meant something.

          • Peter, “can do” definitely made a lot of difference.

            I am not an expert on the history of the terms of finance for first home buyers, but I believe that there have been periodic episodes of government-subsidised home-ownership savings schemes and subsidised artificially low interest rates and tax credits. In many cases this did not lead to any inflationary effect on house prices, which were determined by the cost of supply, just as with any goods in normal undistorted markets.

      • Easy credit and restricted supply are both problematical as Leith notes – I place more weighting on the supply of credit as the bigger cause of the problem while Leith seems to weight restricted supply more heavily.

        It’s going to be difficult for house prices to do what they have done over the past decade if most people are unable to borrow such sums of money. They would have been very unlikely IMO to have reached the levels they have reached today if credit had remained more difficult to get.

  2. In fairness though protecting that green belt land is very important and probably does more to protect standard of living than lower house prices would.

    Also a longer term trend has been for some business and govt depts to move north due to cheaper land values there which is also a positive outcome of the restrictions in the south.

    I think it’s better to compare Australia with the US when it comes to development restrictions/urban sprawl, as the situation is just too different in uk. It’s overcrowded cities would be unbearable without some nearby countryside to escape to for a breath of fresh air. If you spread out any further you just hit the next urban area before long, unlike aus and us where there is space to spread into.

    • “In fairness though protecting that green belt land is very important and probably does more to protect standard of living than lower house prices would.”

      Yes, it is very important to the upper-class, which own estates in the greenbelt, but not so important to poorer families forced to suffer in expensive rabbit hutches.

      Also a longer term trend has been for some business and govt depts to move north due to cheaper land values there which is also a positive outcome of the restrictions in the south.

      Yes, I’m sure some have moved north. However, many have also shut-down or moved offshore due to high land costs/rents.

      It’s overcrowded cities would be unbearable without some nearby countryside to escape to for a breath of fresh air. If you spread out any further you just hit the next urban area before long, unlike aus and us where there is space to spread into.

      I disagree. It is better to take the German approach (where development is relatively permissive) and have lots of green spaces within the urban area, rather than outside of it. Again, it’s predominantly the wealthy that derive the gains from the green belt as they have the ways and means to use it. And the UK is over-crowded only because it has forced people to live in a very limited space. Germany and the Netherlands are way more urbanised and have far more living space per person, yet few would claim that they have “concreted over the country-side”.

      • Absolutely spot on, Leith. A high proportion of city dwellers in the UK rarely if ever sample the delights of the country. Very much a middle and upper class preoccupation. The upper classes live there, or live there intermittently (ie having both city and country residences) while the middle class drive out to visit the stately homes, check out the antiques and dream of retiring to the country.

        • EXACTLY, Alex and Leith.

          Ironically, “access to local green space” is also very high and very democratised in the affordable-housing cities in the USA – and this is a free market result more than a “planning” one.

          Dallas, for example, is 20% public green space, and this is evenly distributed through the region. And this is a LOT of green space, given how low density Dallas is. The average section size is over half an acre.

          And the land rent curve is very flat, and the cost of “buying in” to a desirable location is an obstacle to only a tiny minority of people, which is completely the opposite to the UK’s cities.

          EVERY attribute of housing is cheaper and more democratised in the median-multiple-3 city. House size, section size, local amenity, etc etc.

          • “EVERY attribute of housing is cheaper and more democratised in the median-multiple-3 city. House size, section size, local amenity, etc etc.”

            Which is exactly why the ruling classes here don’t want it.

      • well yes I’m sure you’re right that the upper “land owning” class benefit the most from this, as the do from most things. And I also don’t doubt that germany has a more efficient system in place, again as they do in most things! (See “zipper system” for roundabouts, my favourite!)

        However, I still think that even though it would benefit Sydney to have looser urban fringe development controls, London is better off retaining that circle of green around it. And the UK as a whole is better off is Manchester, Birmingham, Glasgow etc get a bigger share of business and population growth (which realtive high land values in London will help to achieve) rather than the continued expansion of London, which I think is about as big as it can be now and still be livable.

        • If that is the goal, then the UK should eliminate land-use constraints in the north and make planning very permissable. While planning in the north is a bit looser than in London, it is still very restrictive.

          • Very true – the UK economy would benefit very much from having a bit more variety of city types. It has only one success story, London. And this is in spite of urban planning, not because of it. The stagnation of all the other cities is very much “because of” urban planning.

            If just one UK city was like Houston, it would have absorbed all the growth in national sectors that have not just been deflected from other cities, but destroyed altogether.

    • General Disarray

      British conservatives may as well work directly for the banks. And our politicians aren’t far behind them.

  3. “I included a chart showing the extreme price volatility of housing in the UK, where prices have experienced four boom and bust cycles since 1970, with the first two episodes preceding the era of ‘easy credit’ brought about by financial deregulation. (see next chart).”

    You are wrong on this. First two bubbles (early 70s and late 70s) were also caused by easy credit after banking deregulation.

    In late 60s big bank mergers were approved. Than in 1971 Competition and Credit Control Act was passed. This act relaxed bank reserve requirements (enabled banks to create more money), allowed deposit banks to participate on the market, removed interest rate collusion …

    Before 1971, the clearing banks had been required to hold liquid assets equivalent to 28% of deposits. This was relaxed and extended, requiring all banks to hold reserve assets equivalent to 12.5%
    of eligible liabilities. In other words, this act flooded market with piles newly created money.

    This is how Bank of England describes this period:

    “As Capie (2010) notes, however, fringe banks continued to expand after the introduction of Competition and Credit Control, in part reflecting economic expansion during the 1971–73 period and a relaxation of controls on property development. This combination of regulatory and economic factors coincided with one of the most rapid periods of credit growth in the 20th century. It also contributed to an ongoing decline in banks’ liquidity holdings, ultimately to below 5% of total assets by the end of the 1970s”

    Second bubble in late 70s – early 80s was also caused by banking deregulation: In late 70s, foreign exchange controls were lifted.

    The abolition of exchange controls made subsequent financial liberalisation more likely, because businesses had an option to relocate to less tightly regulated jurisdictions.

    This created second wave of fast credit expansion in late 70s. Individual credit expanded at real (CPI adjusted) pace of more than 10% in late 70s (14% pa in 1978).
    1979 Banking Act introduced regulation but it was limited only to recognized banks and did not apply to other licensed credit institutions. This created situation where these institutions moved away from BOE control radar and started landing spree.

    Late 80s and early 2000s are clear case of easy money driven bubbles as well.

    More interestingly, just before early 70s bubble started, new conservative government lifted new land development restrictions, and allowed easier home developments. This did not prevent credit bubble from forming. It probably made bubble smaller but bust larger. Even with this removel of development restrictions bubble was almost as big as early 2000s bubble. Prices jumped 75% (in real terms) and than fell to pre bubble level.

    • Fine. Still doesn’t change the facts about excessively tight supply working with demand (credit) to create extreme volatility. But knowing you, you will simply dismiss the supply-side altogether and argue that the volatility and unaffordability is caused purely by credit.

      As I said yesterday Rave, your focus on one side of the housing equation is about as useful as eating Chinese with only one chopstick.

      • “As I said yesterday Rave, your focus on one side of the housing equation is about as useful as eating Chinese with only one chopstick.”

        +1

      • excessively tight supply of new land will slowly and permanently lift price of “big houses on a big blocks”. Without easy credit and speculative demand it will not affect volatility at all.

        On the other hand new land development restrictions will not affect much price of unit redevelopment in city zones. Our cities have very low density and plenty of ruined suburbs waiting for redevelopment. Cost of redevelopment can be even cheaper than new land development because of infrastructure cost savings.

        • “Excessively tight supply of new land will slowly and permanently lift price of “big houses on a big blocks”. Without easy credit and speculative demand it will not affect volatility at all.”

          Maybe volatility will be low, but without credit, and with inelastic housing supply, prices will still rise faster than a large cohort of the population can save money. This can be seen in plenty of less-wealthy countries where they never ever solve the “informal housing” slum problem. The informal housing and slum problem was not ever solved anywhere without transport system flexibility combined with “free market” suburban development lowering economic land rent.

          “On the other hand new land development restrictions will not affect much price of unit redevelopment in city zones. Our cities have very low density and plenty of ruined suburbs waiting for redevelopment. Cost of redevelopment can be even cheaper than new land development because of infrastructure cost savings.”

          None of this is true. The UK has a major problem, and it has been noted in both Portland and Auckland, that when fringe land is inflated in price, ALL land in the city is inflated in price. The price of existing “ruined” sites remains an obstacle to economically viable redevelopment. Prices are downwards-sticky and the vendors look at the prices of land elsewhere in the city, at previous episodes of volatility, as a guide to what they think they should “hold out” for.

          http://www.scribd.com/doc/78112799/Auckland-Council-FGA-Report-2011-12-22-Final-2

          See also the section of “Making Room for a Planet of Cities” by Shlomo Angel et al, on the rate of “infill” development in Portland. It is slower after land prices are inflated by their UGB policy.

          Sickeningly, planners and anti-growth advocates point to the undeveloped sites and even to empty houses, and deny that there is a “shortage”. This is like an oligopoly in bread in a poor country, denying there is a shortage of bread because every week they destroy a large proportion of unsold loaves – that people could not afford.

          It is not true that infrastructure cost savings can be made by increasing existing urban density. Growth containment is a VERY BAD FAITH policy because its real hidden intent is to force developers to pay, via “infrastructure levies”, for new infrastructure IN EXISTING DEVELOPED AREAS, that the Councils have failed to set aside funds for. Councils are certainly NOT letting developers do “intensification” developments “free of levies” because “no new infrastructure is required”. On the CONTRARY.

          It is a pity that this issue is too complex for the average voter to understand, because it is deeply dishonest, fraudulent, and harmful.

          • Normal (non-speculative) natural demand change is so slow that the price pressure is not strong enough to move prices up fast enough. There is always time for other market forces to act and provide alternatives.

            Land restrictions start moving existing property (developed land) prices up in existing suburbs. Slowly rising demand and land development restrictions push new brownfield developments. These developments in (non-speculative environment) make downward price pressure onto existing houses and developed land.

            There is no reason why would not be able to redevelop and built more homes at current price to meet non-speculative demand before prices move up.

            The only scenario that might push prices significantly up in non-speculative environment is lack of land for redevelopment or inability to redevelop existing suburbs fast enough. I don’t think most of the world has issues with any of these.

            All of your examples experienced speculative credit driven bubble so it’s impossible to use them to prove your point. On the other hand, there are places with strict land regulation but stable house prices – e.g. Portugal.

            Your theory doesn’t explain why house prices bubbled in cities with falling population like Manchester and Liverpool. Population in these cities halved, number of households decreased as well but prices sky-rocketed. Clearly there was no issues with real demand and supply in these places. It would be foolish to build new homes just to satisfy speculative demand, not the real need for place to live.

            BTW. “The informal housing and slum problem was not ever solved anywhere without transport system flexibility combined with “free market” suburban development lowering economic land rent.”

            There are plenty of ways to solve housing problem. Maybe the most extreme one was fully regulated eastern european case. Even that one worked much better than a speculative “free market” we have today.

  4. I own a 2 bed house in Luton which is 25 mins on the express train to Kings Cross. You can buy one for only 130,000GBP (195,000AUD). There’s plenty of affordable options in the UK if you think a bit further than the city centre.

    • Yep, classic unintended consequences of policies that are allegedly to “reduce commuting energy consumption”.

      Compare your “choices”, for house size, section size, and location relative to any job you might get; with your counterpart in a median-multiple-3 city in the USA. THEY have SHORTER commute times on average, larger houses, FAR larger sections, AND lower prices for those houses. AND they shack up and start having kids far younger, and have more of them. This means MORE households that need to locate relative to 2 jobs and 1 or more schools; yet they still manage to keep their average commute to work times LOWER than heavily-planned, masochistic UK cities.

      Where is the benefit to the UK’s planning policies? There is none, before we even start looking at “benefit-cost” ratios. The people who DO benefit, are of course the property owner class and the finance sector.

    • If we had a network of underground and above ground rail it would make the outer areas more liveable for those who work in the CBD, and that would take some price pressure off the city centre – but in 20 years we would still come back to this point, as will London.

      • Here is another irony – these glorious planned cities actually “price out” the bottom 95% or so of the population from the options of SHORT public transport trips and “walkable” communities, as well as from short car commutes.

        A growing cohort of ultra-long-train-commute riders is actually a severe subsidy burden on local governments. Ironically, it would cost a lot less to just let people use cars, let employment disperse, and do realistic “connector route” road capacity expansion at the locations where people are doing their short car trips to work.

        • Phil – even highways have to be planned decades in advance, so planning is a must.

          I don’t intend to argue, but I would need some real evidence to come on board with that.

          • Radial-pattern highways are a bad investment. They are engineered for high speeds yet carry the great majority of vehicles at very low speeds in high congestion. They focus travel patterns and land rent on the urban core, when job dispersal is the norm.

            Congested radial-pattern highways are a highly visible problem, when in fact they serve the needs of approximately 20% or less of commuters, and the hidden success story in urban economies is the other 80% of commute trips, and the other 100% of non-work-related trips, that occur from “suburb to suburb”, with congestion “dispersed”. Spending a bit of money helping the DISPERSED traffic flows, is far more compatible with the direction of urban evolution. If you add one new lane to one existing one, it is far more effective at congestion reduction than adding one lane to 8 that are already there.

            I recommend:

            Brown, Morris and Taylor, “Planning for Cars in Cities” (the full length paper, not brief magazine-article versions);

            Hartgen and Fields, “Gridlock and Growth”;

            Small and Ng, “Tradeoffs among Free-flow Speed, Capacity, Cost, and Environmental Footprint in Highway Design”.

      • yes as soon as they put in higher speed trains the likes of wollongong and newcastle will become very good options for sydney workers, and take a lot of the pressure off. Not sure why this is taking so long though…

        • Why is this better than a short car commute or better still, the ability for people to afford a home within walking distance of likely places they will work?

          Trouble is, commuter rail has come to be regarded as an end in itself, by planners, rather than one component of a very much bigger picture.

        • I would suggest a better option is to move business workplaces to Wollongong and Newcastle, and have commuters spend less than 15 minutes each way.

          Also this would allow for a much better quality of life, being able to pursue idle green idle instead of competing for dwellings in the Sydney basin.

          • Exactly. The process of dispersion of employment is happening anyway; imagine if planners tried to run with it rather than trying to stand athwart the forces of economic evolution.

            In the UK, they have “city centre first” policies as well as their growth containment policies; this is what results in CBD rents being literally thousands of times higher than they need to be. The Cheshire and Hilber paper, “The Political Economy of Market Revenge: Office Rents in Great Britain” is a hilarious – or saddening – read.

    • Adz. Luton is a classic example of “leapfrog development” or “planner sprawl”. That is, where a growth boundary or green belt forces people to move to far flung exurban suburbs or towns in order to find more affordable (but not necessarily affordable per se) housing. This phenomenom has particularly adverse impacts on poorer segments of society and actually works to increase sprawl, energy use, and commuting times.

      I note also that the pre-tax median household income in the UK is around 30,000 GBP (higher in London but lower pretty much everywhere else), meaning your typical household would have to sacrifice around 4.3 times income to buy your 2br house – all for the benefit of living beyond the green belt 50kms north of the Greater London area.

    • For the audience’s benefit and having spent half a decade living 15 kms away from Luton. The 130k property is about 5 times the local industrial wage. The quality of local housing stock is pretty grim at that price point.

      http://tinyurl.com/bj7lxgh

      Luton itself is about 50km from London and can best be described as a kip. It’s not pleasant, half new town, with a dual carriageway running through the middle of it.

      Spruiking ‘just’ 25 minutes on a fast train to a London terminus, ignores the

      15-20 minutes it will take at the very minimum to get to the station from most places in Luton. (Forget parking at the station, you will have to walk or get a bus)

      The 20 minutes and one tube change extra it will take to get to say Bank in the City.

      The 35-40 minutes and two tube/DLR change extra it will take to get to Canary Wharf.

      The 1 hour + tube change extra it will take to get to anywhere in SW London.

      And you will pay $500+ per month out of taxed income for the season ticket.

      Commuting from Luton to anywhere with work in London is 1:20 each way at the very minimum on a good day.

      Unacceptable.

      • Agree with Leith; awesome comment.

        “…..And you will pay $500+ per month out of taxed income for the season ticket…..”

        And taxpayers at various levels will be coughing up another $1000 odd in cost of subsidising your season ticket to make it artificially that much cheaper than using a car.

        • Thanks for the kind words.

          Thing is, rail is a lot more expensive than driving for commuting destinations outside the middle of London, the UK has the highest commuter rail fares in Europe.

          But given congestion + congestion charges. Only the terminally insane would attempt to drive daily to central London from somewhere like Luton. Petrol is $2.50/litre, the congestion charge a.n other 20 bucks and central London parking will run to 50+ bucks/day. Notwithstanding the 90-120 minutes each way for the journey.

          From Luton, NW London through an arc 15-20km either side of the where the M1 intersects the M25 is commutable Luton, and that will be at least a 45-60 minute drive at peak times.

      • @JB I lived there for a couple of years before moving out here 7 years ago, so in response:

        Luton new town is a dump, but you are only a few k’s from great country pubs, golf courses and villages so I was pretty happy there on weekends.

        The house is in old town so about 7 mins walk to the train, all in journey time to canary wharf was about 1:10.

        Yeah the cost of the train was pretty bad, and knowing the UK it’s probably gone up 5-10% every year since I left.

        It’s actually a very nice house, short walk from a park and the old town is quite pretty and you don’t have to go through the new town to get there. Granted it’s nothing like the detached houses that are de rigueur in sydney, but it’s a hell of a lot cheaper.

        @UE you’re totally right with the green belt leapfrog development, the belt makes no sense to me whatsoever.

        My point is, I don’t believe that people are priced out of buying in the UK for places with decent infrastructure to get to work as they are in Sydney. There is nothing here in that price range with the means to get to the CBD reasonably quickly.

        As an aside, I do wonder if the UK got rid of stamp duty whether there would be a massive shuffle of people moving nearer to where they need to be. London is a massive city and so many people waste so much time crossing from one side of it to the other for work, but the draw of ‘roots’, ‘community’, etc is likely to stop it.