House prices and the planners
House prices are overvalued, say the experts. At least, that’s what they said last year. In the last 12 months, however, the average price of a British home has risen by a further 18 per cent. This doesn’t mean that the housing bears were wrong. Rather, it is a reflection on the inefficiency of the housing market, which in this country might have been designed specifically to provide an endless cycle of booms and busts.
Over the past 50 years, the price of the average house has hovered a little above three times the owner’s income. According to Tim Congdon of Lombard Street Research, there are good reasons for this ratio to remain stable. First, the amount of income people allocate to their housing needs does not appear to change much. Secondly, a large part of the price is due to builders’ wages and the cost of materials. Thus house prices can be expected to rise in line with income. Currently, the house price to earnings ratio is somewhat above its long-term average, approaching four times. It was even higher in the housing booms of the mid-1970s and late 1980s but fell back on each occasion.
Were house prices to come off their current levels, the situation would not be too bad-a decline of roughly one fifth would suffice to bring them back in line with average historical prices. Unfortunately, the current housing boom may well continue for some time. The reason for this lies in the peculiar nature of the market. Under normal market conditions, rising prices and profits engender an increase in supply. For instance, when telecoms and technology companies were highly valued in the late 1990s, a vast number of new firms were established and quickly floated on the stock market. Over-supply caused the technology bubble to burst and share prices to revert towards their intrinsic value.
In Britain, however, the supply of new housing is determined by central planners who allocate land for housing according to long-term demographic forecasts regardless of price. Matters are made worse by local authority Nimbies who grant far fewer planning consents than the number required by Whitehall. Furthermore, the house-building industry has become more concentrated in recent years, with companies like Taylor Woodrow buying up a number of their competitors. These house-builders are wary of losing money as they did in the early 1990s after…