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IN 1975, IN her first conference speech as Conservative leader Margaret Thatcher pledged to build “a proprietary democracy”. Over 45 years later, homeowners are still more likely to support the Tories than their rivals, so the government would like to see more of them. In 2017, he set an ambitious goal of increasing the housing stock by 300,000 units per year in England. To help achieve this goal, in 2020 Boris Johnson, the Prime Minister, has pledged to simplify planning and weaken the right of residents to oppose development.
But housing and town planning pose a dilemma for the Conservatives: if they want more homeowners, they don’t want to bother existing ones. A partial electoral defeat in June against the Liberal Democrats in thriving suburban towns of Chesham and Amersham was attributed in part to local anger at the planned development. This frightened the party leadership. The backbenchers are also increasingly nervous. Political insiders now expect a shift in focus at the Conservative Party conference, which begins on October 3, moving away from building new homes and the annual target of 300,000, and towards support increased taxpayers to allow first-time buyers to take out larger mortgages.
British homes are expensive. Since 1995, prices have risen 170% in real (i.e. inflation-adjusted) terms, one of the fastest increases among wealthy economies (see chart). The middle house in England and Wales cost five times the median salary in 2002, but almost eight times in 2020. Homeownership, which has been on the rise for decades, peaked in the early 2000s). Over the past two decades, a consensus has emerged among politicians and policy makers that the main reason has been lack of supply. But since the mid-2010s, Ian Mulheirn, an economist now working at the Tony Blair Institute for Global Change, has argued that the main causes of rising house prices were falling real interest rates and slackening in the market. credit.
For a long time, Mr. Mulheirn seemed a voice in the wilderness. But now, it seems, the government is listening. Michael Gove, who became the minister responsible for planning and housing in the September reshuffle, is said to have told his colleagues that only about 15% of the growth in house prices over the past two decades can be explained by the lack of supply. Nick Boles, Minister of Planning in the early 2010s, an ally of Mr. Gove and long almost evangelical on the need for planning reform, has also changed his mind.
Mr. Mulheirn provides cover for the new management. He has long argued that there was little evidence of a housing shortage. He cautions against relying on housing construction volumes: what matters, he says, are total net additions to the housing stock. Converting a three-storey house into three apartments is materially the same as building two new apartments, but is ignored by the emphasis on new construction. Between 1996 and 2018, the housing stock in England grew by an average of 168,000 per year while the number of households increased by an average of 147,000. The result was that the net housing surplus increased by around 660,000 to about 1.1 million. And while the price of housing as an asset has indeed skyrocketed, he maintains that the price of housing as a service has not increased. Rents have grown more slowly than median household incomes since 1996.
According to this view, which now seems to be shared by the government, the main cause of the rise in prices is the role of housing as an asset. Owning a home produces implicit income: savings that would otherwise have gone to rent. As with other assets that provide an income stream, such as stocks or bonds, the value of that income is determined by the interest rates available elsewhere. According to this logic, house prices are high for the same reason that bond and stock prices are high: because interest rates have collapsed and credit has slackened. Mulheirn does not entirely reject the idea that an increase in supply would lower prices, but estimates that two decades of adding 300,000 units per year would only reduce prices by about 10%.
Castles in the air
This theory is not without criticism. The rental data on which it is based is of low quality. Household formation does not only influence house prices; he is also influenced by them. For example, high prices can cause young adults to live longer with their parents. Real interest rates are low everywhere, but housing markets vary by country and region. Rental yields are considerably lower in London than in the north of England.
Either way, even though global factors account for most of the rise in house prices over the past two decades, increasing inventory in the places people most want to live would be both beneficial. for well-being and for productivity. And encouraging young people to take on more debt should not be the only way to improve their living conditions. More social housing could be built and conditions in the private rental sector improved. Housing taxes could be reformed to better reflect the rise in values. But for a government determined to increase homeownership, none of this would help achieve its central goal. â–
This article appeared in the Great Britain section of the print edition under the headline “Change of plan”
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