Letter: There Is More Than Simple Supply and Demand Controlling the Housing Market

Published on: 16 Jul, 2022
Updated on: 16 Jul, 2022

From: Niels Laub

In response to: The Green Belt Gives Us the Opportunity to Grow

The price of property is governed by factors such as prevailing interest rates and the availability of money – not by how many new houses can be built.

The housing market and the value of property is driven by demand rather than need. 90 per cent of the turnover in the housing market is in existing properties and it is this demand that ultimately determines property values.

When the cost of borrowing is low, as it has been for the last ten years, people can afford to borrow more, and the demand for houses will increase, causing property prices to rise. So it is low interest rates, the availability of money and the government’s incentives, like the stamp duty holiday, that really drives the value of property.

Developers will never be persuaded to build more houses to bring the cost of houses down. That’s not how it works.

Developers build houses at their own pace to maximize profitability. According to analysis by the Local Government Association in February 2020, more than a million homes which have been granted planning permission in the past decade have not yet been built.

The supply of new properties is driven by demand. Newly forming households are overwhelmingly the young, and as they have been hit hardest by the downward pressure on wages and increased indebtedness from student loans, and more recently, rampant inflation, they find it very difficult to save for a deposit or obtain mortgages. Hence the poor demand for new housing and the reluctance of the major developers to increase supply.

According to the Countryside Charity (aka CPRE), government figures show that the amount of brownfield land becoming available for re-development is far outstripping the rate at which it is being used and there is enough available for 1.5 million new homes. The release of more land is therefore not necessarily the answer.

According to a report in the Telegraph December 19 2016, the UK’s biggest housebuilders are sitting on 14 years’ worth of land on which almost one million homes could be built. Research carried out by the housing charity Shelter found that the ten firms control 404,000 plots through their current land banks and a further 558,000 plots in so-called “strategic land banks”.

Developers prefer to develop green field sites because they are generally much cheaper and quicker to establish in terms of site set-up than urban sites, involve no costly removal of contaminated soil and are therefore much more profitable.

But above all developers much prefer to develop “green belt” sites because the uplift in land value is eye-watering. Farmland in the green belt around Guildford could be bought for about £7,000 per acre over the past ten to twenty years. As development land, its value can increase to about £1.2 million per acre in areas such as Blackwell Farm. Ask any local estate agent.

In my view, it is inappropriate to rely on the private sector to provide affordable housing. It is the equivalent of asking Jaguar Land Rover to increase the supply of Range Rovers to make them more affordable.

An increase in the supply of affordable housing will only be realised when the government:

• enables councils to borrow more money to build more housing for subsidised rent
• ends the “right to buy” policy which sells off council housing without replacing it
• makes subletting council houses a criminal offence and enforces it
• adjusts the tax system further to deter the “buy to let” market
• prohibits speculation in the residential market by non-UK residents (this is a big issue in London)
• requires all universities to provide adequate accommodation for their students
• fully embraces and incentivises prefabrication in the construction industry
• finds a way of encouraging elderly people locked into in large properties to downsize.

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