of its
affordability
problems?
Lessons from the
UK
Geoffrey Meen
Professor of Applied Economics, University
of Reading
July 13, 2017
© University of Reading 2006
www.reading.ac.
Central Issues
•
Are Australia’s problems worse than
elsewhere?
•
Some background from the UK – Barker
and her legacy
•
Why affordability worsens in the long
run or is it all a bubble?
•
Can we build our way out of trouble or
do taxes need to rise ?
•
The role of income redistribution.
•
Some “lessons”.
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The International Growth in Real House Prices
30
Annual % change -real prices
20
10
0
-10
88
90
92
94
Australia
96
98
UK
00
02
04
06
US
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3
The International Growth in Real House Prices:
Are they correlated (1987-2006)?
Australia
Australia
1.000
UK
0.719
US
0.343
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4
The Ratio of House Prices to Average Earnings
150
2000=100 (prices/earnings)
140
130
120
110
100
90
80
70
60
88
90
92
94
Australia
96
98
UK
00
02
04
06
US
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5
Private Sector Commencements - Houses
240000
Number of private house commencements
200000
160000
120000
80000
40000
82 84 86 88 90 92 94 96 98 00 02 04 06
Australia
UK
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Some Initial Conclusions
•
Australia’s worsening affordability since mid 90s
is not an uncommon experience. But this doesn’t
mean the causes are the same – important
structural differences e.g. tenure, taxation.
•
For most countries, e.g. Netherlands, UK, it is
not at all clear that this is associated with a
bubble. In UK, prices broadly in line with
fundamentals once lower nominal interest rates and
structural changes are taken into account.
•
In the long run, there are good reasons why
affordability, measured by prices/earnings, would
be expected to deteriorate. These are associated
with weak construction, taxation and the income
distribution.
•
On a per capita basis, Australia has higher levels
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of construction than the UK, but price movements
To
7
The Barker Review of Housing Supply (2004)
•
In the UK the view has largely been that building
many more homes is necessary to improve
affordability (little emphasis on “controlling”
demand).
•
Recent Green Paper raises the housing target to
240,000 new homes (net additions) in England by
2016, compared with 180,000 recently.
•
Barker emphasises making land supply more
responsive to market signals.
•
Also recommended the introduction of affordability
targets at national and regional level.
•
Methodology on the number of houses to be
determined by a new National Housing and Planning
Advice Unit. In fact, they use a regional housing
affordability model built at the University of
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8
Why is there a long term affordability problem
•
In the UK, planning policy attempts to match
the number of new homes to the number of
expected households. (240,000 versus 223,000
pa).
•
However it can be shown that this is
insufficient to stabilise affordability,
because of increasing demand for better
quality homes by existing households.
(Formally if the income elasticity of housing
demand exceeds the price elasticity, then
affordability worsens).
•
To
The problem is worse the wider the income
distribution between young (potential firsttime buyers) and older (existing) owners.
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Why is there a long term affordability problem
The choices are:
(i) either to produce more higher
quality homes.
(ii) To reduce demand by existing owners
(taxation?)
(iii) To influence the income
distribution
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10
Housing Construction and Affordability: Results
from the NHPAU
“Developing a target range for the supply of new homes across
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England
11
New Construction
•
NHPAU argue that affordability could
be approximately stabilised with
annual construction of 270,000 homes
pa in England.
•
Requires the land to go with it, but
no analysis of whether this is urban
or green field building.
•
Of course, homes are constructed
primarily by the private sector
rather than government and there are
questions whether the industry would
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build
this
OFTandlaunched
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Office of Fair Trading Market Study into House
Building
2 Strands
(i)How competition and the planning
system affect the delivery of new
housing.
(ii)Home buyers’ level of satisfaction
Issues
(i) How land is brought through the
planning process
(ii) How land with planning approval is
converted into new houses (competition
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Taxation
•
It is surprising that so much emphasis has been
placed on supply shortages alone in the UK.
•
Taxation advantages are capitalised into house
prices (although tax advantages to ownership have
been reduced over the years).
•
But local property taxes are higher in the
wealthier South of England than in the North.
•
In RBA submission to Productivity Commission
Inquiry on First Home Ownership suggested that
rising house prices mainly due to investor demand
due to tax advantages, rather than supply
shortages
•
In UK the closest equivalent in the UK is the rise
in the Buy-to-Let market, since mid 90s (easier
finance). Jury out on the price effects of this.
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Income Redistribution
•
First-time buyer grants are probably
not adequate.
•
The real problem is the relative
income growth of existing home owners
since housing demand is income
elastic.
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15
Messages
•
It is worth while attaching more weight to
market indicators.
•
But, typically, considerable numbers of new
homes have to be produced in order to have a
significant effect on affordability. These
are not small marginal effects.
•
If the approach is adopted in Australia, the
analytical framework to go with it is
necessary. But this is a non-trivial task.
•
Don’t forget the demand side. One of the main
reasons affordability worsens is not
increasing numbers of households or
immigration, but increasing housing demands
by your
existing
households
incomes
continue to
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