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London’s Housing Crisis: A system dynamics approach with a focus on the role of financial markets
In London, the gap between house prices and incomes has been continuously widening over the past few decades. Median house prices are now ten to sixteen times median incomes, the worst affordability level since data became available. This, chief among various other indicators, has brought observers to virtually unanimous agreement that London is facing a housing crisis.
In the vast literature on this topic most of the attention is directed towards the supply side, with the ‘supply shortage’ discourse completely dominating discussion on the housing crisis. Relatively little attention has been paid to the demand side and in particular the role of unregulated financialised investment demand. However, housing supply is necessarily finite and inelastic, while, because of globalisation of trade, housing demand is not spatially bounded. Therefore, theoretically, measures suggested by proponents of accelerating supply, such as land-use deregulation, seem unlikely to enable supply to catch up with the hyper-inflated ‒ domestic as well as international ‒ investment demand.
In my PhD, I am building an integrated system dynamics model based on existing literature and statistical data that will serve as a step towards a comprehensive model of London’s house price dynamics since 1980 with a particular focus on the role of the financial markets. This model can be used to further our understanding of the long-term trends leading up to the current crisis, the feedback processes behind such developments, and hence where the highest leverage lies when it comes to policies to address the situation.
This is work that is very much in progress at present, with the formal model still being developed. However, there are certain implications already made clear at this early stage. Above all, it is clear that disparate measures taken here and there, aimed at incremental increases in the supply of new build or the provision of affordable housing, do not address the underlying dynamics central to the emergence of the crisis, and are therefore unlikely to solve the crisis in the long-term. I argue that London’s housing crisis goes beyond the housing domain and is rooted in the prevailing paradigm of political economics in the UK, the country’s implicitly envisioned model of economic growth, and its neo-liberal system of asset-based welfare. Therefore, the conversation on the housing crisis, whether on the media or in the social sciences circles, needs to fundamentally shift from an exclusive ‘supply-side fetish’ and an emphasis on ‘making more affordable housing’ towards the more fundamental quandary of ‘making housing more affordable’. The literature supporting this view suggests this could be done through a broader framing of the problem encompassing practically infinite investment demand, the free rein of commercial banks in creating and allocating money, and the UK’s unsustainable model of debt-based economic growth and private asset-based model of welfare provision.