UCL Grand Challenges


Building more houses cannot solve the housing crisis

by Neil May, March 2016

The idea that the Housing Crisis can be solved under the current economic system by building more houses is both mistaken and harmful.  If we define the housing crisis as one of affordability, then according to various accepted metrics, a supply solution would mean that prices would have to fall overall by 50% in London, Oxford and other parts of the South East and between 10% and 40% elsewhere.  It is impossible to achieve this, or even to stabilise house prices overall, by building more houses under current conditions.  The reasons are that

  • New houses constitute only a very small part of the housing stock, so new housing has negligible effects on the overall market until the numbers reach into the millions.
  • Demand is almost unbounded (both from UK and from international investors), so supply can never "meet" demand. 
  • Furthermore lowering house prices would have disastrous consequences on the rest of our economy and on many private individuals and businesses. For example
  • Housebuilders (including now many social housing providers) only build in a rising market. Their businesses would all collapse in a perpetually or suddenly falling market.
  • Our banking system is reliant on housing prices continuing to rise and so would collapse if there was a significant drop in house prices (as it did in 2008 when house prices fell by the largest amount in our history - 16% overall, less in London).  This reliance has increased significantly since the 1980s.
  • Many millions of people would be bankrupted if there were significant long term falls in prices, including all those with buy-to-let properties as well as recent home buyers. Many people now have all their security including pensions wrapped up in high house prices.
  • The whole economy would collapse if prices came down significantly as our "wealth" is now largely embedded in our housing and the liquidity of the economy depends largely on bank money creation on property loans.

For all these reasons Governments have for the last 40 years encouraged house price inflation and seen it as a measure of economic prosperity while all other inflation and particularly wage inflation is seen as bad and is discouraged.  In terms of the affordability of housing this can only end in one way.

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[A common metric for affordability is 30% of your income. The above charts show how this has changed for people between 1996 and 2008. The difference with the 60s and 70s is even greater]

Building more houses under the current economic system cannot reduce house prices and may in fact lead to worse affordability in many areas (as poorer parts of cities and the countryside are "gentrified" and investment raises prices locally). The housebuilders, banks, treasury and most homeowners and landlords in this country do not want housing prices to fall. New homes are a tiny proportion of the overall housing stock and only cater for a very small percentage of those in housing need. Substantially lower house prices which actually made homes available for poor but "hard working families" and those in real housing need would anyway collapse our economy. So why on earth do we keep on saying that increasing the supply of new homes will solve the housing crisis?

Read more analysis from UCL on Re-thinking Housing.