Housing has never been more unaffordable. Homeownership rates are falling, rents are rising and young people are trapped by a crazy Housing market. Against this backdrop, Sir Keir Starmer says he is a YIMBY – he wants to build 1.5 million new homes, even on greenbelt land and we should ignore local opposition to get it done. But, how many homes does the UK need to build and what will be the effect of building so many homes on living standards, the housing market and the environment?

Now, before, we answer this – we could say there is a golden rule of British politics. Politicians promise to build millions of new homes, but once in power, they ignore their manifesto commitments. The Conservatives promised to build 300,000 new homes a year, but the actual figure is nowhere near.  When Labour was in power, they failed to meet more modest targets. The Lib Dems have a manifesto commitment to build more homes, but they often win by-elections by opposing homebuilding. So when Labour promise to build 1.5 million homes, you can take it with a pinch of salt.

But, putting that aside for a moment, would building 1.5 million homes really solve the housing crisis, and make House prices affordable?

Scepticism of building supply

Supply sceptics argue that building new housing will do little if anything to reduce housing costs. For example, if you allow new housing in cities unless it is specifically for low-income groups, they claim it will do nothing to reduce affordability. But building new apartments can lead to the gentrification of an area and an influx of the high-paid, will actually raise rents. But, is this justified? Before I answer that, another reason for Supply scepticism is that the UK population is actually growing more slowly than previously forecast. Between 2011 and 2019, England added an additional 2 million homes. But the number of households in England and Wales increased by only 1.4 million. Ian Mulheirn of LSE claims in 2018, England had 1 million surplus housing. Five years ago, England’s population was expected to be 57 million, but it turned out to be actually half a million less. In 2014, there was a forecast of 216,000 new households in England per year. But, four years, later this was revised down to 150,000. So you may ask where do targets of 300,000 come from? Reasons for slower population growth include a falling birth rate, a cost of living crisis causing young people to stay at home and (until last year) lower immigration than expected.

Housing Shortage

However, this narrative has to be taken with considerable caution. The UK has one of the lowest rates of spare housing in Europe. Shelter claim a one million waiting list for social housing, and other studies suggest a shortage of 4 million due to prolonged backlog and suppressed household formation. Housing is so expensive, that young adults are reluctantly living with parents. If supply was greater, they could choose independence – which is good for both children and parents.

Increasing supply does reduce price

Also, the idea that increasing supply doesn’t reduce prices is misleading. Increasing supply does reduce prices. Even if you only built housing at market prices, evidence suggests everyone will benefit from lower housing costs. Suppose you build expensive apartments in London. It will only be the rich who can buy, but if the well-off moved into expensive apartments, they would move out of cheaper properties, reducing the pressure on demand for everyone. Now, ideally, a mix of housing would be built, The UK’s greatest shortage of housing is definitely in the social sector, which has seen a fall of 1.4 million in the past decades.

But, the critical thing is that increasing supply does improve affordability. Now, people may ask but how come house prices have risen so much despite the fact we are building? The reason is the increase in supply has just not been enough.

Now the big question is – if we do build 1.5 million what impact will it have?

Numerous studies show that for every 1% increase in supply, prices and rents will be 1.5% lower than otherwise. This could mean if we build 1.5 million homes (6% rise in supply) in the next 5 years, prices and rents will 8% less, than if supply had stayed exactly the same.

With average house prices at £260,000, it would mean prices of around £244,000. Not insignificant but hardly a magic bullet for solving housing affordability. It shows that a bigger impact on house prices and rents is effective demand. But, if interest rates stay elevated for the next five years, then combined with increased supply, there will be a good chance for improved affordability.

Now, this is only a rule of thumb, there is no guarantee prices would fall by this number. But the FT report the example of Minnesota who have built the most number of houses in America, the result has been a fall in the real price of rents. Indianapolis with the lowest building rates, has seen the biggest rises. There is a clear link between increasing supply and lower rents.

Benefits of building houses

But, it is not just about prices, there are other benefits of building housing. Greater supply, especially where it is really needed will help increase geographical mobility, it will increase labour productivity and help boost economic growth. Building houses close to where people work can also help with environmental problems. A lack of affordable housing can cause people to commute further to work, increasing the use of cars and congestion. Building high-density housing, with good insulation and solar panels will have a significant environmental benefit. Also, if we don’t build housing, it will increase the perceived intergenerational inequality with home buying becoming dependent on age and parental support.

Downsides of building

However, on the other hand, we can’t ignore the downside of building houses – ever encroaching loss of greenbelt. The truth is we all like the idea of more housing until it comes into our backyard. Labour claim they will build on brownfield or greyfield sites. This is good in theory, but in practise, brownbelt land can be surprisingly expensive to develop and not necessarily where people want to live.

What type of housing

Another factor, is that it is not just about building houses, but where and what type of housing is built. The biggest shortage in the UK is in the south and the private rented sector as landlords have been squeezed by recent rate rises and new legislation. Building affordable social housing for rent, would be most helpful for those vulnerable to homelessness and reduce pressure from the private rented sector. A willingness to build higher housing density, European-style apartments could increase the housing supply with relatively less impact on the greenbelt land. But, at the same time, we need to avoid the mistakes of the 1960s council blocks, which became a magnet for social problems.

Building houses is not a magic bullet for improving affordability. But, if we don’t build more houses it will store up problems for the future. Building the right kind of houses is definitely part of the solution. A current concern is that the private sector have really pulled back from building due to a shortage of skilled labour, higher costs and plummeting demand. There is a real example of market failure and case for government intervention to invest in housing.

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