Merryn's Blog

How to solve the UK’s housing crisis

The problem in the UK housing market is not a shortage of housing but a surplus of speculation called by very low interest rates. Solve that, says Merryn Somerset Webb, and you solve the “housing crisis”.

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If you are in the midst of a housing supply crisis what is it that you would most expect to happen? The obvious answer is a fast rise in rents.

So, given that almost everyone is convinced there is a chronic shortage of supply in the UK, here's a surprising number for you: 1.6%. That's the rate at which rents rose across Great Britain in 2016 according to the Countrywide Monthly Letting Index for December. That's the lowest annual increase for seven years and half the rate of the rise in rents in 2015.

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Even more of a surprise for most will be the fact that rents in London aren't rising but falling: they ended the year down 2.9% (to an average of £1,246 a month).

So what's it all about? Supply and demand (as usual). The number of homes coming on to the rental market rose by 12% in 2016 (with the greatest growing 22% coming in London). But the number of would be tenants rose by only 6%.

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The result? As Countrywide points out, "faced with greater choice, tenants have been able to negotiate on price." In 2015 37% of those renewing contracts accepted a rent increase. In 2016 only 33% did. In Scotland and London renewing tenants even managed to negotiate average cuts in their rent (0.2% and 2.8% respectively).

All this information should be of more than passing interest to those in the UK government tasked with dealing with our "housing crisis." We are told over and over again that our problem is a massive shortage of housing; one we must address by frantically building houses everywhere. Goodbye green belt. Goodbye back gardens. And goodbye low rise. But the rent numbers tell us very clearly that this is complete nonsense.

If there is a shortage of housing in the UK, rents would be rising fast (that supply and demand thing again). They aren't. As the miseries pointed out at a Societe Generale conference last week, UK house prices are still very, very expensive and growth has outpaced inflation by many multiples (in London and the Southeast in particular). Yet look at a graph of rents and you will see that average rents have only just kept pace with CPI inflation.

The result is that UK house prices are bizarrely high relative to rents (50% above the long-term average). Houses are expensive to buy. Houses are not so expensive to rent.

This tells us that the problem in the UK housing market is not a shortage of housing (something also proved, by the way, by the fact that the average size of a household in the UK has not risen for years) but a surplus of speculation called by very low interest rates. Solve that problem and you solve the "housing crisis".

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