Why UK house prices have grown faster than anywhere else
08-07-2014
House prices have grown faster in England since late 1973 than almost all other European countries
Monopoly houses on Old Kent Road and Mayfair
The problem is clearly that there is too little supply, given the demand and the growing population Photo: Justin Sutcliffe
Allister Heath
It is the question we all want an answer to – why, oh why, are British homes so expensive? It is not just in London that they are so pricey, costing an ever-rising multiple of the average annual salary, but also in many other urban centres and in large swathes of rural Britain. New research reveals that house prices have grown faster in England since late 1973 than in almost all other European countries.
So what is going on? The problem is clearly that there is too little supply, given the demand and the growing population. But why? There are two possible kinds of constraints.
The first are regulatory: rules that make it difficult for new homes to be built, stringent planning regulation and other legislative constraints which mean that price increases don’t lead to an increase in supply, unlike in other markets. The second kind are natural and physical: a scarcity of land, for example, or an uneven topography that makes it very hard to build.
So which of the two factors are most important in the case of the UK? And what would happen to prices in their absence? Christian A. L. Hilber of the London School of Economics and Wouter Vermeulen of the CPB Netherlands Bureau for Economic Policy Analysis have just produced a dispassionate analysis of the problem, which will be published shortly in the Economic Journal.
They find that house prices in England would have risen by about 100 percentage points fewer, after adjusting for consumer price inflation, from 1974 to 2008, in the absence of regulatory constraints to housebuilding. In other words, they would have shot up from £79,000 to £147,000, instead of £226,000. Another way of putting this is that prices would have been 35pc cheaper.
Had the south-east of England, in practice the most regulated English region, been as liberal as the North East, the least regulated over the past 40 years, house prices would still have been roughly 25pc lower. As it happens, the authors aren’t necessarily advocating deregulation: they are trying to calculate, using sophisticated econometric techniques and a wealth of detailed data, the effect of constraints.
What about the physical restrictions? In a hypothetical world where they could be magicked away, prices would be 15pc today lower than they would otherwise have been. The majority of these constraints can be felt in highly urbanised areas, for obvious reasons: there is not as much space available in city centres and lots in the countryside. Some parts of the country are easier to build on than others.
So the lesson is clear: prices would have risen even had we still been governed by the liberal planning framework of the 1930s, but by much less. The impact of regulations on prices is relatively recent; they started to have an effect by the 1970s and have played a much greater role in the past 20 years.
The paper also reports on other fascinating findings. The estimated “regulatory tax” in the City of Westminster in central London exceeds 800pc of marginal construction costs. Regulatory constraints are very important in the prosperous provincial town of Reading; meanwhile, in Newcastle and Darlington house prices are barely moved by supply constraints.
None of this is rocket science. Prices are determined by supply and demand. People want to live where there are jobs; these days, this means that there is a huge amount of demand in London and its commuter belt. The government says that it wants to move economic activity to the North, and announced its Northern Powerhouse plan yesterday; but these sorts of artificial activity-shifting schemes have a history of failing. House building finally seems to be creeping up, partly as a result of the Coalition’s reforms in the area, but not by enough to make a big difference. House prices will continue to rise - until the next crash, that is.
allister.heath@telegraph.co.uk