Do we really have a housing shortage?

Capital Economics have produced a new report that plunges me into fresh doubts about the UK housing market.

I used to regard the UK housing market as a massive bubble. But I’ve been moving to the view in recent years that the UK has a chronic supply problem, which is the reason average British house prices have fallen, yet not collapsed. If house prices were going to plummet, wouldn’t they would have done so by now?

However, Capital Economics does not buy the supply constraint argument for high prices.

It points out that, if there were too few houses, rents would have shot up at the same rate as house prices.

That hasn’t happened:

While house prices have taken off over the past 15 years, rents have only climbed gradually.

But haven’t rents been rising in recent years? Yes, but only up to long-run averages:

In other words, during the boom, rents were cheap by historical standards. What we’ve seen is a correction.

I’m not entirely convinced by Capital’s case. I still suspect a shortage of supply will add support to prices. Capital, by contrast, expects them to fall by 5% this year and a further 5% in 2013.

But, regardless of the supply/demand debate, there’s no question that houses are very expensive relative to average earnings.

This chart shows what proportion of the average wage a 20% deposit would consume:

So a prospective first-time buyer on average earnings asked for a 20% deposit would have to save 80% of their annual income to buy an average house. As recently as 1995 it was less than 15%.

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• greggf

  “If house prices were going to plummet, wouldn’t they would have done so by now?”

  In terms of the euro they have fallen by a third. According to your Chart 6 the position now is 290, take off 25%, which puts it at about 220. Compare this with the peak at 325.
  You must get out more Ben.

• http://twitter.com/BenChu_ Ben Chu

  I’m talking US-style 50% falls, which would be around what’s required to bring houses back into historic relationship with average earnings

• greggf

  Your comment that “there’s no question that houses are very expensive relative to average earnings” may reflect a semi-permanent change perhaps because lower interest rates justify higher prices because buyers can take out bigger mortgages. Britain is not alone in such changes to this price/earnings ratio.
  I include a link which examines this situation in other countries.
  http://www.economist.com/node/21540231

• greggf

  Britain is not the only country where prices are holding up, and an article in The Economist last Nov 26 th 2011 cited Australia, Belgium, Canada, France, New Zealand, Britain, the Netherlands, Spain and Sweden as having overvaluations of 25% to the price/earnings ratio. They suggested the reason that lower interest rates justify higher prices because buyers can take out bigger mortgages.
  Ref; article node/21540231 under Economics focus.

• http://nycrc.wikispaces.com/New+York+City+Regional+Center+Invest+in+Projects+That+Change+the+Dynamics New York City Regional Center

  These graphs show significant figures and information. They defined we really have a shortage of housings. Valuable information indeed. Love the way this blog has explained about the subject.

• Steve

  My guess is as to why the supply of housing hasn’t met demand, and thus lowering housing prices is due to government regulations and limitations, mostly likely building codes. Wouldn’t it make sense to developers to start building more living spaces? My guess is that the government impedes this by, for instance, not rezoning areas for high density living.