While the country has been striving to build more homes to ease the housing crisis, staff at the Bank of England suggest that the problem really lies elsewhere.
Bank Underground, a blog written by staff at the Bank of England, has released an article arguing that low interest rates have played a bigger part in real house price rises since 2000 than the lack of housing supply.
Arguing that housing is an asset rather than goods, the blog says: “Lower interest rates raise asset prices by increasing the present value of future cash flows. These effects can be powerful, especially when interest rates are already very low.
“To see this, suppose a contract pays you a pound coin every year forever. The first 20 pound coins are discounted by the prevailing expectations of future interest rates at the appropriate points on the yield curve, and then assume the discount rate is constant at some other value after that. How much would this contract be worth at different points in time?”
It argues that if house prices had risen at the same rate as goods in general over the past 20 years, they would have risen by 50%, but instead have risen by 60%. Using a series of charts, the report, which can be viewed in full here, goes on to demonstrate what it calls the “drivers of change”, concluding that the “relative scarcity of housing has played almost no role at the national level since 2000, though it has pushed in opposite directions in different regions“.
Rising rents linked to taxes?
Another blog post on Bank Underground linked to the above also looks into the idea that taxes on rental income – which is hugely topical at the moment with Section 24 tax changes affecting many landlords – is not necessarily linked to higher rents for tenants, and the same goes for taxing buy-to-let transactions.
It argues because physical stock (housing) is “fixed” in the short term, because it’s hard to convert individual residential properties into business or other use, and demand hasn’t changed, rent shouldn’t change either.
“Some landlords will sell up as letting becomes less lucrative. But at the end of each sales chain is either another landlord or someone who was previously renting.”
“If it’s another landlord, aggregate rental supply and demand are both unchanged, and so are rents,” the article says. “If it’s a new owner occupier, the supply of rented property has shrunk by one, but so has the number of renters. The tightness of the rental market and thus rents are unchanged.
“The net yield (rents minus tax) from letting property has fallen, so to restore yields to match outside options the asset price must fall. As with any asset, asset prices adjust to the news in yields, not the other way round.”
Other evidence
Bank Underground isn’t alone in its theory of housing supply playing a minimal role in the so-called housing crisis. A report by Ian Mulheirn for the UK Collaborative Centre for Housing Evidence, titled Tackling the UK housing crisis: is supply the answer?, has a similar standpoint.
According to this report, since 1996 “English housing stock has grown by 168,000 units per year on average, while growth in the number of households has averaged 147,000 per year”, indicating an apparent oversupply, as opposed to a shortfall.
It concludes that a shortage of housing did not contribute to house price rises between 1996 and 2018, and increasing housing will do little to reduce current prices.
