The Role of Housebuilding In Limiting House Price Rises

Sector: Residential

Briefing paper

The Building More Homes report to the House of Lords Select Committee on Economic Affairs (July 2016) identifies that since the late 1990’s there have been dramatic increases in house prices in real terms within the UK. The report recognises that this has already had significant effects on the accessibility of the housing market, particularly to those households on lower or medium incomes. Indeed, it identifies that by 2016 some 72% of first time buyers have an income that places them in the top 40% of incomes in the country. If the trends in house prices are perpetuated, then housing will become inaccessible to an even greater proportion of the population.

The report identifies that one of the reasons for these house price increases is the shortfall in housing completions and that in turn this has been negatively affected by the planning system which continues to restrict the supply of housing.

In the period 2001 to 2011 the dwelling stock increased by only 8%* across England and Wales. This level of housebuilding is widely acknowledged as being significantly below that which was required and contributed to the median house prices increasing by 120%^. The average increase in house prices equates to 8% per annum (or 5.6% in real terms). Over the period 2002 to 2011 (for which data is available) the average income increased by 2.5% per annum (or remained static in real terms).

It is useful to examine the relationship between new housing completions and house prices across to see the effect of increased housebuilding on house prices. Such a comparison is provided in Figure 1 below.

Increase in median house prices

Figure 1 demonstrates that increasing the dwelling stock across a Local Planning Authority area does limit median house price increases. This would suggest that if a concerted and co-ordinated effort was made nationally to increase housing supply, there would be corresponding limiting effect on house prices.

The same effect is less pronounced at a local level as demonstrated in Figure 2 by the fact that the line of best fit has a lesser gradient. This demonstrates that the effect on house prices is not contained within the local area in which development takes place, but rather that it is distributed across a broader area. This means that whilst householders are often concerned about the effect of new development on the value of their property, this effect is limited. Indeed, if the existing dwelling stock increases by 30% in 10 years in a Mid Super Output Area, house prices would be expected to increase by 108% as opposed to increasing by 113% for the Mid Super Output Area if the increases to the dwelling stock experienced during 2001 to 2011 (which contributed to the current housing crisis) are replicated.

Mid Super Output Area

If the percentage growth of the dwelling stock achieved over the period 2001 to 2011 was replicated for the forthcoming decade, then it would be expected (based on the trend identified in Figure 1) that median house prices would increase by 115% on average across each Local Planning Authority (or 76% in real terms). However, if as advised by the House of Lords the number of homes built per annum increases to 300,000 across the UK, it would be expected that there would be a 114% increase in median house prices (or 74% in real terms).

This demonstrates that the effect of increased house building has a very limited effect on house prices. This is unsurprising as the number of new dwellings has been a relatively small component of the overall dwelling stock. Indeed, based on the relationship identified in Figure 1, a hypothetical 10% increase in dwelling stock over a 10 year period (such that 9% of the total dwelling stock would be new) would reduce the median house price increases of the total dwelling stock by 9%. The effect of a comparatively limited number of new dwellings can therefore be seen to have a disproportionately positive effect on limiting house price increases across the entire dwelling stock. This disproportionate effect demonstrates the value of even small increases in new housing delivery to limit house price rises. The result is that the greater the number of homes that can be delivered, the greater the effect will be on limiting house price rises.

However, in order to maintain current median house prices (in real terms) it would be necessary to increase the existing dwelling stock by 140% which is simply unachievable. Indeed, this would necessitate the delivery of 3.3 million homes per annum across the UK, some 11 times more than the figure identified by the House of Lords. The truth of the matter is that this will never be achieved and that as a result, unless there are other fundamental changes, the housing market will become less and less affordable which is likely to prevent many households being able to access the market. As has been demonstrated over the recent past, the housing market will be limited to highly paid individuals and/or those who have access to the “bank of mum and dad”. Even these measures will become increasingly insufficient to gain access to the market for first time buyers. This is likely to manifest itself (as it already has to some extent) as an increase in young households remaining in the family home as well as increasing levels of over-crowding, shared households and homelessness.

In order to limit house price rises and the resultant effects it will be necessary to take steps, including (but not limited to) providing a significant boost to housing supply as identified in the National Planning Policy Framework (NPPF). This can only be achieved if the planning system facilitates increased levels of growth, through taking a positive approach to identifying housing needs, developing policies to respond to and if possible exceed these housing needs, and affording significant weight to the benefit provided by additional housing delivery. These requirements are embedded in paragraph 47 of the NPPF, but many Councils are unprepared to take the action required by national policy and approve developments to address these needs, as demonstrated by the fact that in some 70% of Local Planning Authorities, planning decisions have been appealed and independent Inspectors have identified that the Council is unable to demonstrate a sufficient housing land supply+.

* Based on the 2001 and 2011 Census’s
^ Based on the ONS House Price Statistics for Small Areas, Dataset 9
+ Inspectors’ Findings on Five-Year Land Supply, Pegasus Group, January 2017

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