House prices and rent controls

There have been two news stories in the past fortnight on the same subject, house prices, but it’s been framed in two different ways, for two different political ends. In this post I want to address the substance of both announcements, consider their utility, and address the white elephant they both show a determined effort to ignore.

Houses in Styal, Cheshire
Victorian worker’s homes in Styal


The first was George Osborne’s announcement to the BBC that “In the event of a vote for Brexit, by 2018, houses could be worth up to 18% less than if the UK voted to remain”.

This is classic Osborne. He’s not suddenly interested in house prices. It’s a politically calculated move to win a vote.

Homeowners, as a group of the population, are much more likely to vote than tenants, who would, you’d expect greatly welcome an 18% or greater fall in rent that would surely follow. As well as generally being older (older people vote more), by buying a home people buy into the status quo; capitalism and the right to private property and capital gains, house prices that rise each year, laws that punish crimes against property more harshly than say, financial or corporate crimes. Thus they are as invested in supporting and maintaining the status quo as comparatively marginalised groups, like tenants, ought to be in opposing it. Only they have the overwhelming home side advantage. Defending the status quo is its own idea and unites support behind itself. Opposing the status quo is inherently fractious. There are always myriad solutions to a problem, so those in favour of change will generally never be able to unite in such a force to oppose those simply ticking the ‘business as usual’ box.

As for the truth of the number, it would depend on the exact implementation of a ‘Brexit’. Certainly there would be a ‘shock’ to future expectations, as a UK outside the EU would be expected to let in far less migrants than it currently does. If less EU migrants were going to come and live in the UK in the future, there’d be less demand on housing, so housing would be comparatively more plentiful, so prices would be expected to drop. Looking at the figures, I believe the drop could be far greater than a mere 18%.


Later on last week, the Labour Party leadership announced at a conference in London that they were looking at encouraging proposals around “local rent regulation” and “offering cheap, local authority-backed mortgages to first-time buyers in particular”.

There’s an awful lot of ‘truths’ that economists produce that I’m dubious of, but supply and demand is a pretty solid rule. If a resource has any element of scarcity to it, supply and demand applies. Even feudal societies grappled with this, and it has been a constant thorn in the side of centrally planned communist economies.

Rent controls

And so, I strongly oppose rent controls. They do nothing to address the root of the problem, which is simple supply and demand, and introduce a new economic incentive of future expectations, which will lead to a reduction in rented housing supply. It’s true that in the UK, comparatively few newly built homes go to be rented, and so the shock would never be especially intense. Nonetheless, if a developer is considering building a block of flats, and sees that rents in this area will be fixed below inflation, he is more likely to consider this a comparative waste of his resources, and do something else with his capital.

The effect is that although rents stay lower than on the free market, a shortfall gradually develops. People wanting to move to the area find themselves more and more unable to find a room to live in. This might be acceptable in the short term, and welcomed by previously hard-hit locals. But what happens when their children come of age? The population has increased, but, hidden behind the rent controls, the housing stock has barely changed. By this time it’s too late and a true famine has arrived. Rents were low, so there appeared to be enough houses for all. In reality, government manipulation in the market had distorted it. There weren’t enough houses at all. The policy was well meaning but ultimately disastrous.

Mortgage incentives

‘Helping’ first time buyers is, for exactly the same reasons, a terrible policy doomed to eventual failure. Only this also manages also to be regressive.

Giving first time buyers lower mortgage interest rates, or lower deposit requirements, or just straight up giving them money towards a deposit, as the government announced in the budget this spring, will clearly lead to more of them buying a home.

However, it won’t lead to that many more, because where they’d previously been renting a house, they’re now buying one. No new home has been built, so overall house prices stay the same. We know that the population is increasing, so house prices will too, and after a decade, £1000 for every £4000 saved just isn’t going to help much, because the deposit required will be 25-50% more than it used to be. Similarly, lower mortgage interest rates don’t help much if existing homeowners are living longer and longer, taking up a house, and still, no new properties are being built.

In terms of social justice, any policy that rewards saving rewards the already privileged. Privileged in terms of having a stable enough career to secure a mortgage, earning a salary where one can decide to begin saving for a deposit on a home, and in terms of understanding money and the importance of delaying some gratification for greater future rewards.

How can a young adult who went straight from school into low paid service sector work like retail earn enough to save even a few hundred a year, let alone four thousand to get the full benefit of the government’s proposal? How can someone who folds cardboard trays and slots them around individual trifle portions 12 hours a day (I once did this work) be expected not to spend their entire salary every month trying to forget the meaningless drudgery of their job?

The real kicker at the end for these renters is that as their higher earning, more socially empowered peers take advantage of this state aid, they slowly but surely substitute previously rented homes into owned homes (still, no new homes were built). Thus for already suffering minimum, or just above minimum wage earners, rents just go up and up and up.

Housing supply and demand

I come now to the crux of my argument, drawing these two strands together. If you’re a homeowner with two or less children, we don’t have a problem. Listen to George Osborne and protect your investment. For everyone else, there is a gross mismatch between housing supply and demand in the UK. This is why in the last twelve months (March-March), house prices increased by 9.0%, while CPI inflation (this measure excludes accommodation costs) was 0.5%.

Tinkering with the edges of the market isn’t going to help. There are only two solutions. Reduce the population (demand), or build many many new houses (supply).


Between 2001 and 2010 the UK population increased by 3.5 million. 1.4m (38%) was a result of more births than deaths, and 2.1m (56%) from more migrants arriving than emigrants leaving. At the same time the total number of dwellings increased by just under 2m (table 101). Certainly, on average, a newly built house will accommodate more than one person. However, the following two graphs show clearly just how much of a disparity has been opening up between population growth and houses built.

UK population increase vs houses built since 1970
UK population increase vs houses built since 1970. Sources: ONS, PWC

The trends are going in opposite directions. In the 1980s, at exactly the time the UK population started to rise in earnest, the government took a conscious decision to dramatically reduce how many social homes they were going to build, and to encourage home ownership. No subsequent government has reversed that decision, and planning rules to privately develop land have only got more and more stringent.

In the 2014-15 financial year, 152,000 new homes were completed (table 209), but the Town and Country Planning Association estimate that “over 240,000 additional homes will be required each year to meet newly arising demand and need”. Planning rules and regulations would need to be significantly loosened to achieve this figure. Thinking longer term, to begin to bridge the gap and stabilise house price rises The Financial Times reckons its closer to 300,000.

We need to double the current supply, or halve the demand.


The figures are clear. Removing migrants would halve the demand.

Drivers of UK population change since 1992
Drivers of UK population change since 1992. Source: ONS

Since 1999, net migration has driven 50% or often substantially more of the UK’s population growth. 2012 was an exception, but has not become part of a falling trend. On the contrary, 2015 appears to bear witness to the highest inward flow of migration ever.

In addition, it appears likely that migrant families have also contributed to the rise in natural population growth (births minus deaths) seen in the graph after 2001. Between 2001 and 2010, the UK fertility rate increased from 1.63 to 1.94. This was a reversal of a long standing trend across the UK and Western European countries that had all witnessed falling birth rates. It is worth noting, however, that in the four years since then, rates have begun to fall again, to 1.83 in 2014, indicating that as The Economist believes, migrants quickly adapt to local fertility trends.

In fact, if we built a great big ‘ol Trump wall and sent all the migrants back, house prices would absolutely tank. This is why I noted in reply to Osborne’s figures that leaving the EU would likely impact house prices to a much greater extent than -18%. If the government didn’t grant any kind of amnesty to existing EU migrants and more-or-less ordered them out, we could easily see a 30%+ fall. Look at the supply side figures above. Between 2001 and 2010 the population naturally increased by 1.4m, but there was a net increase of 2m dwellings. There would be a glut.


The United Kingdom is a green and pleasant land, and quantity of life needs to be weighed off against quality.

Apartments in HK
Apartments crowd out the sky in Hong Kong

Can the Japanese consider it a success to live the longest if where they live is concrete and steel from horizon to horizon? Do American’s acknowledge that their abundance of bungalows and huge square footage for reasonable prices come at a cost of a 2+ hour commute to work each morning?

At the same time, I’m the only son of a single mum who owns her house. My plan for homeownership? Play the waiting game. Until then, were I to move back to UK, I’d have to go where the economic growth is – London and surrounding areas – and accept the eyewatering rents there.

If you value fields and trees and wild nature above all else, even the value of your bricks and mortar investment, even the ease of European travel, even the short-term economic decline that would certainly follow an exit, even the multitude of human and workers rights the EU affords you, even the cultural diversity of our island, even peace and stability in Europe, then your choice on June 23rd is clear – vote to leave the EU.

In terms of housing demand only, voting to leave is an obvious choice.

Despite this, I strongly support reducing the lottery of birth and personally hugely appreciate the opportunity I have had to come and live and work in China. It is not right for the natural born citizens of the UK, France, Germany, the Netherlands, Belgium, Italy, Spain, Portugal, and Denmark who have so so profited from prior and in many cases the continuing conquest, subjugation, colonisation, exploitation and expropriation of every other peoples and every other region on earth, to now turn around and shut the doors. Anyone who believes that the West is rich, and continues to be rich, without the unwilling and exploitative participation of ‘the rest’ should engage in a critical re-reading of post-1492 history. Start with Haiti.

If Europe really is to continue to build up its fortress borders, or the UK to go alone and erect its own, then we must at the same time begin in earnest to repay those to whom we owe our privilege.

Or build more houses.

Update: August 2nd 2016

I have just listened to a short interview with the chief economist of the Resolution Foundation, Matthew Whittaker, on Radio 4’s the Today programme.

His findings mirror my own, and I support everything he has to say.

Home ownership is in crisis and our rental market is nothing like that which works so well for Germany. Since the 1970s incomes have remained stagnant or fallen, and house prices remained concomitantly stable until the early 90s. From that period until the financial crisis of 2007/8 prices soared from 1-200% of annual incomes to 4-500%. Easy access to low interest rate credit filled in the shortfall. Since 2008 most incomes have fallen, and although interest rates have got even lower, banks are understandably much less willing to lend. Home ownership has already become a mere pipe dream for millions.

The only solution is to build hundreds of thousands more new homes each year, for many years.

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