Accounting for the house price hockey stick

Every country and every city experiencing rising house prices has its own explanation for what’s going on, often rooted in what seems to be some local or national factor. In England we like to blame the Green Belt, the decline in council house building, poor foreigners (for moving here) and rich foreigners (for investing here).

These locally specific stories often have at least some truth to them, but what they miss is that rapid increases in house prices are a surprisingly pervasive phenomenon. The best analysis of cross-country house price trends is ‘No Price Like Home‘ (free version) by Katherina Knoll, Moritz Schularick and Thomas Steger, the result of a gargantuan research effort to uncover price, construction cost and land value data for 14 affluent countries going as far back as 1870. Their Figure 1 below shows the long-term trend in average prices in each of these countries. In almost every one, price growth took off in the latter half of the 20th century and was particularly rapid in the run-up to the 2007-08 crash. capturecapture

The authors average these trends to create a somewhat cheekily titled ‘Global House Price Index’, shown below (after adjusting for inflation).

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The stability (or even slight decline) of prices in the two decades prior to WWI and the sharp increase between the mid 1990s and 2007-08 are particularly striking when you plot them against GDP, as they do in the next chart. Rising incomes were associated with stagnant real prices in the pre-WWI period, but very rapid price growth in the run-up to the recent crash.

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The growth in prices in the latter part of the last century doesn’t seem to be the result of improvements in housing quality, because quality-adjusted price indices show a similar trend.

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To show this more clearly, Knoll et al disaggregate the change in house prices into (1) changes in the value of the structure and (2) changes in the value of the land. They do so by comparing changes in construction costs to changes in prices, with land values estimated as the residual. In the two charts below, the orange line always represents the real house price trend – the one on the left compares it to the trend in construction costs, and the one on the right to the estimated trend in land prices.

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What the chart on the left tells you is that on average, the cost of constructing housing roughly doubled in real terms between the end of World War I and 2010. That’s pretty significant, but it’s dwarfed by the increase in residential land prices, which roughly quadrupled in real terms over the same period.

So the answer to “why did housing get so expensive?” seems to be “because land did”. Having said that, it’s really important to bear in mind how these figures are calculated. In this kind of analysis, any change in house prices not directly related to a change in construction costs must by definition be attributed to a change in the land price. Even macroeconomic factors such as changes in interest rate, which you might think have a similar impact everywhere, are counted as changes in ‘land’ rather than ‘structure’ prices. The value of housing, just like any other asset, will tend to go up when interest rates go down, but by convention we tend to ascribe all that change to the land rather than the structure. That probably isn’t exactly right, but probably is mostly right.

With that important caveat in mind, the question is: what made land get so expensive? I’ll try to answer it in a future post.

 

The myth of the shrinking British home

Writing in today’s Guardian about the government’s hint that it might weaken England’s already not particularly strong housing space standards, Rupert Jones says

In 2014, researchers from Cambridge University found that, at an average of 76 sq m, the UK’s newly built homes were the smallest by floor area in Europe. At the other end of the spectrum was Denmark at 137 sq m (having all that space probably helps explain why it is allegedly the world’s happiest country).

The 76 m2 new build home is probably Britain’s favourite housing statistic, appearing regularly for years now in popular media and academic research. I’ve become very familiar with it over time, but I know that not everyone is aware of its history. So I thought I might set it out for those keen to learn more about this distinguished datum.

The Guardian helpfully provides the following table comparing new build home sizes in the UK to the rest of Europe.

Table: average size of a newly built home across Europe.

The source is this 2014 paper by Malcolm Morgan and Heather Cruickshank, who agree that ‘The UK has the smallest homes by floor area in Europe’ but who don’t come up with the figures themselves, instead citing a 2010 paper on ‘Internal housing space standards in Italy and England’ by Nick Gallent and others. Here’s Figure 5 from that paper:

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Confusingly, the notes to the table say these are dwelling sizes for the EU in 2005 even though they are taken from ‘Housing Statistics in the EU, 2002’. So it seems that as of 2017 we are still quoting statistics from 2002 to describe the size of ‘new’ homes in England (or the UK, or Britain – the terms seem to be used interchangeably).

It’s actually worse than that, though. Go to the original EU statistics (you can find a Word version via Google) and in table 2.1 this is what you see:

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The ‘UK’ (actually England) figure of 76 m2 dates from 1996. So the figures being used to describe new build homes in 2017 are around 20 years out of date.

But wait! Where would figures on the average size of new build homes have come from in 1996? As far as I know the only reliable source was the 1996 English House Condition Survey, a survey of around 13,000 dwellings across the country (the data is available to users of the UK Data Service here).

A sample of that size can’t give you reliable figures on homes built in the last couple of years, so I suspected that the 76 m2 ‘new homes’ figure was based on a longer period. Looking at the 1996 EHCS data, it divides homes up into several age categories, with the most recent one being anything built since 1980. And indeed, when you calculate the mean floor area of homes built in England since 1980 the result you get is … 76 m2.

So there you are. In 2017, our most commonly used statistic for the size of new homes in Britain is actually based on homes built between 20 and 35 years ago.

What’s doubly frustrating about this is that we have perfectly good, much more recent statistics that we should be using instead. The English Housing Survey is the successor to the English House Condition Survey, and the 2014/15 housing stock report says that the average size of homes built since 2005 is 87 m2, compared to 94 m2 across the stock as a whole. Note, both of those figures have increased since 1996: English homes are getting bigger, not smaller.

In fact, the EHS report has a whole chapter on space standards. This concludes (paragraph 3.19) that “there is no clear evidence to conclude that each cohort of English homes is, on average, smaller than the cohort before it”, and includes this chart:

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What this indicates is that homes built in the 1980s are on average the smallest, with homes built since 1990 significantly larger.

For a much fresher estimate we can refer to statistics from Energy Performance Certificates, the latest release showing that new homes built in Q4 2016 had an average floor area of 92 m2. So please, use 87 m2 (homes built since 2005) or 92 m2 (homes built in late 2016) but just stop using 76 m2.

By the way, if for some reason you’re not convinced by any of this, go read Neal Hudson.

This post is already too long so I’m not going to get into any detail why people keep using this out of date factoid (hint: it makes new homes sound nasty), or how average new build sizes in England really compare to the rest of Europe (below average but not the smallest), what affects average home size (housing type, land prices) or whether we should demand that new homes are more spacious (this is relevant). If we could just stop perpetuating the myth of the shrinking British home that would be more than enough for one day.

Cost is not the only barrier to housing

Writing for CityLab, Feargus O’Sullivan expresses some puzzlement over a new EU report that reports what share of people agree it is easy to find good housing at a reasonable price in various European cities. Here’s a map:
Map showing  what share of  people agree it is easy to find good housing at a reasonable price in various European cities

Feargus writes:

Predictably, it is in wealthy northern European cities where people feel that finding good value housing is toughest. Less than 19 percent of respondents in London, Paris, Berlin, Hamburg, Vienna, Munich, Stockholm, and Oslo thought affordable housing was easy to find.

But when it comes to the realities of housing affordability, how much credence can we give to this one measure, based on public opinion? In terms of perception, for example, Vienna and London appear to be on roughly the same level, even though the latter surely has far higher housing costs when compared to average income. Indeed, if you look at another map, which shows how many people are satisfied with their household’s financial situation, a rather different picture emerges.

Even though residents of Vienna and Munich expressed doubts about whether they can find affordable housing with ease, they are also among the happiest with their incomes in all of Europe, with over 83 percent of citizens in those cities responding that they were satisfied with the financial situations of their households.

To explain these results, I think we need to refer back to the actual question that was put to people, and consider that there are other barriers to ‘finding’ good housing than just the price. Rent controls and tenant-friendly regulation in places like Stockholm, Vienna and many German cities help keep the rent down below the market level, but they also make it more difficult to actually access housing at that price, because there is less turnover and landlords are more picky about who they rent to. As Kath Scanlon says here (p28) of the German rental system, “Because tenancies are indefinite, landlords are extremely selective about who they rent to: the search process can take months” – and if you don’t believe her there are some (very) detailed first-hand accounts here and here.

In London the barrier is more straightforwardly financial. Rents (and deposits) are very high, even when compared to London’s relatively high earnings. But if you’ve got the money, the process of finding a rental is relatively straightforward, and landlords are not (to my knowledge after years renting here) as picky as in German cities. Or at least, they were – things may be changing now due to the government’s misguided decision to make landlords check people’s residency status, which is likely to make access to housing more difficult for migrants or anyone who looks like one.

But this just proves the importance of non-price barriers when comparing housing systems from different countries. Unfortunately these barriers are very hard to measure, which makes questions like that in the EU survey all the more valuable.

Tracking England’s shifting centre of gravity over time

The new projections of future population growth in England released in May by the Office for National Statistics reinforced the impression of a country whose social and economic centre of gravity is moving remorselessly southward. But just how far has England ‘tilted‘ in recent decades, is the southward move picking up pace, and is it led or lagged by the movement of jobs and the supply of housing?

These are all big questions, but it turns out there is a relatively simple way to answer them (at least partially). By finding the geographic centre of each local authority district and then calculating an average ‘Easting’ and ‘Northing’ (as the X and Y values of Britain’s ‘National Grid’ coordinate system are called) using the population of each district as a weight, we can pinpoint England’s “population centre of gravity”. What’s more, we can track it over time (using re-districted population data from the Vision of Britain website), from the first Census in 1801 to the last one in 2011 and, using ONS population estimates and the new population projections, predict its location all the way out to 2039. Ideally you would do this with more data at a finer spatial scale than that of local authorities, but that’s not available for as long a time-scale as the Vision of Britain data (though in 1995 Danny Dorling and David Atkins estimated the path of the population centre of Britain between 1901 and 1991 using ward data).

Using this method, we can pinpoint England’s population centre of gravity as of 2014 to Easting 455822, Northing 274644, about 200m west of the A5 in a field that once accommodated the now-defunct Rugby Radio Station. But how far has it travelled in the last couple of centuries? Well, not very far, but it’s been an interesting journey.  In 1801 the centre was about ten kilometres almost due west in a field between Rugby and Coventry, and for the next two decades that’s more or less where it stayed. Then in the 1820s it started heading north-west, picking up speed in the following decades as the industrial revolution gathered strength and both domestic and international migrants flocked to the growing cities of the North. Around the middle of the century the centre began to move north-east, and kept going in that direction, but at a slowing pace, for the next several decades.

In 1911 England reached ‘peak North’ as its population centre of gravity rested at Stoney Stanton, after which began the great movement south-east that has continued to this day. For the last couple of decades England’s population centre has travelled at a rapid pace on a route pleasingly parallel to Watling Street, the Roman road that connected Wroxeter with London and the coastal ports beyond.

England's population centre of gravity, 1801-2039

If the ONS population projections are any guide it will continue heading south-east, and in a couple of years should hit Daventry International Rail Freight Terminal, which on this evidence seems very smartly located. By 2039, the last year of the projections, it should be just off the A5/Watling Street and about to cross the Jurassic Way, which follows another ancient cross-country route. More symbolically still, it will be just a few miles from the Watford Gap, which on this evidence it should cross some time in the early 2040s.

What does this circumlocutory demographic journey tell us? First, that there have been no great migrations in in England comparable to the westward expansion of the United States, as seen in the movement of its population centre from 23 miles east of Baltimore, Maryland in 1790 to 3 miles outside Plato, Missouri in 2010. Movement of that scale and speed is presumably unique to the United States as a country that grew dramatically over less than 200 years, but England’s population distribution has probably also been relatively stable compared to other European countries, due to a happy absence of major wars, famines and epidemics since at least 1801.

All that means that the movement that we have seen has probably been largely in response to the rise and fall of economic prosperity in different parts of the country. And as it happens we can also track that too, by finding the centre of gravity of people in employment from historic Census data. The earliest year this is available is 1841, at which point the employment centre was a little outside Shilton, north-east of Coventry and about two miles north-west of the population centre (indicating that unemployment rates were lower in the north-west of England than in the south-east at that point). By 1881 both centres had moved north-east and much closer together, and they tracked each other very closely until the 1950s, at which point the employment centre began to pull away south-eastwards, highlighting the rise in unemployment in the North relative to the South. By 2001 it was about 5km further south-east than the centre of population.

Pop and jobs centres

Why didn’t the centre of population keep up with the centre of employment? Probably because the South didn’t build enough housing. We can only calculate comparable centres of gravity of people, jobs and homes from 2001 on, but at that point the housing centre was lagging around 800 metres north-west of the population centre, which in turn was around 5km north-by-north-west of the jobs centre. Over the next 14 years they all moved south-east, but the housing centre moved the slowest. Broadly speaking, this is why we have a housing crisis: people want to move to where the jobs are, but there’s not enough housing to accommodate them all at a reasonable cost, so you get a mixture of higher housing costs, more crowding and some people choosing not to move at all.

Pop, jobs and homes centres

It’s not that surprising that the growth (or decline) of the housing stock lags behind changes in the distribution of jobs and people, since homes can’t move or disappear very quickly. This lag can mean rapidly rising costs in growing cities, and then an over-supply when economic and population growth go into reverse (something demonstrated all too effectively in recent decades by the great industrial cities of the North). But local areas can still choose to build new homes more or less quickly, and right now many places that are seeing rapid growth in population and jobs are deliberately restricting the supply of new homes. And so we are where we are.

Acknowledgement for use of Vision of Britain data: This work is based in part on data provided through http://www.VisionofBritain.org.uk and uses statistical material which is copyright of the Great Britain Historical GIS Project, Humphrey Southall and the University of Portsmouth. Parts of the data are Crown copyright, adapted from data from the Office for National Statistics and licensed under the Open Government Licence v.1.0. Parts are based on historical material which has been re-districted by the Linking Censuses through Time system, created as part of ESRC Award H507255151 by Danny Dorling, David Martin and Richard Mitchell.

The disappearing new build premium in UK housing

As part of their long-running house price index Nationwide publish data on average prices for new, ‘modern’ and ‘older’ properties at UK level. According to this data the price premium on new/modern homes versus older ones has disappeared over time.

2016.02.07 Nationwide new build premium 1952-2015 UK HP Since 1952 Chart 6

Some of this is probably due to objective quality trends – i.e. the low-quality older homes being demolished and more investment being put into the remaining ones – but I think some is a symptom of our decades-long refusal / inability to build enough new housing.

In functioning housing markets new homes should be pricier due to better-than-average locations and build quality (remember that EPC statistics show new builds are on average slightly larger and much more energy efficient than the existing stock).

A consistent new build price premium would also be a sign of filtering at work, with higher income households buying new homes and older ones filtering down to lower incomes. This filtering process is a natural feature of well-supplied housing markets and is critically important for improvements in overall affordable and quality.

For comparison, in the US (where they build a lot more homes than we do) new builds command a premium of around a third.

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But because in the UK we block new supply in high-demand areas the price of old homes is pushed up while new builds are diverted to worse locations. This erodes the new build premium and cuts off the filtering mechanism. It’s a pretty clear signal that we’re doing housing policy wrong.

Analysis of London housing sales data

The Land Registry has recently started publishing data on individual residential property sales, and the two charts below use the data to compare housing markets in London and the rest of England and Wales.

The first chart shows the distribution of prices (up to £1m) in the capital and elsewhere in 2012, broken down by the tenure type (leasehold and freehold, roughly corresponding to flats and houses) and whether or not the property was newly built at the time of sale. Average prices are higher in London across all categories. You can also see the effects of stamp duty in the kinks of the price distribution curves just before the threshold values of £125,000, £250,000 and £500,000.

House price distributions, London and the rest of England and Wales, 2012

 

The second chart plots the total value of new build and non-new build residential property sales in 2012 by local authority area, with London boroughs in cyan and other local authorities in pink. In the vast majority of cases the value of new build sales is far lower than the value of older home sales. London boroughs account for the top four new build markets, Tower Hamlets (in the top left) leading the way with new build sales that account for around 30% of total sales value in 2012. Kensington and Chelsea (bottom right) is at the other end of the spectrum, with very few new build sales (because it doesn’t really build any new housing) but an incredibly valuable resale market. Westminster (top right) combines both a lot of resale and lot of new build sales.

Total value of new and old housing sales by local authority, 2012

 

The data was analysed in R and the charts produced using the ggplot2 package among others.

London Housing Market Report

I have converted the GLA’s London Housing Market Report from a quarterly document (last edition here) to a live resource on the London Datastore. It uses the Google Charts service via the googlevis R package, which allows you to create HTML straight from your own data rather than having to upload it to Google’s servers. While the use of Google Charts started out as a labour-saving device and hopefully will be over time, setting this up involved a lot of fiddling with Javascript to get the charts to display okay on the Datastore’s Drupal system. I’m grateful to Scott Day in the GLA’s GIS team for help with this aspect.

The great advantage of using Google Charts are that its layout and colour defaults are very good and where changes are required they are pretty easy to implement. I used to agonise excessively over the choice of colours in charts like this one but I think the Google version looks fine.

Quarterly change in average London house prices - comparison of indices

Most of the report consists of fairly standard presentations of market data. But one thing I would like to draw people’s attention to is the presentation of changes in average rents as published by the Valuation Office Agency. We show these changes at Inner London, Outer London and London-wide level to show that the London figure can be significantly distorted by shifts in the VOA dataset, notably the exclusion of a large number of Housing Benefit cases in Outer London over the last year which has skewed the balance of the dataset towards Inner London. So the average rent for a one bedroom property in London seems to have risen 13% even though the average in Inner London rose by 8% and the average in Outer London by ‘only’ 6%! I’m not sure these features of the VOA dataset are widely understood but lots of people are using their data to calculate changes anyway.

Change in median private rents in London, March 2012 to March 2013