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.

BN-IA478_homepr_G_20150422120114

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.

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