Yes, there is a housing shortage

Jonathan Ely of the FT tweeted today:

Reading the article, “there is no shortage of homes” is qualified with “nationally at least”, which is a rather important caveat. Because housing is generally both immobile and very long-lasting, it is perfectly possible to have both a growing national surplus of housing and growing local shortages in places where people most want to live.

To illustrate this, imagine we suddenly discovered magic money trees in the centres of some of our major cities. Lots of people would suddenly try to move to be near the magic money trees, causing overcrowding in city centers and de-population elsewhere. If there was no change in the housing stock the national surplus/deficit would be completely unchanged, but supply would still be failing to meet demand.

The point is: all housing shortages are local or regional, and whether there is a ‘national surplus’ or not is mostly irrelevant. It’s like saying there is no problem of air quality in city centers because when averaged across the whole country, including the vast swathes of rural areas, the air is pretty clean.

Ely echoes Ian Mulheirn in saying that we have a housing surplus because the number of dwellings has grown faster than the number of households, which has been much lower than official projections indicated:

In recent years, net new supply has been below the 210,000 dwellings that the government estimates will be needed each year from 2014 to 2039 in England. But long-range forecasts on household formation require big assumptions about longevity, fertility, household size and migration, and are subject to large margins of error. In 2008, the government estimated that 280,000 homes would be needed in the UK each year until 2016. In 2012, after the global financial crisis, that had dropped to 231,000 a year. Not only are the figures a moving target — the statisticians now have to factor in the impact of Brexit on migration, for instance — but they are also some way off the reality. The 2012 forecasts predicted 27.7m households by 2016. Figures from the Office for National Statistics say there are now 27.2m households — around 500,000 fewer than predicted.

This apparently widening gap between the number of homes and the number of households applies to London and the South East as well as nationally – so isn’t this evidence of a real surplus?

No, because household formation is constrained by housing affordability: if people (particularly young people) can’t afford to buy or rent a home of their own they can’t form their own household and have to remain living within another one, which usually means living with their parents or sharing a rented home with a bunch of other people who are in the same position.

Ely considers this possibility, but rejects it:

One possible explanation for this contradiction is that high prices have suppressed household growth. Households cannot form because 30-year-olds are still living in their parents’ spare bedrooms. The data do not really bear out the anecdotal evidence of the “boomerang generation”. Around a quarter of people aged 20-34 still live in the parental home. In 1996, when house prices were much lower relative to earnings, the proportion was still a fifth.

But sharp-eyed readers will have spotted that a quarter is higher than a fifth, and indeed when you look at the data you find that the number of 20-34 year olds in the UK still living with their parents has risen from 2.7 million in 1996 to 3.4 million in 2017. In fact it dipped for several years after 1996 so it would be just as valid to say there’s been an increase of a million or 40% since 2002. I feel like only in the UK would people see this data as evidence against a housing shortage. The fact that house prices have risen faster doesn’t mean that there isn’t a housing shortage, just that other factors like income growth and credit availability also affect house prices, which I don’t think is a controversial point.

We also have more direct evidence of constrained household formation. The source of the data on both the number of households and the number of young people living with their parents quoted above is the Labour Force Survey, which also gives us the number of ‘family units’ in the population. A family unit is defined as

either a single person, or a married/cohabiting couple, or a married/cohabiting couple and their never-married children who have no children of their own living with them, or a lone parent with such children

Given this definition, if there is enough housing to go around then it seems reasonable to expect that each family unit should have a home of its own. But not only is that not the case in England, but the number of family units without a home of their own (and who therefore have to share accommodation with one or more other family units) has been going up. These are called ‘concealed households’, and in 1996 there were 1.64 million of them in England. But by 2016 this had risen 50% to 2.45 million, far outpacing the rate of household growth.

This increase reverses the trend of most of the previous century, which had seen huge falls in the number of concealed households as housing supply outpaced population growth (see Holmans, ‘Historical Statistics of Housing in Britain’, which uses a different measure). And if there was truly ‘no housing shortage’ it would be falling rather than increasing.

The problem is also much worse in London, where the number of concealed households has increased 81% from 400,000 in 1996 to 717,000 in 2016. Obviously, that’s entirely consistent with London having a much more severe problem of housing affordability, and with separate data from the Resolution Foundation that shows a sharp increase in the number of families who are sharing privately rented accommodation with others, particularly in Inner London.

The supposed ‘growing housing surplus’ turns into a growing deficit when you compare the number of homes to the number of family units, rather than the number of households. The chart below shows that for England as a whole the dwellings/households ‘surplus’ grew but so too did the dwellings/families ‘deficit’.

When we make the same comparison for London (using annual rather than five-yearly data from the LFS, because I had more time to collect it) the picture is even starker:

By this admittedly crude measure, the deficit of homes compared to family units in London rose from 270,000 in 1996 to 490,000 in 2016.

So yes, there is a housing shortage and yes, it’s worse in London.

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6 thoughts on “Yes, there is a housing shortage”

  1. Well, yes – sort of. In many rural areas the number of people hasn’t risen in 150 years but there are three times the number of houses, suggesting that historically there may have been more ‘concealed’ households.
    Stamp tax at very high levels distorts everything, but makes buyers reluctant to settle for a house in a second-choice area (and reduces mobility to new jobs and opportunities).

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