Historical housing and land values in the UK

Before getting on to explanations of rising land costs, I wanted to follow up the last post with some more detail, this time focusing on the UK only.

The research I discussed last week uses a standardised methodology to disaggregate house prices into structural and land prices in 14 different countries, but in the UK (and at least some of the other countries) we also have some official statistics that shed some light on this (but which don’t give exactly the same results due to differences in data sources and methodology).

The Office for National Statistics publishes data on the total estimated value of the UK’s housing (£5.5 trillion in 2015) and of the value of the dwelling structures only (£1.8 trillion). Implicitly, the remaining £3.7 trillion is accounted for by the land under the homes (and gardens, garages and anything else within residential plot boundaries).

By cobbling together various ONS datasets (and with the kind help of Brian Green) I’ve managed to trace these figures back to 1957. Here’s the estimated average value of a UK home, disaggregated into structure and land values and adjusted for inflation.

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Collated from: ONS data on total value of homes (series ALLA and CGLK), net capital stock of dwellings excluding land (CIWZ and MJF8), GDP at current prices (YBHA) and composite price index (CDKO); and DCLG UK dwelling stock trend (table 101)

According to these figures the average value of a UK home was £192,040 in 2015, of which the structure accounted for £62,610, leaving a residual that we assume to be ‘land’ of £129,430. In 1957 these component figures were £15,890 and £8,350 respectively. By the way, if the average value of a UK home of just under £200,000 seems low to you, remember that this figure covers the entire housing stock, and the homes that are actually sold in any particular period are generally of significantly above-average quality and therefore value.

Obviously incomes have also risen a lot over this period, and one way to adjust for that is by calculating the total value (across the whole dwelling stock) of housing structures and housing land as a percentage of national GDP, as below.

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This shows that the structural value of the UK housing stock is almost exactly equal to one year of national income (95%, up from 52% in 1957), while the land value is worth twice that (197% of GDP, up from 27% in 1957). Among other things, it also shows that there was very strong growth in land values in the early part of this period (roughly doubling as a share of national income between 1957 and 1968), while there was a notable increase in structural values under the Labour government (rising from 63% of national income in 1996 to 99% in 2009).

Looking only at the period since 1957 gives the impression of inexorable growth in residential land values, but as Knoll et al’s Figure 7 in the previous post shows the 1950s were a low point for land values across developed countries as a whole, being roughly three-quarters of the level seen at the end of the 19th century.

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That picture is backed up by a separate series of estimates of urban land rents as a share of national income in England and Wales, compiled by Hans Singer (before his days as an international development economist), reported by Colin Clark in his book ‘The conditions of economic progress’ and charted below.

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According to Singer’s estimates, the income from urban land rose from 1% of total national income in the 1840s to a peak of 4% at the end of the 19th century, which makes sense when you consider the extraordinary pace of urbanisation in England and Wales at the time. But while urbanisation carried on over the next few decades, the share of urban land rents in national income actually fell. In the next post in this series, I’m going to look at why that happened.

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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.