Housing undersupply: Fact or fiction?

Published 13th Dec 2007

Recently, there have been two contrasting claims made about housing supply…
The first, made by nearly everybody in the residential housing market, is that there simply are not enough homes to meet demand.

In response, the government has set out ambitious plans to build 240,000 new homes every year and three million by 2020, with 160,000 of these lined up for the Thames Gateway and other plans including ten new eco-towns and a lot less planning red tape.

In contrast, where developers have been building lots of homes, such as brownfield sites in inner cities, there has been the opposite argument: That too many apartments have been built and this is leading to lower prices and empty properties as for once supply exceeds demand.

Implications for BTL
This paradox has implications for the buy-to-let industry, both in terms of the value of apartments should investors buy into the city living market or the rental market as a whole, which has been boosted by the decision of many would-be first-time buyers to rent rather than buy in times of economic uncertainty and high mortgage salary multiples.

Northern Housing recently reported that the sort of housing being built in Salford principally includes new apartments. Its figures for the 2,200 homes constructed in the city since 2006/07 includes 410 homes, with the majority consisting of apartments in the area just across the Irwell from Manchester City Centre.

The implication was that there was a clear demand for the city living lifestyle (which would to a lesser extent include other apartments in the Quays area), which has driven the market in building. Such demand may suggest the claims that city living is oversupplied are not necessarily true.

However, the organisation noted that the city council still wanted to ensure 20 per cent of new dwellings were affordable and the new building was not just for professionals moving from outside. Councillor Derek Antrobus, Salford council's lead member for planning, said: "Salford has a strong commitment to affordable housing and is setting guidelines for developers through the affordable homes strategy and housing guidance document to help first-time buyers and those residents who wish to remain in the city."

Such a commitment, in Salford and elsewhere, might be seen as a huge boost to the first-time buyer market. But just as the government plans to build three million new homes by 2020, an economist from the University of Nottingham has questioned the whole idea, the Daily Mail reports.

Deflation of the market
Professor Daniel Bernhofen of the Globalisation and Economic Policy Centre has said the plan could lead to a major deflation of the market as the number of houses could increase at a time when the market was poised to naturally correct itself.

He said: "A big-scale initiative to increase the stock of housing requires fine tuning between the increase in the stock and the predicted demand," adding that the government did not have such detailed information.

"That's why the government should be careful that it's not getting confused between need and demand."

Of course, such a claim may not be fulfilled, not least because social trends such as a drift towards smaller households and immigration may continue between now and 2020. While an increased supply of houses would naturally reduce the demand-push inflationary factor, it remains in any case to be seen if the government can successfully deliver on its market pledges.

Professor Bernhofen said the market was capable of correcting itself. If that is true, it may be that at some stage new housebuilding will be scaled back accordingly. The same will be the case for apartment building if a clear supply surplus is emerging. But the experience of Salford of late suggests this is not yet the case.

Source: ' Assetz '

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