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    Default hOUSE BULDING & SALES - IS THERE A RELATIONSHIP BETWEEN THEM?

    The strangest chart

    Sep 24th 2015, 13:01 by C.W. | LONDON
    [


    WE DID not have space for the following chart in our lead note on housing this week, but I think it is worth sharing. It comes from Neal Hudson, of Savills, and reveals a bizarre relationship. For the last forty years the number of new houses built privately has been almost exactly one-tenth the total number of houses bought and sold in a given year. So, for example, if 1m houses are bought or sold in Britain next year (as seems likely) then you can expect about 100,000 houses to be built by private housebuilders. Here is the chart, taken from the Savills website.

    This chart has big implications. Everyone goes on about how Britain needs to build 250,000 or so houses each year to keep up with demand. The chart, of course, implies that unless you get housing transactions up, private builders won't get anywhere near that figure (the public sector build very little housing).
    Now, the big question is: why does this relationship exist? Economists don't really know. However, here is one suggestion, courtesy of Mr Hudson. It gets a little technical here. Housebuilders, he says, tend to target the price of new-build houses at the upper decile of the prices prevailing in the local property market (ie, at the top 10% of all the houses sold nearby in a given period of time). If that is true, then you would expect there (roughly) to be one house built for every ten sold.
    Mr Hudson, though, just pushes the question back one step further. Why do housebuilders target the top 10%? Again, there are no easy answers here. But let's consider the relative merits of building and selling one house on a given plot of land, versus building and selling ten flats on that plot of land. The average price per square foot of flats (apartments) tends to be lower than that of detached or semi-detached houses (see here, for example). People in Britain, at least, basically want a house with a garden and so value each square foot of that ideal more than they do an apartment. So in other words, building a big house is more profitable than lots of flats. Add to that the transactions costs (lawyers and so) of selling ten flats, which will almost certainly be higher than selling the single house, and you can see why homebuilders end up building the expensive house.
    What can you do to boost housing transactions? One would be to reform the tax system (stamp duty and property tax) as we outline in the piece. This would incentivise people to move more frequently. By increasing demand, the argument goes, you will implicitly help to boost private house-building.
    You can also deal with the supply side. The costs of a housebuilder include the cost of land; the cost of building the house; and the expected profit. (Land tends to be about one-third of the total costs.) The revenue is the price they get for selling the house. If you push down costs they might be able to sell at a lower price. There are different ways to do this: free up much more land for residential development; or make it easier to employ builders (thus pushing down wages).
    However, Mr Hudson is candid about the problems with Britain's housing market. "It appears unlikely that transactions will significantly increase [...] therefore we must look to other tenures." The state, in other words, may need to step in if Britain is to solve its housing crisis.


    http://www.economist.com/blogs/freeexchange/2015/09/british-housing

    http://www.interest.co.nz/opinion/77...-mass-emerging



 

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