Economic Myths: Building more homes will increase owner-occupation rates

The politicians keep saying that owner-occupation rates are falling because homes are too expensive(1), that increasing new construction would get prices down(2) and hence reverse the decline in owner-occupation rates(3).

On closer inspection, none of these assumptions are correct:

1) Every home has to be owned by somebody, either an owner-occupier or a landlord. If high prices are deterring owner-occupiers, then why are they not deterring landlords as well?

2) We establish by observation that building more homes where people want to live (the sensible thing to do) does not push down prices in those areas, agglomeration effects mean that they go up slightly on average. Prices would only fall in emigration areas because of people moving to the new homes in immigration areas.

3) Whatever happens, landlords will continue to outbid owner-occupiers:

From page 11/12 of the DCLG English Housing Survey 2013-14:

In 2013-14, the private rented sector accounted for 4.4 million or 19% of households. Throughout the 1980s and 1990s, the proportion of private sector households stayed steady at around 10%. However, the sector has undergone sharp growth since then and has doubled in size since 2002.

So scaled up for the whole of the UK, that’s an increase of about 2.7 million homes in the private rented sector between 2002 and 2015. From DCLG Table 209, in the same period, 2.3 million homes were completed in the UK.

In other words, landlords were easily able to soak up all net new homes and then some. Why? Because people who already have some ‘housing equity’ can borrow larger sums more easily than younger would be owner-occupiers. The mortgage market review and recent tax changes might put a bit of a dent in that, we will see.

But you can build as many new homes as you like, as long as landlords have a natural advantage, they will be buying them up (even if prices were to fall, which they wouldn’t).