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Muddled assumptions which cancel each other out.

Monday, January 9, 2017 8:23
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Somebody alerted me to this drivel at the Adam Smith Institute (but I can’t find the email any more, thanks anyway):

Thankfully the situation is much better now, but in some ways we still have the worst of both worlds in housing policy. You might imagine that housing policy aims at balancing out two concerns: quality and quantity/price.

You might think policy picks one spot along a line: at one end we guarantee very high standards in design, materials, space, and amenity, but prices are high; and at the other we allow lower quality housing to proliferate, meaning prices are low. In fact we have managed to create a planning system that builds mostly ugly, unpopular housing in inconsistent and unpredictable ways, mostly where it’s least needed, and builds so little of it that prices in growing cities are staggering.

He is making two opposite assumptions and completely ignoring the real world:

1. That an increase in supply of housing = lower prices

2. That an increase in the quality of housing = higher prices.

Truth is, rents and house prices are set by what people are willing and able to pay to live at any particular location. Construction costs have more or less nothing to do with it.

To show why his two assumptions cancel out, let’s assume that higher quality means larger homes. Let’s imagine every home had been built with one more room that it actually is. It would be quite easy to have done this without using any additional land by building up a little bit higher, using loft space etc, so location values are barely affected.

1. That is clearly an increase in the supply of housing. There is more space available. So that means, under his logic, prices would fall.

2. Each individual home is now more desirable, better quality and cost a few thousand pounds more to build at some stage in the past. Under his logic, prices would increase.

It can’t be both can it? So one or both of his assumptions is incorrect.

IMHO both are incorrect. What would happen is that there would be a net movement of people from lower to higher value areas, pushing down prices in lower value areas and pushing them even further in higher value areas.


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