House prices: demand or supply?

Merryn Somerset-Webb had a good piece in the FT this weekend. She argued that the current high level of house prices was been driven by demand rather than supply. Her main evidence was the lack of significant price effects of any supposed supply shortages in the rental market and the fact that there has been little change in household size in the last decade.

…private rental prices across the UK rose by only 2.6 per cent in the 12 months to March 2016 — a little more than GDP (currently forecast to be around 2 per cent this year) but really not much…In London, things aren’t exactly smoking either: according to property investment firm PCL, the rents on newly refurbished properties in the capital rose only 0.3 per cent in the first quarter of this year. Those on “relets” — old properties let to new tenants actually fell (1.2 per cent)… The number of households in the UK has risen by 7 per cent since 2005, but ONS numbers suggest that the number of people living in each of those households hasn’t: our current average of 2.4 people is the same as the European average and the same as it was in 2003.

It does echo the experience of Spain and Ireland in 2005-2006.  These were markets where a huge supply response didn’t seem to affect prices.  It seemed to be the demand shock caused by the global financial crisis that triggered the collapse in prices.  She doesn’t see much risk of a demand shock identifying a kind of ‘Camborne put’ on house prices.

So should you worry? In the short and even medium term, the answer is probably no. The government hasn’t put all this time, effort and money into keeping house prices high to give it all up now.


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