Introduction

Consider two alternative interpretations of conditions in Britain. The first argues that there must be a housing shortage because house prices have consistently risen faster than other prices – real house prices have increased by approximately 3.5 per cent per annum since the early 1970s. The solution, therefore, is to build more homes led primarily by the private sector. This will help not only those on higher incomes, but the benefits will also trickle down to those on lower incomes and in this case the need for additional social housing is reduced. Our problems, therefore, arise from the inability to construct more homes. Under this view, the main constraint has arisen from the nature of the land use planning system, which is excessively restrictive (and is discussed in detail in Chapters 9 and 10), although additional constraints have occurred from shortages of skilled labour and finance. Furthermore, the concentration of the residential construction industry into a small number of large builders, which dominate the market, has reduced competition. Arguably, this has, in turn, weakened the incentives to innovate in an industry that has long suffered from low productivity compared with, for example, manufacturing industry. Moreover, the objectives of builders have not necessarily been to meet demand as quickly as possible for fear of disturbing the market. Instead, builders would prefer to bring forward new properties gradually in line with the ability of the market to absorb the increase.

The second view emphasizes the role of housing as an investment as well as a form of shelter. Chapter 3 discussed the relationship between the two, including that between market rents and house prices. However, since the expansion of the Buy to Let market in the late 1990s, market rents appear to have increased more slowly than house prices and, indeed, have risen at a similar rate to overall inflation. There are multiple reasons for the differences between rent and house price growth rates discussed in earlier chapters, but one view is that the near constancy of real market rents suggests that there is no absolute shortage in the number of dwellings to meet the number of households (although we showed in Chapter 4 that the number of households is itself affected by housing market conditions). Rather, house prices are being driven mainly by investment demand, particularly since the returns on financial assets have been low.