The people who don’t buy houses also drive prices
The two worst commentators on British housing are tag teaming each other. Nick Bano quotes Phineas Harper from The Guardian:
Twice as many new homes have been built in London in the past decade as the number of households added to the city’s population, yet average property values in some areas have almost doubled. In some places, rents have even gone up as populations have fallen
This is the heart of the idiot argument. Prices rise if more people buy houses in an area. If there are more houses built than people buying them then prices should not rise, right?
Therefore all this nonsense about supply and demand is wrong and….well, apparently and everyone get to continue living in rabbit hutches or some such.
The error is obvious to us select but if you’re a lawyer, or called Phineas, we’ll help you out with the obviousness.
Prices are driven by the interface between supply and demand, not by the number of completed contracts. Completed contracts, of course, give us the strike prices at which contracts were completed. But the number of contracts that complete - the number of added households actually added - is not the driver of house prices. The number of people - and how much money they’ve got, clearly - who wish to complete such a contract is what drives house prices.
Measuring housing demand by how many - at absurdly high prices - actually buy houses is absurd. What drives demand and thus prices against that badly limited supply is who would like to buy houses in those places. Thus to declare that there were only so many extra households and therefore demand is met by that limited supply is absurd. Prices, the third moving part of the system, are screaming out that there’s large unmet demand. This is why prices have risen to allocate that scarce supply.
That prices have risen tells us that more people would like to have a house in such areas than are able to. Using high prices themselves to insist that demand has been met, well…..sure, the demand at those high prices has of course but what about the demand that is there at lower?
Sure, yes, we’re great with people noting that supply and demand thing, it is indeed important. But managing to get it entirely the wrong way around - measuring the number who complete on limited supply rather than using price to tell us about supply and demand - is not a great step forward. Could we recommend that people called Phineas - and lawyers, obviously - have a look again at pages two and three of any basic economics textbook?
No, not page one, that’s the copyright note.
Tim Worstall