A divisive report from CaCHE on the role of supply in the UK housing crisis

A new report by Ian Mulheirn for CaCHE has caused considerable debate amongst housing policy analysts and economists. Mulheirn’s argument essentially focuses on challenging the assumption that undersupply is the primary cause of the current housing crisis. Mulheirn, an economist with the Tony Blair Institute, provides evidence such as the growth of UK housing stock compared to the growth in the number of households which he argues shows that enough housing has been built to match or exceed demand and therefore prices should have responded by reducing, which is the opposite of what has happened. He argues therefore that supply of housing is not the key factor in the rise of house prices.

Challenges to Mulheirn’s evidence

It should be noted that both this rationale and Mulheirn’s evidence have been challenged by two prominent housing academics who published responses (also through CaCHE). Professor Glen Bramley argued that Mulheirn’s approach was ‘completely wrong-headed’. Bramley argues that the way that ‘households’ are defined and formed needs to be considered and that ignoring this may lead to an appearance of balance between the two figures, where there is none. Household formation by younger adults has been affected by the availability of affordable housing and access to social housing, among other factors and in order to assess housing supply adequacy, Bramley argues that you need to look at a ‘basket of indicators’. Mulheirn has in effect conflated correlation with causation in this argument in neglecting to consider that rising house prices will undoubtedly affect household formation and therefore have an impact on how many households there are.

Professor Geoffrey Meen in his response, argued that in terms of supply and demand, it was possible for there to be both an absolute shortage of homes whilst also being a problem in terms of distribution. Whilst Mulheirn did look at regional distribution of housing, he failed to consider the interaction of availability of affordable housing and regional variations in employment and income. There may indeed be an adequate supply of housing, but where that housing is located and whether or not it is appropriate or affordable also needs to be considered.

Challenges to Mulheirn’s theoretical basis

However, both of the critiques which were published by Cache alongside Mulheirn’s paper, criticise Mulheirn’s theoretical basis, focused as it is on viewing housing as equivalent to other types of assets. Others have weighed in on this point, such as John Myers in his recent blog post on Mulheirn’s paper. Myers points out that the total value of housing in the UK today exceeds the cost to build those homes by about three times. Housing is not the same as other assets and the market does not appear to function like any other market. Myers points to the interaction of housing supply and interest rates in determining house prices. In the UK this means that interest rates have driven house prices up primarily because of the constraints in supply.

It appears that Mulheirn has hit a nerve in some ways in dismissing the focus on supply. His analysis provides some hints that focusing instead on the interaction of mortgage interest rates and the availability of credit may be of use in explaining the housing crisis. Whilst defending the importance of supply in contributing to the housing crisis, both Bramley and Meen agree that there is merit in exploring other factors causing rising house prices and rental costs such as the availability of financing for house purchases and the need for profit in the buy-to-let market and the regulation (or lack of) which has driven changes in homeownership and renting. Meen in particular, argues for the inclusion of demand policies such as these with supply policies. Much of the critique of the status quo offered by Mulheirn, and indeed the responses offered by Meen and Bramley, point to the need to see housing as a complex system and as such, both the original paper and the critiques are to be welcomed as contributing to a much needed debate around the causes and consequences of the UK’s current housing crisis.