Another factor that should support home-building over the medium term is that we are starting from a position of some undersupply in the housing market. Although there is some uncertainty as to how large the undersupply is, I suspect it may be less than some of the estimates in the public domain.
The largest estimates of the cumulative undersupply are based on comparisons of actual completions in recent years with estimates of ‘underlying demand’ for housing. This figuring is essentially asking the following the question: Given current population growth rates, if the decline in average household size and level of demand for second houses that has occurred over recent decades had been maintained in recent years, how many new homes would we need to build? Most calculations now put ‘underlying demand’ at something like 180,000 to 200,000 dwellings per year, which means we would have needed to build significantly more homes than has actually occurred.
However, such figuring is based on simply extrapolating earlier trends and ignores the likely impact of prices on the demand for housing. Over recent decades, the cost of housing (including land) has grown faster than incomes and the cost of many other goods and services. This reflects both demand-side factors and supply-side ones. But we might expect that, at some point, the demand for housing will be affected by the higher cost of housing. For example, with housing – both owner-occupied and renter – more expensive than in the past, we might expect to see some young adults choosing to live with their parents for longer. We might expect some households to look for an extra flatmate rather than leaving a bedroom vacant. Some owners of holiday homes or second homes might have become more inclined to sell them, with those houses then occupied full-time.
So perhaps the longer-term run-up in the cost of housing is one of the reasons that we have built fewer homes in recent years than might have been expected. Now I am not saying that there is no undersupply of housing. At the very least, one can look at estimates that the aggregate nationwide rental vacancy rate is currently around 1½ per cent versus more normal levels of around 3 per cent (Graph 12). Given a rental stock of around 2½ million dwellings, a simple calculation would imply the need for about 40,000 additional dwellings to get the rental market back closer to balance.
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