To more satisfactory discussions about housing

I had one of those unsatisfactory conversations about housing recently.  It wasn’t a big deal, and it was politely conducted, which is always a plus.  I’ll not go into some details, because it was a private conversation, and in any case those I omit are inessential.  The essence was that it would help the UK housing crisis if rental contracts were made more favourable to tenants, in a way apparently normal in Germany.

My position is that anything which makes owners less willing to rent out property leads to a reduction of the supply of housing, from which we can say immediately that the housing crisis will worsen, given no reason to think demand for housing will fall correspondingly.  Of course, houses previously rented out won’t go empty, but be sold to owner occupiers.  However, this will mean fewer people living in those houses.

There were several unsatisfactory aspects to the conversation. The first, I’ll admit, is that I didn’t state my position as clearly as in the paragraph above, and instead I complicated the matter by talking about the impact on new build, rather than the effect of existing stock moving from rental to owner occupation. I’m sure the impact on new build will differ, but it is a distraction from the main point.

Another unsatisfactory aspect was that the discussion quickly turned to the impact on house prices.  There was no disagreement here – a measure which puts off buy to let landlords will mean lower house prices.  Indeed, and good news for aspirant owner occupiers, but there is still an effective reduction in supply, so bad news for the rather larger numbers who will remain in the rental sector. Their demand for housing stays the same, but supply has reduced – so rents will rise.

I think there is a cultural factor here – in the UK we talk so much about house prices, and information about them is so easy to find, that we don’t pay enough attention to the rental sector.  There is also the presumption, for many, that living in rented accommodation is temporary, so not that important.

I’d like to think an economist from Mars – or perhaps Germany – would look instead at demand and supply for, in economics jargon, the “services” housing supplies, or in plainer language, having somewhere, for a given period, to sleep, eat, entertain and relax in private. For a given period only. To want to own a house, so having a particular space with the right to sleep, eat, etc. there, for an unlimited period, is rather like wanting to own the source of all of some other essential good for an unlimited period.  In the case of food it would amount to wanting a big enough allotment, to grow your own for as long as you wished. It might be an attractive idea for some of us, but we’d not get distracted into talking about allotments when thinking about the economics of food production and supply.

A final reason for not focusing on house prices is perhaps simpler, at least for those familiar with financial markets.  Because houses can generate a rental income, and owner occupiers can get mortgages, the price of houses is as much about interest rates as it is about supply and demand for housing services.  Many conversations about housing – not this one, thankfully – divert at this point into arguments about banking and macro-economics.  If the hope is to get house prices down, they generally come up with ways to limit the amount of money to buy properties.  To the extent that new investment does increase supply, cutting back on this does not help supply, so the beneficiaries are again only the aspirant owner-occupiers, with the remaining private sector tenants again the sufferers.

A third unsatisfactory aspect of the original conversation was the casual reference to how things are in Germany, generally seen, I think rightly, as having nothing like the same housing crisis as we have. The problem in this case was that, in what seems like a good overview of the German rental market

Tenant’s Rights Brochure for GERMANY

I can find nothing like the aspect of how things are done there which we were discussing. In other words, while we were able to have a sensible conversation based on shared general understanding of how markets work, for lack of knowledge about actual market conditions, the discussion was entirely theoretical. I don’t mean to demean economic theory, but the discussion would have appeared fatuous to anyone who did not think readily in terms of supply and demand. especially if they did know anything about the specifics of the German rental market.

Having read that link, I now know a fair bit more about how the market in Germany differs from the UK.  Some of it I had come across before, thanks to this article from the FT

A German lesson in rent controls (£)

What particular took my interest there was this

The existing rental benchmark is the Mietspiegel or “rental mirror” which has been around since the early 1980s. With typical Teutonic thoroughness, every municipality in the country collects rental market data over a four-year period to construct an index of rental values. The idea is that this forms a “mirror” of the rental market that governs rent increases during a tenancy

but with the additional information from the Tenant’s Right brochure, we have these key points: 

  1. tenancy contracts are mainly concluded for an indefinite period
  2. 52% of houses are rented
  3. 64% of housed rented are privately owned
  4. to date – but changes are being introduced – rents could be raised throughout a tenancy in line with the “rental index”
  5. while not on the scale of the UK, in big cities other than Berlin, such as Munich, Frankfurt and Hamburg, Germans too feel they have a “massive” housing shortage.

I’m not sure what conclusions to take from these, although, if it is accepted that Germany does not have a housing crisis on the same scale as in the UK – more precisely in London and the South East – then we can tentatively say that:

  1. the private rented sector, appropriately regulated, can be part of the solution; and
  2. since the system of rent capping discussed in the Tenant’s Right brochure is only now being introduced, it, in contrast, cannot be said to be part of the solution.

Beyond that, I am left wanting to know more about how the Mietspiegel is constructed, and how it works.  In principle such officially administered transparency is just the sort of thing to help markets work better.  However, a bigger question is how new housing supply is determined.  There’s no reason there should be in a Tenant’s Right brochure, but another unsatisfactory aspect of so many conversations about housing is that they do not engage with the architectural and town planning challenges of getting more homes built.  Sadly, LB Lewisham’s Cabinet member responsible for housing, is no longer a near neighbour – in private rented accommodation – and is perhaps one who does not think readily in terms of supply and demand, but what Lewisham is doing does look like part of the solution

popuplewisham

CREATIVE THINKING IN LEWISHAM WILL HELP ALLIEVIATE HOUSING NEED

And one final unsatisfactory aspect of so many conversations about housing – economics in general.  We just don’t have enough empirical data, and its too easy to sound knowledgeable by cherry picking evidence. I’d like to think I’m not as guilty as the rest, but I’ve made assertions – such as that if a rented house is bought by an owner occupier, it is likely to lead to fewer people living in it.  I’m planning to start familiarising myself with more housing stats, so I can put numbers to such assertions – assuming they are true – but that takes some time and effort.  I’m working on it.

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