Do British housing markets suffer from market failure?
As the price of land continues to rise, housebuilders target the rich
By C.W. | LONDON
IT IS OFTEN said that London is becoming a city just for the rich, particularly as far as housing is concerned. This sweeping statement means different things to different people, and it is actually quite hard to marshal evidence showing that this is indeed the case. There is, however, evidence that housebuilders are increasingly targeting wealthier customers over poorer ones.
Some researchers suspect that there may be a persistent market failure in the British housing market. They have noted that housebuilders do not build houses across the price spectrum (ie they don't build roughly equal amounts of houses for rich people and poor people, in a way that there is roughly equal provision of supermarkets for rich and poor people). Instead, they tend to target the price of new-build houses at the upper decile of the prices prevailing in the local property market: ie, at the top 10% of all the houses sold nearby in a given period of time. (For potential reasons why, see here.) If this is true, then it follows that British housing markets, at least new-build ones, tend to cater poorly to people on low incomes.
In London this problem is magnified, since the top 10% of the housing market is especially expensive. Researchers at JLL, a property company, have prepared the following chart for us. It shows data on houses currently being built, and houses recently completed. Of course, it's hard to know what the "right" distribution of prices should be: but to me it seems fairly obvious that people on low incomes are not being well catered for. Just 2% of houses currently being built in the capital will be priced under £250,000 (this is the lowest price category tracked by JLL, but even this is equivalent to ten times the average salary).
And the problem seems to be getting worse. There is only one year of data here, so it would be wrong to draw too strong a conclusion. But in just one year the proportion of London houses being sold for between £250,000-500,000 seems likely to fall from 51% to 45%.
It might not necessarily be a problem that there are relatively more expensive houses being built over cheap ones. It may simply free up already-built houses for poorer folk. But housing markets are extremely complex and things probably don't work out quite so happily. (An oversupply of luxury flats, for instance, may draw in well-heeled folk from outside London; or those flats may sit, unsold.) And the scale of the undersupply seems striking. This chart hints at the possibility that the London housing market is failing.
