Bursting the bubble: the math behind the housing crisis solution

I said bursting the bubble would be easier than it looks, it looks like it is
It's a bird, no it's a plane, no it's the price

It’s a bird, no it’s a plane, no it’s the price

In the last post I promised a more rigorous mathematical analysis of my housing market solution for the UK. After some serious Excel number crunching (what better proof of my economics geekiness that I find this an enjoyable exercise in my free time), I have come up with the following model which can be tweaked to demonstrate how certain scenarios can play out. Now, as I mentioned in my previous post, this solution is highly theoretical and in fact, my assumptions may prove to be unworkable in practice. However, I think that despite its simplicity, the fundamental logic behind the model is sound, not least because it demonstrates just how easy the fix would be and by extension, just how the present housing crisis is a political construction with no other objective than to make a certain home-owning class wealthy(er) at the expense of the taxpayer.

The model is an attempt to calculate how many houses can be built per year up to 2030 depending on certain criteria, such as the percentage of GDP that the government can spend on housing, the extra revenues from increasing the top rates of council taxes, and the savings obtained through a reduction of housing benefits (yes, I know, this has now been scrapped in favor of a universal credit, but a proportion of this will still be dedicated to housing so it’s still a de facto cost). The theory behind this all is in the previous post. Additionally, the share of private construction relative to GDP can also be tweaked, as can the estimated cost of a single house which I have put as £125,000 as a baseline for 2012 and adjusted on the basis of consumer inflation up to 2013 (and pre-dated as well so we can crudely estimate the share of GDP spent on housebuilding). On this basis, I have developed a pair of potential scenarios to show how the solution would work out in practice. Continue reading