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

Bursting the bubble: a structural rule for housing

A simple plan for bringing UK housing prices to sustainable levels
Not for the feint of heart, or shallow pocket

Not for the feint of heart, or shallow pocket

The unstoppable rise in house prices over the past decade or two has been, along with stagnant real incomes, the most important contributor to the decline in prosperity and well-being among the middle classes in Western countries. The sheer level of absurdity of house prices in cities like London and New York simply beggars belief, and has forced residents to either dish out a larger share of their incomes on rents and mortgage payments, or accept compromises such as shared accommodation, distance, or simply bad quality housing. Worse still is that the housing markets in some of these global cities appear to defy economic logic, rising even when their national economies stagnate. And it’s not just the big “alpha cities” that are feeling the pinch: cities in Canada, Australia and Brazil among many other cities in both the developed and the emerging world have also seen meteoric rises in prices over the last two decades.

Understanding London’s urban crisis

London is perhaps the most representative city of the modern housing bubble for various reasons. It is one of the few unquestionable alpha cities, as well as being the economic and political center of the nation. This alone has created tremendous demand for housing that in recent years has been most strongly felt from abroad (particularly for more high-end real estate). Despite this, the city is constrained in its capacity to build high and afar: in the former case, due to height-restrictions in many central parts of the city and in the latter case, by the Green Belt which sets an outer limit for the extent of urban sprawl. Lastly, the city is unique among those of its size in the sheer amount of single-family housing available in its central area. In contrast to cities like New York or Paris, where most living space in the central area is composed of multi-family apartment blocks or high-rises, entire neighborhoods in Central London are formed of neat terraced houses that give the city its unique Victorian and Georgian flair. Continue reading