Supply beats demand
Mortgage repossessions head for a 16 year high. The number of new mortgages has fallen by 20% in a year. And at 5.94% the average interest charged on mortgages is higher than it has been for nearly seven years. So is this the start of a house price crash? No. And I’ll tell you why.
I am not an economist. But I’ve interviewed dozens of them over the years and they have been consistent in one thing. Ever since house prices started rising again ten years ago they have told me year after year ‘this cannot go on forever’. And every year they have been wrong. Some have predicted a crash. Others a gentle slow down. A third group – and remember these are all experts working on the same data – have told me there will be a standstill. So far they have all been wrong.
There is one law of economics that everyone knows – it is the e=mc2 of finance – the law of supply and demand. Prices will rise and fall so that the demand for a product equals its supply. But house prices are being driven up by both sides of that equation. Supply – the number of homes we build – is too low. We build about 170,000 new homes a year and we need at least 250,000. At the same time demand is growing. There are a million buy to let homes, our aspirations are rising, and a growing number of people wants to live alone. And that is before this week’s figures on immigration are taken into account. With demand growing and supply falling further behind
, rising prices are inevitable. And, I am sorry to say, can be sustained as long as those conditions exist.Yes but
...I am told...the average home now costs £200,000 – eight times average earnings – and young people cannot afford to get on the housing ladder.That is true. They face terrible problems
. As do the tens of thousands who have bought a home and now are struggling to pay their rising mortgages. It is tough. It may seem wrong. But where is the law that says a country’s economy has to alter so that people on average pay can buy a home to live in? It does not exist. If it did a studio flat in Monaco would not cost €1.1 million – way beyond the means of the average young Monegasque.We all know streets that are too expensive to live in, towns where the price of property is too high, even cities that are largely unaffordable. So why not countries?
It’s a tough message. But until we build enough homes, both to buy and to rent, it will only get worse. The iron law of supply and demand has never been broken. And it won’t be here.
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