A little bit more on houses and homes

I wrote a long post about housing policy the other day. This is just a short addendum.

In my earlier post I took it as read that it would be possible, at least in theory, to reduce house prices in London by increasing housing supply, just as increases of supply drive down prices in other markets, and I merely doubted that Britain could ever take the steps necessary to achieve that.

As it happens, there is a further twist when it comes to the land and housing markets: increased supply can raise prices. Here's how.

The crude model for jobs and housing in London (or similar big cities) is to imagine that jobs are essentially the same as a fountain of gold in the middle of London and people simply want to get there each day to siphon off their share of gold. The gold fountain doesn't run out, so building more houses doesn't mean less gold for each new commuter; but as you get more and more houses, people have more options for living in while commuting to the gold fountain and, as those options increase, they are less prepared to pay more for the privilege of living in any particular one.

But London doesn't in fact make money out of a gold fountain: it makes money out of people. The interesting fact is that the more people there are, the more deals are done: from big deals (the eurobond market; insurance at Lloyd's; M&A) to small deals (people buying haircuts, sandwiches and cinema tickets). People meet more people, share ideas and come up with more new ideas. Large numbers of people living in close proximity can support new restaurants, clubs, art galleries, etc. Densification creates excitement and wealth. 

The effect is that adding more people makes the fountain of gold more valuable - and therefore increases people's willingness to pay for housing that can access that gold.

Let's take an example. I mentioned Battersea Power Station (BPS) in my previous post. Now think of Battersea as a whole. The redevelopment of the BPS site has added massively to the supply of housing in the area. But it has also added massively to the attractiveness of the area. If you live in an existing ex-council flat just outside the redevelopment zone then you will have seen: your local riverfront become more attractive and better served by funky hipster foodvans; new shops, restaurants and cafes appear; a new tube station open. Overall, the addition of a large number of affluent people to the area, and the cool new projects they support, is likely to have increased the value of your property.

The same is potentially true of London as a whole. If Zone 1 gets an injection of additional people making additional money then there will be all the more reason to splash out on a Zone 2 house that gives you the chance to join in the money-making machine.

I suspect that there is an effect of increased supply causing lower prices as well as increased supply causing higher prices. Which effect dominates will depend on all sorts of things, including the nature of the supply: BPS, with its proximity to the American Embassy and its new tube stop are a particularly high-quality addition to London; a development that increased crime or was simply particularly ugly might well depress prices. 

My point is simply that the addition of more people - and the businesses and amenities that more people can support - has a contrary effect to that of mere supply of empty properties. As Ian Mulheirn puts it, "it’s like running up a down escalator".

(If you are interested in this kind of argument and Mulheirn's discussion of the difference between land and capital then I recommend this, on Henry George.)