Industry Comment

 

Dr Ricardo Gomez / Associate Director

 

May 2008

 

House prices have become a critical economic policy issue in the UK, yet we still have a lot more to learn about the link between housing and the economy at a local or regional level, says Dr Ricardo Gomez...

 

Over the last decade, housing has become one of the most hotly debated topics in the UK.

Price to income ratios have almost doubled since 1999, an indication of unprecedented levels of demand. Monthly mortgage outgoings have become by far the single biggest item of household expenditure for most of us. Our homes are more than ever our biggest single asset.

All of this has fuelled interest in the role that housing and house prices play in the national economy. Movements in the housing market are subject to constant analysis and comment amongst economists and financial experts.

But what if any effect does housing have at a local or regional level? How and where does the inflow of workers into an area create greater demand for homes? Will building more housing in turn help attract more jobs? How can planners ensure they get the housing supply right? And what will be the effect on the economy of continued housing shortages and high prices?

Regeneris Consulting recently set out to answer these questions with a detailed review of the existing research on housing and the economy.

Homes for workers

The main focus of many recent studies has been the role housing plays in supporting the labour market. A well functioning economy needs a wide range of housing to support a thriving and diverse workforce.

Clearly, income really matters in determining people’s choices. Higher earners enjoy a much wider range of options and are able to choose the most attractive and priciest locations. They are also willing to travel further to work. Effectively they can pick and choose from an extensive menu, and have the means to sustain long journeys to work if that is necessary.

In contrast, the lowest skilled and lowest paid tend to need housing much closer to their place of work and are most likely to rent, either from social or private landlords. These are the people who can exercise the least choice in where and how to live, and have limited means to sustain long travel to work journeys.

Research is now strongly linking social housing tenure to lower aspirations about education and work, and a much higher propensity to be out of work.

Housing for a growing economy

If the population and the workforce of an area are expected to grow, more housing will be needed. The challenge for planners and developers is to determine where, what type and how much to build. This is not an easy task.

While it is reasonable to assume clear links between employment growth and housing demand, the relationship is a highly complex one. Many observers of housing markets argue that the job is the primary factor when people are deciding where to locate, and that choosing a home and a place to live comes after.

 

 

 

 

 

 

 

 

 

 

 

 

But ultimately, where and how people live and work is the product of many individual choices determined by an equally extensive array of circumstances. The job really matters, but so too do a whole series of individual decisions. This makes the link between housing and the economy a difficult one to quantify.

We do not know the extent of economic costs or benefits of getting the housing policy choices right or wrong in a particular area. We do not even know if there is anything but a minor effect. For policymakers, the challenge is knowing which housing policy levers to pull that actually (rather than theoretically) support their aspirations for the economy.

Attracting knowledge workers

Assumptions about how housing can be used to support economic change have become a prominent feature of modern economic development and regeneration policy in the UK.

High on the agenda currently is the idea that if an area is to create more high skilled jobs and attract more so-called knowledge workers, it needs to make sure it offers quality housing in attractive locations.

There is a need for more research on this important subject. An extensive study for the Northern Way found that while there were some strong grounds for such thinking, housing and quality of place were among a complex array of factors which attracted investors and people to an area.

The higher skilled and higher paid will clearly demand the best quality housing, but building more is not guaranteed to pay dividends to any particular local economy. Why is this? Almost certainly because of the extensive travel to work areas and therefore wide choice of housing markets of many knowledge workers.

Housing and the wider economy

The debate about housing is now also sharply focused on the macro-economy. Housing is a key indicator used to fine-tune macroeconomic policy in the UK, and the Bank of England’s Monetary Policy Committee pays close attention to changes in the housing market in making decisions about interest rate policy.

For most home owners, and they are the majority in our so-called property owning democracy, housing is one of the biggest item of household expenditure each month (20% of average household budgets), and also their biggest asset (worth an estimated £4 trillion by 2007), unlocking investment opportunities and acting as a store of wealth for the future.

For all these reasons, the substantial price increases over the last decade have become a critical policy issue for the UK. In some locations, choice is becoming very limited as rising prices have outstripped incomes. Many areas of northern England, previously seen as low-cost locations, have seen house process double in the six years from 2002 to 2007.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

In some segments of the labour market, such as key workers or lower skilled positions, employers are now having difficulty recruiting people because there isn’t sufficient affordable housing available. These issues seem to be especially acute in rural areas, where there may be a smaller workforce and strong pressures on affordability from holiday home purchases and retirees.

Soaring prices have made social and private rented housing an affordable and potentially attractive alternative to home ownership. Yet social housing comes with challenges, not least the lack of flexibility and mobility it offers and its role in adding to the impact of the benefits trap.

Policy implications

The housing market clearly follows the economy, and it is important to ensure that the relationship is a supportive one. But decision makers are faced with a considerable challenge to ensure that the public and private sectors offer the right volume and type of housing in the right places.

It is not clear from the research what is “right” and what the consequences of getting the provision equation wrong might be.

Despite the high profile of housing within the UK economy, there has been limited research to date on the relationship between the two. The influential review produced by economist Kate Barker in 2004 recommended a more effective housing policy required a much stronger evidence base. There is much still to be done to achieve this.

More hard evidence to support decision-makers is essential, particularly on key issues such as the economic benefits of developing new housing in specific target locations, the impacts of over or under supply and the effects of continued affordability problems.

If there is a need for a sharper focus on the housing-economy relationship, wider issues of well-being and sustainability remain a critical part of an effective housing policy. Ensuring that people live in decent houses in good quality, safe places should be an important goal in its own right, along with the need to develop environmentally-sound housing closer to places where people work rather than simply allowing housing and labour markets to expand as community patterns stretch.

A more sustainable approach to housing will bring with it long and lasting economic benefits.