Scala Land wants more houses built to reduce house price volatility

(PRLEAP.COM) August 25, 2009 - Scala Land want to see an end to the housing boom and bust that has been a contributing factor in crippling the UK economy over the last 30 years.

On July 30th the National Housing and Planning Advice Unit (NHPAU) sent recommendations for house provision to John Healey the new Housing Minister. In their covering letter they briefly highlighted if more houses aren’t built the price volatility will only increase, leading to more variance in the boom and bust cycle of house prices.

As house prices have finally stabilised due to the paucity of supply we must understand exactly how and why the price rises reached such catastrophic levels: a combination of stagnated supply, readily available credit and the belief that a home is as good as a pension. Whilst the first two are market oriented the third is a quite worrying belief given that real house prices (after inflation) rose only 0.2% a year between 1900 and 2000.

The government have no control over this third factor as it appears to be ingrained in even the most prudent of investors. However, the supply of housing and credit is an area that the government can certainly affect. Whilst the credit market has dried up, supply has suffered as a direct consequence of the global recession. The government being in a position to increase the level of supply in the market agreed to fund a number of stalled housing projects in a bid to kickstart the house building market.

There is a growing need for new home given the population projections for the next twenty years. The NHPAU have predicted another 6.3m households by 2031. This revelas inflationary pressures which are exogenous to the housing market. Increasing the number of people competing for homes, will lead to house price rises above sustainable levels. Without new homes we are set to see another boom driven by demand.

One of the key determinants of how a market reacts to changes in supply and demand is the relative elasticities of the two drivers. Supply to the market is extremely inelastic as there is a large time lag between an increase in demand and price and the subsequent provision of new homes. Demand in recent years has also been seen to be inelastic with consumers not responding to the rising price and extending themselves beyond would what be considered judicious. The two most significant factors affecting price elasticity are the availability of substitutes and the degree to which the product is a luxury or necessity. Unfortunately in the last ten years the supply of substitutes has declined and it is this that must be arrested.

If the government is committed to its Keynesian beliefs of stabilising the UK economy then the housing market is an area which will need large amounts of public sector involvement. Although the rate of construction has slowed to its slowest rate in 16 months, total output is still declining at a period in time when the UK needs more houses, more jobs and more investment. Scala Land Group are fully in support of the NHPAU’s recommendations to increase housing provision helping to feed the green shoots of recovery and making land an even better investment - this report is by Scala Land a leading UK land investment company based in the City of London

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