The impact of 3 million new homes

The balance between demand and supply in the housing market is a delicate one, as the US housing market downturn illustrates: there, one factor in the downturn has been oversupply, with 5.5m homes completed since 2004 and only 3.8m new households formed.

Experts acknowledge that Brown’s new targets to build 212,000 new homes a year up to 2016 and 240,000 from 2016 to reach 3 million by 2020 in fact represent only a modest increase on the housebuilding targets already in place. Ed Stansfield, property economist with Capital Economics, says: “There are elements of smoke and mirrors about the whole thing, but it is a politically astute ploy.”

Still, the government has been consistently upping the numbers for more than a decade. Policy aimed at delivering more homes has extended from the four growth areas of Milton Keynes/South Midlands, Thames Gateway, Ashford, and London-Stansted-Cambridge-Peterborough announced in 2003 through the growth points initiative to expand existing communities announced in 2005 to this month’s announcement from Brown that the government will free up public land for more housebuilding.

The most recent target could present housebuilders with a dilemma, Stansfield says: “There is a tension because there is enormous political pressure to produce more homes at the same time as higher interest rates seem to be impacting on the market and there is a short-term cyclical pressure on housebuilders to pull back on building.”

The figure of 240,000 units a year coincides with that cited in economist Kate Barker’s first report for the Treasury on housing supply. Barker’s report predicted such an increase in housebuilding would moderate house price growth to the European average of 1.1% a year.

Research by Hometrack shown in the graph demonstrates how an earlier policy has impacted on price. The government’s moves to increase housing density and in consequence increase the number of new apartments has had a negative impact on prices. But Hometrack research director Richard Donnell doubts that 3 million homes can constrain house price growth. He says: “More homes are welcome but if you wanted to have an impact on pricing, you would have to build one hell of a lot.”