Why are houses so expensive?

Well, supply and demand, innit. Build more houses and the price comes down. Job done.

Only it’s not that simple.

Before the financial crisis there were building booms in America, Ireland, Spain and even Britain, to some extent. However, houses did not become more affordable – quite the opposite. Indeed, one of the few places where prices stayed flat was Germany, which was also one of the few places where there was no building boom.

To be clear, I’m not putting these facts before you as an argument not to build more houses. Rather, it’s to emphasise the complexity of the situation and the need for non-simplistic solutions to the housing crisis.

The situation in France provides further evidence. As Marie Le Conte explains in a piece for CityMetric, the French are much better than the British at getting houses built:

“The continuous need for more housing is one of the few things most French politicians seem to be able to agree on. Both the Socialist Party and the centre right UMP argue that France needs to build at least 500,000 new homes every year.

“That quota is never quite reached, but the idea still remains universally popular. After all, France is one of the EU countries that has traditionally built the most houses. In 2013, it built 5 per 1,000 people, compared to only 2.3 on this side of the Channel. This has been driven by a series of financial incentives – mostly centred around tax breaks – created both by the government of President Hollande, and by the Sarkozy administration which preceded it.”

Given this record, one might expect that the French would have no problems with housing affordability. Malheureusement, this is not the case:

“Despite this building spree, housing in France has become increasingly unaffordable over the past 15 years, as house prices have doubled, and rents have increased by more than half. Over the same period of time, wages have gone up by just 30 per cent.

“French housing is now some of the most expensive in Europe, just behind the UK. In 2015, a 70m2 flat would cost you around 7.9 times the average wage. In the UK, it’s 8.5.”

Of course, it’s easier for the French to get new houses built than it is for us. For a start, the French state has a way with infrastructure that seems to elude the British and our interminable planning inquiries. Then there’s the fact that their country is so much bigger than ours. This is something we prefer not to dwell on – but the terrible truth is that France is more than four times the size of England.

The French, therefore, have plenty of space, though not necessarily where they need it:

“…the state hasn’t been building in the right places. Because demand is unevenly spread, some towns are bursting at the seams, while others are struggling to fill their existing buildings.”

This is something we need to think about back home. For instance, scrapping the Green Belt would certainly free up a lot of space, but not in a way that is likely to make housing more affordable in London – the ground zero of the affordability crisis. We can build all over Buckinghamshire and Bedfordshire, but the fact remains that London is somewhere else. Attempting to match supply to demand in a geographically slapdash manner will not work.

One last thought: If housing is unaffordable, then why do prices stay up? Within the British context, insufficient supply can be offered up as an easy answer. However, the French experience shows that there is more to it than that. In particular, we need to look at the excess demand created by artificially low interest rates and a tax system that allows the surplus cash of the wealthy to be pumped into a housing market that can never keep pace with it.