What if the market is constrained by demand and not supply?
Here’s a question for you; what would be the impact of government policy increasing new supply if the market was only being held back by demand and not supply?
During the last decade, in spite of popular perception, the UK was actually delivering enough housing to meet new demand. However, since the beginning of the recession, new supply has collapsed and delivery is 33% below peak levels and housing stock is only expanding at 120k dwellings per annum while I estimate that new demand is closer to 150k households per annum (the frequently quoted 250k households per annum is unrealistic for a number of reasons).
On the face of it this would suggest a new supply shortfall of at least 30k dwellings per year but overall market turnover is 46% below peak levels and new build delivery, having compensated for a lack of overall supply during 2008/09, is now firmly inline with overall market turnover.
Meanwhile demand remains severely constrained by the inability to raise large deposits and access mortgage finance while the pricing out of first time buyers has brought house purchase chains to a juddering halt.
If we therefore assume that the supply of new build has reached a point of saturating market demand for it at existing constrained demand levels then what would be the impact of increasing supply?
Basic economics would then suggest that without corresponding policies to increase demand, any increase in supply would lead to price falls and this would eventually help to increase market activity but probably not in the manner intended. Therefore, any increase in supply would need to be counterbalanced with support for increased demand whether by subsidising mortgages for prospective owner occupiers or increasing demand for institutionally held private rented stock.
Meanwhile, as one of the few locations where demand for new build remains strong, central London developers would probably reap the rewards of any policy designed to increase supply by reducing s106 contributions.