Another house price post

Via Tim, Raedwald has a silly piece suggesting that the 30% collapse in new-build flat prices, rather than being the outcome of a speculation bubble, came because developers were required to build 30% social housing as part of the development.

However, this doesn’t fit the facts, or what we know about economics.

If the new-build flats sold for 30% more than existing Victorian and Edwardian properties nearby, that’s because buyers believed the new flats were worth 30% more than existing Victorian and Edwardian properties nearby – otherwise, prices would have converged.

In fact, the most likely reason the new build flats listed for 30% more than existing properties is that builders across the board granted a discount of just over 30% for buying off-plan. Which also means that any fall in real new-build flat prices should be measured from 30% below list price, not from list price.

But we all know you can’t get something from nothing – so how were the ‘affordable’ flats funded? Well, the marginal cost of building them compared to building the same development without a social housing element, which is low (e.g. adding an extra storey to the block), is covered by the money that’s actually paid by the social housing body to the builder.

So who’s paid for the difference between the cost of building and the theoretical value of an HA flat? As long as you assume that the purpose of the planning laws is to protect local residents from overpopulation, the answer is other local residents: in the space where the developer would otherwise have been given permission to build 20 full-price flats, he’s received permission to build 20 full-price flats and 8 affordable ones.

11 thoughts on “Another house price post”

  1. From my limited knowledge (i.e. what various clients have told me), you can't start with 20 and add 8. If the maximum capacity is 28, then it's 28 minus 8 = 20. I am very dubious about all this HA stuff, it's largely counterproductive. If the builder were allowed to build 28 flats and sell them off, this would tend to keep prices down overall. Restricting supply of flats for non-'key workers' must push up the price.

  2. Hmm. AIUI you don't /get/ permission unless you've got the HA flats, so the theoretical maximum is moot.

    I'd agree with you about key workers *if* national payscales in the public sector were abolished. But as long as they exist, key worker properties are required simply to ensure that people living in London can actually have their kids taught, their fires extinguished and their bedsores tended…

  3. If you scrapped national pay deals in the public sector, would hospital workers in Chelsea suddenly be able to afford to live there? Wouldn't it just end up with public services being seen as unaffordable in those areas? Or would local taxes have to rise?

    On the flats, if there's still only 20 flats, not 28, and 8 private-sector ones have been lost, then presumably 'who pays' is the taxpayer, assuming they sold the land originally, or whoever owned the land originally. Which I see is what Rosscoe says.

  4. 1) they wouldn't be able to afford to live in Chelsea, but they would be able to afford to live within sensible commuting distance of Chelsea (which, without key worker flats, at the moment a policewoman/nurse couple couldn't).

    2) not really – this isn't about replacing 28 old flats with 20 + 8 new flats – this is about replacing derelict industrial buildings, car parks, old warehouses etc with some new flats. The builders could make more money if they were allowed to build 28 + 0; they could also make more money if they were allowed to build 40 + 12. But they aren't, because of planning laws that are supposed to protect the interests of other residents.

  5. Yeah, I meant 20 flats built rather 28 built, not they were replacing 28. But presumably the council (if it was selling the land) gets as much as it wants depending on the planning permission it allows, but wouldn't be able to charge as much to the developer if it insister 8 of them were keyworker housing?

  6. Yes. From the perspective of the developer (and hence the money paid to the council, if they're the ones selling the land), it's as if the land had permission for 20 flats, but from the perspective of The Community, it's as if the land had permission for 28.

  7. If the builder were allowed to build 28 flats and sell them off, this would tend to keep prices down overall

    Oh, nonsense.

    For a start, even if they went down a bit, they'd still be way, way out of most people's reach. I mean when I left South London two years ago, new one-bedroom flats in Peckham were going for about £170,000, which is a very great deal more than most people in Peckham could afford.

    Secondly, how much do people really think that developers are constrained by the requirement to provide social housing? I'd suggest the answer is "very little" – my opinion being formed by the proliferation in London over the past few years of developments which miraculously offered fourteen flats, that being one fewer than the number which triggered the requirement to provide social housing.

    But suppose the site was too big for only fourteen flats? No problem – what the developer does is split their planning application into two or three smaller chunks, and end up building rather more than fourteen anyway without providing anything by way of social housing. (Obviously, they can't always get away with this, but I think there's a lot of it about.)

    they wouldn’t be able to afford to live in Chelsea, but they would be able to afford to live within sensible commuting distance of Chelsea

    Why would you think so? Or rather, why would you think it would make a significant differnce? Would, say Chelsea and Westminster Hospital suddenly be able to pay nurses a great deal more than they do now?

  8. That does actually raise a point which i have always thought problematic. If you scrap the national pay scales then if spending is to remain level, the higher salaries in London and every other place that has significantly above average house prices (S.East mainly) will have to be matched by lower salaries elsewhere.

  9. "Why would you think so? Or rather, why would you think it would make a significant differnce?"

    For the same reasons that people working in private-sector jobs in London get paid more than people working in identical private-sector jobs elsewhere – ie labour supply is determined by disposable income, not by nominal income.

    So in the absence of national payscales and key worker housing, the C&W hospital would have to pay nurses more than it currently does, otherwise it wouldn't be able to find any.

    This would need to be funded either by cutting back on services or by an increase in central government's grant to the hospital – either of which would be a more transparent way of reflecting the real costs to society of providing the C&W's services than the hidden subsidy given by key worker housing.

  10. the C&W hospital would have to pay nurses more than it currently does

    You see, it's the "have to" which I have a problem with here: I follow the argument, but not its certainty. What happens if there is no "have to", because, as I suspect would happen, nobody's willing to stump up the cash?

    (In point of fact, I suspect, from experience, that "key worker housing" in the sense I think is meant here, play very little role in this anyway. It would be useful to see figures though. What probably plays a much larger role is that hospitals themselves are able to offer cut-rate rooms to a fairly high proportion of their nursing staff.)

  11. John B, sure the pay for nurses in Central London would go up – but they could pay for this by scrapping all the key worker subsidised housing nonsense. Which solves the tied worker problem.

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