The Parallel between Oil and Housing
Many years ago now, I went through a couple of modules in my degree that talked about OPEC (Organization of the Petroleum Exporting Countries). It was used as a great example of the power that supply levels can have on price. The premise is simple enough that, even as much of my degree knowledge fades, this one stays fairly clear. OPEC are what they sound like, a group of thirteen countries that collectively have around 73% of the world’s known oil reserves and account for around 40% of the production.
When OPEC wants prices to go up, they can turn down the flow of oil, releasing less to the market. Lower supply leads to higher prices. Simple. The same is true the other way. The effects of OPEC decisions are easy to relate to for most people as we will see it every time we drive past a petrol station. The current sub £1 per litre prices are in large part thanks to OPECs decision to flood the market with cheap oil, a tactic designed to squeeze other producers out of the market.
So what has housing got to do with this? Well the UK is dominated by a number of large housebuilders that appear to be able to exert pressures on supply that parallel those seen in the oil sector. They are able to bank land (reserves) and build new homes to add to the market (production). Their collective dominance gives them a great deal of power over the total supply of new homes. When the Government announces a house building target, the large housebuilders are the ones that have the biggest influence on whether it will be hit.
The need to build more homes is socially driven, a wish to ensure that there are enough affordable places for people to live. The housebuilders have a more commercial drive to build more homes, to gain the best possible commercial value for their work. Their stance is not wrong, but it does mean their incentives are not perfectly aligned with those of the Government.
To extract maximum value for their work, housebuilders may control, and sometimes restrict, the supply. Raising supply to meet the Government’s targets is likely to result in less than optimum financial results for the housebuilders as increased supply could lower prices. Add in that rising land values mean even unused banks of land still make money, and it is easy to see how a large housebuilder will feel conflicted about flooding their market with new homes.
This conflict is a big reason, along with a shortage of skilled workers, that I cannot see the Government’s target of 240,000 new homes per year. I believe the Government knows a shortfall is likely, and it will be interesting to see how it attempts to create extra supply. One option is to grant more projects to small developers, breaking up the supply chain into smaller pieces. It’s my belief though that the demand could and should be met by Housing Associations. Their combination of social purpose and commercial drive makes them the ideal partner for the Government in hitting their targets, and as a result the Government should be looking for every possible way to help Housing Associations build. Partnerships like the one with TfL seem a step forward, and it will be interesting to see how well the Housing Associations involved perform in the series of bid processes.
A Housing Association sector, powered by strong Government support, with a strong mandate to build seems to me to be a better bet for solving one of the UK’s biggest social challenges than relying on natural private sector economics. The potential is already there, and if the proposed mergers within the sector go ahead, the scale will also begin to emerge. There may be creative alternative solutions but I think it would be a shame for this one to be overlooked.
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