I assume most people take ‘affordable housing’ to mean accommodation that is affordable, something that people on average levels of income are able to afford to buy. But let’s go back to basic economics: What determines the price of a property?
Although there is a rough correlation in that, if all else were equal, someone would generally prefer to live in a bigger property than a smaller one. However, the size of a property does not necessarily correspond to its price, which seems counter-intuitive. This is easily demonstrated in that a small one bedroom flat in the centre of London is easily worth far in excess of 10 times more than a massive empty barn in Lancashire.
Supply and demand
So what does affect the price of a property? Essentially, price is determined by the interaction of supply and demand. The greater the supply of something, the less people are willing to pay for it, so the lower its price; the higher the demand, the more people are willing to pay for it, and thus the higher its price.
For example, tap water is relatively plentiful, so very few of us would be able to imagine paying £100 for a litre of it. However, were you to be stuck in the middle of the Sahara desert you might find that a litre of water will be of more value to you than the last £100 you may have in your bank account.
Likewise, a desirable product such as an iPhone can command a rather high price despite many millions of them being in circulation, simply because the product is high in demand.
Going back to economics and the cost of property…
In terms of supply, metropolitan areas have a greater supply of property than rural areas. High density housing developments will have greater supply than low density developments.
In terms of demand, things that increase demand are factors such as transport links, access to public amenities, quality of housing, reputation of the area, beauty of the neighborhood, and probably the most significantly: employment prospects.
Within a given area, how does one decrease the cost of housing? Given that most of the aforementioned factors that affect demand (ie transport links, public amenities, reputation of area, beauty of neighborhood) are somewhat fixed geographically, thus the property developers’ epithet “location, location, location”. It is clear that there is very little one can do to reduce the price of housing by reducing demand. Possibly the only factor left that can be varied is the quality of housing – and surely no advocate of affordable housing would even consider the idea of reducing quality in order to make housing affordable. In a civilised and developed world, it is a natural expectation that houses must be built to meet a standard.
Next up is supply: within a given area, supply of housing can be increased by increasing the density of housing. This means more flats, smaller rooms, smaller gardens or even non-existent outside areas. This is already happening in London and other cities around the world. Big houses are being converted into multiple much smaller flats. Entire rows of houses have been knocked down to create apartment blocks. Human and road congestion increases, noise and air pollution increases, living conditions deteriorate, and social cohesion fractures. Those living in cramped housing in London will be able to relate to what I am describing. Even worse, even these measures of increasing supply is enough, because the property market is not the same as the manufacturing market: In the world of manufactured goods, supply can always be cranked up in order to meet demand. But you can only build so many houses within a particular area, so supply never rises sufficiently to meet demand.
Abandoning the free market?
Some might ask, why do we have to let the market dictate the cost? Why can’t developers just sell the houses at the price it cost them to build it? Consider this example: the market price of a 2 bedroom house might be £150,000. The land costs the developer £50,000 to buy, and the construction cost another £50,000. So the developer generously forfeits the massive profit and sells the property affordably, at cost: £100,000. The lucky buyer becomes a homeowner at half the market price. But then the same lucky buyer is then able to then sell the property at market price, reaping a huge profit of £50,000 with very little effort. Now the property is immediately back at market price, and only the first buyer benefits from the developer’s generosity.
In the UK, property developers rarely, if ever, practice such generosity. They are financially savvy, and will not be taken advantage of. But politicians are not property developers, nor are they necessarily as financially savvy. Thus governments sometimes invest in making ‘affordable housing’ available for sale. Of course, the houses very quickly return to market prices, effectively ripping off the public purse to whomever was lucky enough to be the first buyer of this property. Alternatively, the government can mandate that property developers include a proportion of ‘affordable housings’ in every housing development. How this works out in practice is that property developers dedicate a proportion of the development to low-quality and high density housing, which is actually sold at market price, and frequently still not affordable to those on average incomes!
So what is the solution?
To those unable to afford a house where they want to live, the only recourse is to buy a house where they can actually afford to. They can aspire to be able to afford to live in a certain area, and they are free to work their way up the housing ladder until they can afford to do so. There’s no quick and easy way to accomplish this.
The more complicated issue is for those in government setting housing policy. Instead of reducing prices by subsidising house buyers, or increasing supply by cranking up housing density… I suggest that the only feasible solution is to increase the desirability of other areas. If the described factors such as transport links, public amenities, housing quality, and general neighborhood desirability. This would increase supply of desirable housing, create competition for property occupation, easing the demand for housing in congested areas, and improve living standards for all.
In practice, this would mean investing in infrastructure to build high capacity public transport links such as railways to create affordable commuter towns around major city hubs. And within these commuter towns, good quality high density housing such as premium apartments or even tower blocks should be built to maximise the supply of housing.
Along the same vein, to increase employability prospects of living in a particular area, businesses should be encouraged, maybe even financially incentivised, to set up shop. This could be via setting up attractive infrastructure and financially beneficial arrangements such as low business rates, plus support via loans/grants, advice, or subsidised marketing.
You cannot create ‘affordable housing’ by artificially forcing the price down without regard to market forces. The way to make housing affordable is to influence the market so that conditions are met where people can naturally afford housing by their own financial means.
This post was originally published by the author on his personal blog: https://hoongwai1984.wordpress.com/2016/09/07/what-is-affordable-housing/