Select Committee on Economic Affairs Minutes of Evidence

Written evidence from Professor Stephen Nickell, Nuffield College, Oxford University

  It appears that Sir Andrew Green (Q 541) thinks that the expansion of households is the only significant factor in housing demand. In fact, per capita real incomes are equally important and will drive upwards the demand for housing services, and hence house prices, even if there are no extra people.

  My calculation is done as follows and refers to England:

  If we continue to build houses at the current rate (ie roughly the RPG plans (Regional Planning Guidance), the NHPAU (National Housing and Planning Advice Unit) model indicates that the house price to income ratio will rise from 7.07 in 2006 to 10.46 in 2026. This uses the CLG (Communities for Local Government) household projections of an average of 223k new households per annum, an average growth of approximately 0.94% per annum. The rise from 7.07 to 10.46 in 20 years is approximately 2% per annum.

  The NHPAU model suggests that a 1% ceteris paribus rise in the number of households raises house prices by 2%. Suppose there was zero net migration. CLG used to suggest that this would reduce the rate of growth of households by one third, or by 0.31 percentage points per annum (one third of 0.94). Using the model coefficient of 2, this suggests that house price to income growth would be reduced from 2% per annum to 2-2x0.31 = 1.38% per annum. At this rate, the house price to income ratio would rise from 7.07 to 9.3 by 2026 as indicated in my evidence.

  If we use the latest CLG figures on the contribution of migrants to household growth, namely 0.4, as favoured by Sir Andrew Green, then if migration was zero, the house price to income ratio would rise to 9.06 by 2026. So housing remains a big challenge even in the absence of immigration.

23 January 2008

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