Misunderstanding Household Formation – Not 232,000/annum but higher #NPPF

There is a lot of misunderstanding about the use of household projections to calculate planning for housing requirements.

Myth 1 – You can simply read off from Household Projections Housing Requirements

No but it is a good starting point.  Since 2007 the government target for new housing has been 240,000 new dwellings a year – a figure read directly off household projections.  Grant Shapps has not set a target but said we need to build around this level, although the latest 2008 based projections show a recession induced dip to 232,000 dwellings a year.  The Welsh Government advises that you should average growth over 5 years to avoid such cyclical issues.

But it is just part of the formula used in strategic planning – which is (ive included a number of corrections to the original approach set out in the 70s).

Delta HH =  Delta HS −  Delta SEC −Delta SH – VAC − DEM

Or change in household formation =change in housing stock minus change in second homes minus change in enforced sharing (concealed households) minus vacancies minus demolitions.

Vacancies is the number of frictional vacancies – that is housing unoccupied between occupants, plus the change in the number of long term vacancies – that is housing outside the housing market. So because of frictional vacancies along you need around 3% more houses than the change in households.  Demolitions should only be counted where they are part of the short term housing stock otherwise this is double counting.

Now imagine a situation where the household stock etc is fixed.  Then the requirement for new dwellings is the same as the change in households plus the frictional adjustment.  But that does nothing to clear any backlog of household of concealed households.

Also imagine a situation where housebuilding also rose with household formation but incomes rose steadily.  Wealth effects would cause some households to consume more housing including second homes, reducing affordability and supply in the stock available for single home owners.

Indeed you can gather terms and produce a formula:

Delta HS =Delta HH+Delta SEC +Delta SH + VAC + DEM

Because of second home ownership, demolitions and the backlog element the figure will be a lot higher than 240,000 per annum.  Sadly there is no national data for some of these terms especially enforced sharing which is typically measured at a local level, however rough estimates by the Smith Institute, JRF and others estimate we need around 270-300,000 dwellings per annum.  Of course at a local level SHMAs should do this, though in a number of new localist housing studies, which to my mind have taken a giant technical leap backward from many SHMAs, this seems not to be done.

Myth 2:  You can replace Household Formation with Affordability Targets

Household formation is a trend forecast not a projection.  It assumes that society will keep doing in the future much as it did in the past.  So if as a society we have built roughly in line with need and plan to do so in the future it is a fair guide.  But if we dont build to that level then affordability will decline.  So if you want to increase affordability then you can’t simply assume the continuation of past trends as the purpose of planning policy will be to change the current situation.  This of course was the basis of the Barker Review recommendation to take into account affordability issues as well as household formation, and the setting up of the shortlived NHPAU.  But has led some writers notably Meen and Andrew 2008 to recommend replacing planning by household formation with planning by affordability target.  But affordability is affected by the economic cycle, so in a downturn do we need to build less homes?  Planning for housing is a long term issue planned over more than one business cycle.  Short term price signals alone can be a very bad indicator.  Planning cannot control the demand for housing, money, only supply, but by steadily increasing supply it can maintain and increase affordability.  The key is the actions at the margins of concealed households who are forced to share because they cannot afford not to.  This is the same as the enforced sharing element above – so ultimately over the very long term accommodating household formation and clearing the backlog will maintain affordability – and it is much easier to calculate.

Myth 3: Because Household Formation is also caused by housing availability you can stop it growing simply by not building housing

This is an argument recently put  Collins Stewart Hawkpoint described by Chris Brown (the full report is subscription only) as follows:

[Household Formation] assumed to be a driver but CSH suggest that it is an outcome from building more houses and making mortgage finance readily available. They also point out that household size in the UK is at the EU average and the suggestion is that it could just as easily start to increase due to the mortgage shortage (indeed there is some evidence that this is already happening).

CSH suggest that house builders deliberately peddle the housing shortage line to help ramp up the political pressure to get land with planning permission (they have certainly achieved that under successive governments) and, perhaps more importantly, to convince investors of the underlying investment story in the housebuilding industry.

Certainly causality is a two way street.  Increased household formation causes politicians to release more land, which creates more homes which concealed households then go on to form new households into etc. etc.  And indeed if housing is steadily built there will be no housing crisis.  But of course it can so easily go wrong, especially given the variability in construction in affordable housing.  If it does then private rental prices will shoot up and real incomes decline.  Some residents opposing new housing will say there is ‘no need’ because their are unsold houses in their villages etc.  By the law of averages most villages will have several such properties.  But all this probably shows is that there are elderly people who have died and new potential purchasers cant get a mortgage.  Look at the youngsters in town forced to pay for extortionate rents for a proper measure of need.  All this shows is the crisis in the banking sector nothing about housing need.

Indeed if you did as CSH suggested then will people stop getting divorced, will they euthenaise themselves to stop getting older, will immigration cease (net migration is steady despite the government efforts), will they stop deferring cohabitation and marriage and will they conveniently share with there parents for the rest of their lives?  Of course not.  What CSH is suggesting is a return to the medieval extended household.

The fact that housebuilding and household formation is a two way causal street does not mean that we can ignore or seek to cap household formation as if the policy aim was restriction of the housing stock.  rather it requires the planned expansion of both and in step over the longer term.

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About andrew lainton

International Urban Planner

Posted on February 28, 2012, in Housing Economics, National Planning Policy Framework, political economy, urban planning. Bookmark the permalink. 1 Comment.

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