Why the ‘Waterbed Effect’ means Labour’s new policies will have zero effect on reducing House Prices

Lucy Powell is to introduce some wise changes to Labour Housing policy, such as reforming cpo existing use values and capping social rents – but restricting who can buy a home – demand side restrictions – never work and never can work. It is effectively casting around for any excuse not to reform planning and increase supply – the one approach where there is evidence that it works.


Labour plans to slash affordable rents and give first-time buyers exclusive rights to purchase new-build homes for six months, it will announce this weekend, as it bids to steal the Conservatives’ claim to be “the party of homeownership”.

Lucy Powell, shadow housing secretary, will say a government led by Keir Starmer will restrict to 50% the number of properties in a development that can be sold to overseas buyers, which in some city locations has created “ghost towers” as investors leave homes empty. 

The problem is what is known as the ‘waterbed effect’ – if you restrict someone who wants to buy a service in one sub-market for that service they will switch to the second best – and likely more affordable – sub market pricing poorer buyers from that market – which creates huge ripple effects because it blocks the ‘filtering effect’ . Richer buyers buying new homes never blocks filtering. So the effect is actually counterproductive as the ‘waterbed spreads’ as buyers spill out into making previously affordable non new stock unaffordable and gunking up the filtering which drives affordability througout the whole housing market, especially low income first time buyers. Where it has been tried, such as British Columbia the results have been disappointing, they kept cranking up restrictions on foreign buyers ever more strictly to no effect. The only changes occur where contraction in China forced repatriation of capital.

[it is what} Vancouver Mayor Gregor Robertson – who, after 10 years in office, announced that he won’t seek reelection – calls the “waterbed effect of capital flooding wherever taxes are lowest and regulation is weak.” When one area tries to tamp down on the influx of foreign money, the flow simply goes somewhere else.

Business Insider

The effect is well studied in climate economics. If you introduce carbon trading in one market and not every market it has no impact on emmissions because of the waterbed effect. Capital always flows to the margin of greatest return.

Frankly the policy is dumb and totally counterproductive. Lucy Powell, any study of any housing market anywhere in the world where it has reduced house prices? Like the Sadiq Khan rent control challenge – its a challenge that cant be won, its virtue signalling gesture politics designed to deflect from the necessary pain of increasing supply and reforming regulation of unblock resistence to increasing supply i.e. planning reform.

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