A few years ago I asked Andy Haldane, the Chief Economist at the Bank of England, what would happen if there were to be an increased supply of cheap housing. He kindly replied
If additional housing supply was to cause sharp declines in house prices, this might raise concerns about the adequacy of mortgage lenders’ capital positions and hence raise financial stability concerns. Some insurance against this risk is provided by banks’ own credit risk model calibrations and regulatory stress which consider severe levels of stress in the housing market, both of which are used to set banks’ level of capital.
We intend to conduct a further, housing market related stress test of UK banks later this year.
Some five years later, I have been able to have a conversation with another important BoE official . She maintained that the BoE’s only remit was to ensure financial stability and consequently could not have any opinion on government policies such as housing legislation.
I thank her and Andy Haldene for their attention to my questioning but, on reflection, I find their answers polite and generous but lacking.
In most areas of the UK, most of the cost of a new dwelling, as paid by the purchaser, is accounted for by planning gain, the increase in value that is accrued by the land owner (or option owner) when planning permission is granted. This also keeps house prices high for homeowners.
Using standard techniques, used in appraising local plans, the cost of building a new house is about £100,000 but this figure is much more than could be achieved using modern prefabrication, such as that now being used by Legal and General. There are other considerations which can bring the cost of a new starter home down. In other postings, I speculate that this could be £20,000 or even lower.
For the sake of argument let’s assume that government policy could greatly reduce the effect of planning gain from purchase prices and that starter homes could be provided at £30,000 each. Assume also that
The government planned to provide 5 million new cheap starter homes in 2 years.
My questions for the BoE are now.
What could be done about financial stability?
Would the BoE pressure government to prevent cheap starter homes?
Should the cost of financial stability be borne by the homeless, the young and the poor?
 In case I have misremembered the conversation, I have not named the official.
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