Is overcrowding to blame for high house prices?

by Cliff D'Arcy on 02 July 2012  |  26 comments
Tweet

Some experts claim population density explains high house prices in the UK. But does it?

American humorist and satirist Mark Twain once remarked: "Buy land; they're not making it anymore."

This was Twain's witty reference to the law of supply and demand, which states that when the supply of an item is squeezed, but demand remains healthy, then its price rises. Likewise, over-supply or falling demand causes prices to fall.

Of course, this rule also applies to houses, because we all need a place to live. What's more, thanks to immigration, divorce and other social trends, new households are being formed at a higher rate than Britain builds new houses. So the supply of housing is being squeezed over time and, if demand rises, then so too will prices.

A crowded island?

During the housing boom of 1995 to 2007, housing pundits, mortgage lenders and landlords often fell back on the same old argument for ever-rising house prices. They claimed that the UK was a small, crowded island and, thanks to a rising population, demand for houses would always rise.

Alas, this argument came spectacularly unstuck from the summer of 2007 onwards, when the credit crunch forced banks to stop lending wildly. As homes loans became more difficult to get, demand for mortgages collapsed and house prices soon followed suit.

Thus, is it really true that the UK (England, Wales, Scotland and Northern Ireland) is a crowded island? The answer very much depends on your definition of 'crowded'.

In 2010, the population of the UK was over 61.5 million people, of which 51.5 million were in England. Scotland had 5.2 million inhabitants, Wales had three million and Northern Ireland had 1.8 million. In other words, about five-sixths (84%) of the UK population live in England, the UK's largest country.

The total area of the UK is over 94,000 square miles. Therefore, on average, there are more than 650 people for every square mile of the UK. However, as the saying goes, "Averages invite comparisons", because they often mask a wide range of results.

England is most crowded

To show you what I mean, here are the population densities for each of the UK's four countries (sorted from highest to lowest):

As you can see, England is far more crowded than the rest of the UK, with 1,023 residents per square mile. In Wales and Northern Ireland, population density is roughly a third of that of England, with respective densities of 374 and 329 people per square mile. Scotland's population density is a mere 171 people per square mile, roughly a sixth of England's population density.

At first glance, it does appears that England is crowded, but the UK's other three countries are much less congested.

Ah, but property markets are local

Then again, people don't tend to live on mountain tops or in lakes. What matters is how much habitable land is available for settlement. Scotland, Wales and Northern Ireland all have large areas of rugged, uninhabitable terrain that cut down on living space.

In addition, tradition and trade have caused the UK's population to become highly focused on metropolitan areas. So what becomes clear is that the UK is far from crowded at a national level. However, at local and regional levels, we have some very large populations crammed into relatively tight regions.

For example, here are 15 of the UK's biggest cities, including all four capital cities (sorted from most to least populous):

Together, these 15 major cities have a total population of 14.3 million and account for nearly a quarter (23%) of the UK's total population. As a result, house prices in these crowded metropolitan areas are almost always higher than in outlying and rural areas.

In short, many of us modern Brits prefer to live in cities, often to be closer to where work is. We bid up house prices in these regions, making these homes more expensive to buy and maintain. More than 200 years after the Industrial Revolution, this news should come as no surprise!

Show me the bubbles

So far, I am unconvinced that over-crowding caused the housing boom of the nineties and noughties. While I see it as a contributory factor (most notably in London, parts of the south east and in coastal areas), I sincerely doubt that it was the major contributor to our 12-year housing boom.

To find out more, I checked population densities in other countries to establish whether these nations experienced any house price bubble in recent times.

My next table lists 16 leading nations with Western-style economies, together with their populations, population densities and whether (in my opinion) these countries witnessed a house price boom or bubble in the noughties. Here they are, sorted from highest to lowest population density:

The first three countries – Singapore, Hong Kong and Taiwan – are all incredibly densely populated, financially advanced, island economies in the fast-growing Far East. These factors help to explain why their house prices exploded over the past decade or so.

Conversely, the next three major countries – the Netherlands, India and Japan – are all relatively densely populated, but have seen no housing bubble in the past decade. Indeed, house prices in Japan have been declining for more than two decades, since its housing bubble burst in 1989.

Likewise, the UK and Germany have similar population densities, yet we Brits experienced one heck of a housing boom, while house prices have declined in real terms (after inflation) in Germany over the past decade.

At the bottom of my table, Spain, Ireland, the US, Australia and New Zealand all experienced amazing housing booms (and busts), despite their low population densities.

So, on a global scale, population density does not seem to correlate with housing booms. What then caused prices to race out of control?

A national mania

For me, the answer lies in two things: access to cheap credit and a national mania for getting rich through property.

We Brits certainly had both in the boom years, before our bubble burst in 2007. Similarly, the five countries at the end of my table underwent credit-fuelled booms as get-rich-quick 'property mania' swept these nations.

In summary, I am not convinced that rising population density over the past 20 years fuelled the UK's property bubble. For me, risky mortgages (125% Together loans from Northern Rock, anyone?) were the prime driver of our housing folly!

More on property

Buying is cheaper than renting

What's the 'right' price of your house?

Why house sellers are deluded

How to deal with property chain problems

Government backs self-build homes