Fixing our broken housing crystal ball

Since the 1990s household growth projections for England have been persistently overestimated, resulting in a baseless panic about the inadequacy of supply. How did it happen?

“Experts say we need 250,000 new houses each year.” Have you ever wondered where that number comes from? Unless, like me, you spend an unhealthy amount of time thinking about housing the answer is probably ‘no’. But it’s worth deconstructing.

In this blog I look at where numbers like this have come from, and why they’ve been persistently wrong. In the next blog I then re-forecast the household projections correcting for the source of those errors.

The case I’ve been making over the past year is that simply building more will not solve the housing crises we face — high prices and growing homelessness, to name but two — because a lack of supply is not their cause. To recap, the evidence for this is that the number of dwellings has outstripped household formation comfortably in England for a generation, while housing costs have declined relative to average incomes, at least since decent data began. More than casting doubt on the idea of a shortage, this is positive proof that the supply of places to live has unambiguously improved, relative to need, over the past 25 years.

But it’s hard to accept this conclusion when barely a week goes by without some august institution intoning that “experts say we need to add 250,000 houses per year in England”. Take the House of Lords Library briefing paper earlier this month, or the Chris Philp MP’s paper for CPS late last year, or the Housing White Paper itself, which all quote need figures in the range of 225,000 to 300,000 for England. The evidence I’ve been pointing to might be compelling, but surely all those experts can’t be wrong… can they?

A ‘broad consensus’ on housing need, or a single estimate?

The trouble is that when you trace the references ‘all those experts’ are really referring to one expert’s 2013 paper, which in turn uses DCLG’s methodology. Take that House of Lords Briefing paper. It cites two academics at Sheffield Hallam, who report that there is a “broad consensus” that we need between 240,000 and 300,000 per year, in turn citing:

Holmans (2013) , which says 243,000 per year are needed between 2011 and 2031

, which says 243,000 per year are needed between 2011 and 2031 Lyons (2014), which says 243,000 — citing Holmans (2013)

KPMG and Shelter (2015), which says ‘around 250,000’— citing Holmans (2013)

House of Lords Select Committee on Economic Affairs (2016) which says 300,000 — citing some confused ministerial answers without an apparent source.

In other words, the consensus is far from broad: most roads lead back to the late Alan Holmans’ 2013 paper (and those that don’t, appear to offer no source for their projection). Holmans reached a ‘need’ estimate of 243,000 per year, of which 225,000 was projected household growth, with the other 19,000 the number of dwellings required to maintain the proportion of second and vacant homes.*

But Holmans’ 225,000 household growth projection was based on the DCLG’s own methodology, and barely differed from the official estimate at that time. DCLG’s latest projection is similar, anticipating an extra 220,000 households per year between 2011 and 2031.

So in practice there is no consensus of experts. There is only the DCLG household projections, echoed back and forth between housing analysts and commentators until hardened into dogma. Since there is no plurality of analyses here, it’s important to look under the bonnet of the official projections.

The projections keep turning out wrong: why?

All the more important because they keep turning out to be wrong. The origins of the UK’s mythical housing shortage lie in the methodology used to forecast household formation. Only at census time do we really know how many households there are in England, and in between censuses we have to rely on forecasts based on past trends in the size of households of different types, combined with population estimates. The household size projection is the crucial element: the smaller the average household, the more homes are needed for any given population.

During the last third of the 20th century, household size shrank rapidly. DCLG implicitly assumes that this trend is set to continue, basing their projections on census data starting in 1971.

But the evidence we have suggests that English households — in keeping with most other developed OECD countries — stopped shrinking around the start of this century. The red line in the chart below shows how the average number of people per household has evolved in England since the 1960s, as well as previous government attempts to forecast it based on past trends.**

Sources: DETR, DCLG, ONS

In 2000, nine years after the 1991 census, DETR (as it was then) assumed a continuation of the steeply-falling household size trend seen in the censuses from 1971 to 1991. The result was the mustard-coloured line above. But following the census a year later, it emerged that households hadn’t continued to shrink at the rate seen in previous decades. So there were almost half a million fewer households in England than had been forecast, and the concern about a housing shortage at the time — such as this report produced before the 2001 census data became available — turned out to be unfounded.

The same thing happened in the run-up to the 2011 census. The 2008-based DCLG projections (the orange line above) again assumed that the trends in household size from 1971 to 2001 would continue, spelling a boom in household numbers. But when the 2011 census emerged, there were 287,000 fewer households than predicted primarily because household size was broadly unchanged since 2001.

All of this begs the question: are we in the process of making the same mistake again? The most recent DCLG household projection (the blue line above) incorporated the 2011 census, but assumed that the stability in household size between 2001 and 2011 must have been an aberration. Surely, the analysts seem to have reasoned, the trend of 1971 to 1991 will resume and households would begin shrinking again, creating more of them.

But since 2011, household size appears to have, again, stubbornly refused to follow the downward path predicted. According to the most recent DCLG forecast, average household size in 2016 should have been 2.33. But the ONS’s estimate has it at 2.39. Largely because of this difference, ONS surveys suggest there were fully 600,000 fewer households than DCLG had predicted.

At this point you may be wondering whether the reason the projections haven’t been borne out because there haven’t been enough houses for households to form into. This is hard to square with the fact that, far from bumping up against a sluggish rate of new supply, household formation in England has lagged new supply by an average of 26,000 per year since 1996. What’s more, England’s households are already among the smallest in the OECD, and the end of the shrinking household trend appears to be a global phenomenon.

It should be clear by now that the methodology used to forecast household formation is flawed, triggering wild overestimates of housing need for over 20 years.

Two changes to fix the crystal ball

But don’t just take my word for it. In light of this less-than-impressive history of household forecasting, the methodology is about to get a shake-up. The ONS has wisely proposed to ditch the ancient history, and simply use 2001–2011 trends in household size when it takes over responsibility for producing the official household projections later this year.

There’s also been another important change that should cause us to rethink the current DCLG household projections. Last October the ONS revised down its UK population projection substantially, with England’s population in 2031 expected to be over one million people smaller than previously anticipated.

These two changes have big implications for our view of future housing need. In the next blog I’ll show what happens when we re-forecast household formation using the same DCLG method, while changing just these two crucial input assumptions. The results are stark.

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*Others commentators then go higher on the grounds of redressing the (unevidenced) ‘decades of undersupply’, but I’m not aware of anyone presenting evidence to back such numbers up.

** A brief look at the LFS suggests that the recent rise in the red line is down to the increased number of migrant households, which tend to be larger.