Think through, just for a moment, the idea that those who run companies are rational. Not omniscient, not perfectly predictive of the future, just rational.
So, if it takes x amount of time to get a new supply of something then the business will - rationally - hold a stock of that thing equivalent to x times’ worth of production. If a car maker will only get new car making steel after a 6 month wait then the car maker will hold a 6 month stock of car making steel. We saw this in both 1970s British car making and also throughout the Soviet economy.
Actually, it’ll be a little more than that - for of course we now need to add uncertainty. But the general principle stands. You hold a stock of whatever to tide you over until you can get more.
If this confuses then try thinking that one level deeper again. The big costs of being in business are rarely those physical inputs like steel. They’re the costs of having the factory and plant to be able to transform steel, the workforce to do so and so on. The costs of those being empty, or having to be paid without work to do, are vastly greater than the carrying cost of some steel. So, steel gets carried as stock so as to allow continual employment of plant and labour.
This rational behaviour is not limited to something like steel for carbuilding. That essential raw material for housebuilding is land upon which you are allowed to build a house:
Mr Perrins has long called for an overhaul of planning rules to boost the housing sector. Berkeley Group specialises on building on brownfield land but has repeatedly said that obtaining planning permission for its sites is difficult.
The time taken to gain planning permission for new projects was now averaging almost four years, the company said, compared to two historically.
The rational building business will have a 4 year stock of planned and permitted sites given that it takes 4 years to get new ones.
Again, think on this. So, a housebuilder buys a site now, it will be late 2027 before it is permitted. The brickies, chippies and so on need something to do in 2024, 2025 and 2026 while they await that permission. A four year time span between land acquisition and permitting means 4 years of permitted sites moving through the system like a pig through a python.
There are, perhaps, some 1 million permitted sites. The housebuilding target is 300,000 a year. It takes 4 years from buying the site to building the house. We have not enough permitted sites in the system. Add in a bit of uncertainty and we have many too few permitted sites. So, we should increase the number of permitted sites.
Or, obviously, reduce the time taken to gain planning.
The alternative argument offered to us is that the housebuilders are a cartel who buy up all that potentially permittable land and then sit on it - land banking. Then a miracle occurs and they make a profit by doing nothing in the usual tale. Let us assume, just for this part of the discussion, that that’s true. OK, so what do we do?
The way to kill a cartel is to flood the zone with supply. No one can buy everything to corner the market - as the Bunker brothers found out with silver. So, if housebuilding is a cartel restricting supply by buying it all the way to kill that cartel is to flood the market with planning permissions.
That is, either argument - the rational and true one or the one made up by fools - leads us to exactly the same conclusion. Issue more planning permissions. Vastly larger numbers of planning permissions, millions upon millions of them. Or, as we say, blow up the Town and Country Planning Act 1947 and successors, proper blow up, kablooie.
If this is all too complicated then consider something very basic indeed. If you increase the supply of something then, against a settled level of demand, the price will fall. And that’s what we all want to do, right? Get house prices lower? So, issue more planning permissions.
Sure, there are bits of economics that are difficult. This isn’t, this is simple. Allow more housebuilding, vastly more housebuilding, and the houses that are built will be cheaper. Job done.