Housing supply in UK

new-housing-builds

A fundamental problem in the UK housing market is a persistent shortage of housing. The ONS forecast the number of households in the UK will increase by 1.6 million (7.1%) over the next 10 years, from 23.2 million in 2018 to 24.8 million in 2028, and yet the current rate of home construction is struggling …

Read more

Why is it so expensive to rent in the UK?

Readers Question: Why is it so expensive to rent a house in the UK?

The average cost of renting a property in the UK is now £1,060 a month (£1,752 in greater London) statista. Between 2005 and 2022, the cost of private renting in England has increased nearly 40% (index from 82 to 114) The high cost of renting is due to the shortage of supply in the UK, the growing number of households and the period of low-interest rates since 2009, making it more attractive to try and buy.

renting-private-england

Between 2005 and 2022, the cost of private renting in England has increased nearly 40% (index from 82 to 114)

This is at a time of stagnant/very low real wage growth

average-mean-wages-uk-77-21-lines

This shows that since the financial crisis of 2009, average disposable income growth has slowed down, falling way behind the increase in rental costs. Therefore, rents have risen despite low real income growth.

 

Reasons for expensive renting

House prices are even higher

average-house-prices-uk

Real house prices (adjusted for inflation)

Rising house prices and rents are closely linked. Renting is the alternative for buying a house. In the UK, buying a house is considered highly desirable. But, increasingly first time buyers cannot afford the high prices. The housing market is influenced by

Shortage of supply. The UK population is growing relatively fast, and the number of households is forecast to grow sharply (also more single people living alone). Demand is forecast to grow by 250,000 a year. However, supply is constrained by planning permissions and the difficulty of making land available. This is especially true in major cities, such as London. Local planning regulations means it is easier for local communities to block the building of new houses.

Low interest rates have definitely helped increase house prices because mortgages are cheaper. Low interest rates mean that buying a house can give a better rate of return than buying other forms of investment, such as shares. An investor looks at the return on housing (rentable income) vs the cost of buying a house (mortgage interest payments). Very low-interest rates increase the attractiveness of buying a house as an investment. The buy to let market has been buoyant but this has meant more first-time buyers having to rent rather than buy.

Growing number of households

uk-household-projections
27.3 million in 2017. to 31.6 million in 2039. (4.3 million increase)

The UK population continues to grow (52 million in 1960 to 63.23 million in 2012). The forecast is 71 million by 2033.

Shortage of council housing

 

dwellings-bytenure-dwelling-stock-estimates-2021
Source: Dwelling Stock estimages gov.uk 2021

In 1981, social housing was approximately 30% of housing stock. By 2001, this had fallen to 20% and 16% by 2021.  Private renting has doubled as a share from 10% to 20%.

From the 1980s, council tenants were given the Right to Buy. This led to a large fall in the amount of publically provided social housing. This has not been replaced by new council housing builds and so more households have needed to look in the private sector, where continued shortages have caused higher prices.


Why are rental prices more stable than house prices?

  1. Many tenants have longer-term contracts. Landlords may enter into agreements (either formal or informal) to keep rental prices fairly constant. House prices, by contrast, are driven by supply and demand. If more people enter the market for buying a house, it can push prices higher. If house prices rise 20%, it doesn’t mean homeowners will see a 20% rise in the cost of mortgage payments. Most homeowners will be unaffected in the short term by rising house prices. Renters will be affected directly by any change in the cost of rent. Most renters couldn’t afford more a sharp jump in rents.
  2. Rents not affected by interest rates. If interest rates go up, this doesn’t change the cost of renting. But, it might dissuade people from buying a house. Similarly, if interest rates fall, landlords will not pass the interest rate cut onto tenants.
  3. Supply more elastic. It is likely that rental properties are slightly more elastic than houses. If there is greater demand for renting, and the price of renting goes up, it may encourage more landlords to put houses for rent on the market or it may encourage people to let out a room. However, this point is just an assumption – it would need a bit more investigation.
  4. Demand more price elastic for renting. If rents rise in London, it may encourage workers to move elsewhere to find cheaper rents. Renters are more flexible and more price sensitive. If you want to buy a house in a certain area, your demand is more likely to be price inelastic. If house prices go up, you may be willing to pay the higher price – you don’t notice a price rise straight away. Higher prices are spread over the 30 years of the mortgage term.
  5. Buying houses as investment. Rising house prices have encouraged more people to buy houses as an investment. This pushes up house prices, but consequently leads to an increase in the supply of rented accommodation. Therefore, you could have a situation where a sharp increase in buy to let activity, pushes up house prices, but decreases rental prices. Evidence suggests the % of homes which are owner occupied has declined in recent years; this could imply an increase in the supply of homes put on the rental market.

    Read more

Why are UK house prices so high?

house-prices

In recent years, we have had a devastating global credit crunch, the longest and deepest recession since the 1930s and then the impact of Covid. Yet, despite this financial and economic upheaval, UK house prices have bucked the trend, avoided a major collapse and now exceeded pre-crash levels. The economics of Covid have even made …

Read more

How the housing market affects the economy

uk-real-house-prices-2017

A look at how the housing market and changes in house prices affect the rest of the economy. In summary: Rising house prices, generally encourage consumer spending and lead to higher economic growth – due to the wealth effect. A sharp drop in house prices adversely affects consumer confidence, construction and leads to lower economic …

Read more

UK Housing Market

house-prices-nominal-1952-2020

Latest UK housing market stats and graphs. Including house prices, Price to income ratios and construction of new housing.

Would a cap on house prices work?

Readers Question: Would a cap on house prices work?

Despite the recession and credit crunch, UK house prices continue to rise. (See: Why are UK house prices so high?) This has caused record levels of house price to income multiples. For homebuyers in London, house prices are approaching a record seven times average earnings. Understandably many feel house prices are already too expensive, and there is a strong case for trying to limit future house price increases.

house-price-earnings-ratio-uk-regions-1996-2021

 

For example, the Royal Institution of Chartered Surveyors have suggested that the Bank of England impose a cap of 5% a year on house price growth. (Independent link)

Firstly, how would a house price cap work?

The Bank of England cannot influence supply in the short term. Therefore, they would have to influence demand through credit controls (e.g. limiting amount of mortgages) and possibly interest rates. Both have drawbacks and limitations.

1. Interest Rates

In theory, The Bank of England could use interest rates as a tool to influence house prices. A rise in interest rates, in the current climate, would inevitably cause an end to the house price growth as mortgages would become more expensive. Mortgage payments are a large % of disposable income, therefore any change in interest rates will have a significant impact on reducing housing affordability and housing demand.

However, the use of interest rates to control house prices has significant drawbacks.

  1. The main aim of monetary policy is the control of inflation and economic growth. If the Bank is asked to also target house prices, it would mean the Bank of England are placed in a difficult position. To prevent house price rises in London, may require higher interest rates. But, at this stage in the economy cycle, a small increase in interest rates could sniff out the recovery. Interest rates can only achieve so much.
  2. Time lags. A change in interest rates will take time to feed through into the housing market. Ideally, the Bank of England would anticipate house price changes, but in practise this is difficult to do. Few would have predicted the strong rise in house prices in recent years. If the Bank did increase interest rates to affect demand for houses and mortgages, it could easily get it wrong. By, the time mortgage rates rose, house prices may be falling anyway.

2. Mortgage regulation

A more realistic option is for the Bank of England to adopt new regulation which makes mortgage lending scarcer. If house prices are rising too quickly, the Bank of England could introduce controls which limit the availability of mortgages. This could involve insisting on certain size of deposits or limiting the size of income multiples.

Read more

Regional UK house prices

regional-house-prices

In the past decade there has been a divergence between house prices in different parts of the UK. In particular, house prices in London and surrounding areas has rocketed to unprecedented levels. Source: ONS According to the ONS, average mix-adjusted house prices in September 2015 stood at £299,000 in England, £175,000 in Wales, £199,000 in …

Read more

London housing market – boom and bust?

The London housing market is one of the most expensive places in the world. In Sept, 2015, the average London house price is now just under £500,000 (BBC) Since 2013, house prices in London have risen 40%, defying a weak economy and stagnant growth in average earnings. London house prices are 7% higher than the …

Read more

Item added to cart.
0 items - £0.00