uk housing - Economics Help

An examination of UK house price affordability.

uk-house-price-to-earnings-ratios

UK House price to earnings ratios (all buyers) reached a peak in 2022. Above the 2009 peak, which preceded the housing price falls.

house-price-earnings-ratios

The house price to earnings ratio is most extreme in London, with the ratio reaching 11 times salary. Housing prices in the North, Scotland and Northern Ireland are relatively cheap.

In many parts of the country, potential buyers are being kept out of the market due to house prices being much higher than average incomes. For young people especially, owning a home has become increasingly unrealistic because the deposit required is out of reach for most workers.

UK real house prices since 1975

This shows average house prices – adjusted for inflation. It shows that house prices have risen considerably faster than the average price level.

The average UK house price was £271,000 in November 2021. ONS

Mortgage payments as % of income

One useful measure of housing affordability is to look at mortgage payments as a percentage of income.

For first time buyers taking on large mortgages, the mortgage payments are still taking up a big % of take-home pay – despite the low-interest rates. The average mortgage payments are lower for average homeowners because many householders took out a mortgage when house prices were cheaper. In this regard, it doesn’t look too bad.

Since interest rates were cut in 2009, mortgage holders have benefitted from low-interest rates, which have made mortgage payments cheaper.

However, when interest rates rise, many homeowners will see a nasty shock of rapidly rising mortgage payments.
Also, rising house prices have required a bigger deposit. This means many who might be able to afford mortgage payments are unable to get a mortgage in the first place

uk-inflation-interest-rates-may-2022

UK base rates are starting to rise from historical lows – which will increase the cost of mortgage payments.

The deposit required has risen particularly for first-time buyers. from 10% of purchase price in 1995 to 23% in 2012.

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Affordability index

Median income of mortgage borrowers in UK

income mortgage borrowers — The average income of mortgage borrowers. Source: ONS

The graph shows a significant rise in average incomes of those with mortgages.

In 1990, the proportion of people with mortgages on income of over £50,000 was 2.5%. In 2011, the proportion of mortgages by people with income of over £50,000 was 40%.
In 2011, only 6.8% of people with mortgages had an income of less than £20,000. In 1990, 61% of people with mortgages had income less than £20,000
There is a similar drop in the % of mortgages held by people under 30 years of age.
Source: ONS House price index May 2012

This data shows average house price to income ratios. It is based on the ONS mortgage survey.
After peaking at a ratio of over 5.0 in 2007, there has been a surprisingly limited drop in the ratio of average house price to average incomes.
The graph also shows that the average advance for buying a house has significantly increased. This is one factor in explaining why the average incomes of those with a mortgage have more than doubled in recent years.

Readers Question: What policies could be used to ease pressure on housing market?

Firstly, the main pressure in the UK housing market is the persistent and continued above inflation price increases. Back in 2004, Kate Barker’s report into housing market trends found that the UK would need to build 250,000 houses to reduce the house price inflation rate to 1.1%. But, since 2004, the UK housing market has fallen short of this target. In the middle of the recession, the number of home starts fell to just over 100,000. (Housing supply)

The Home Builders Federation claim to catch up, we would need to increase home building to 320,000 a year – something not seen in the UK since the 1950s.

Policies to ease pressure on housing market

1. New Garden cities The building of new cities, in the mode of Milton Keynes, can enable a significant increase in homes. Currently there are plans for a new city in Ebbsfleet, Kent on the high speed railway line to London.

However, from planning to completion this will take a long time. It also means building on greenbelt land, which is likely to raise objections.

2. Government subsidy / council homes. Additional government spending to subsidise the building of ‘social’ housing could help increase supply. In the past decades, council housing has fallen out of vogue as the government have sought to sell off council housing and cut back on the building of council housing. But, it was council houses which provided a significant boost to the UK’s housing stock in the post war period.

Clement Attlee’s post-war Labour government built more than a million homes, 80% of which were council houses. In recent years, local authority building of new houses has virtually ceased. It is notable that since local authorities ceased to build homes, the UK housing shortage has become more acute. Housing associations have never been able to replace the large numbers built by local authorities.

It would require a change in political commitment and the willingness to spend extra money. Also, since the Thatcher era, the notion of council housing has gained a form of social stigma. However, it could make a big difference to the number of homes built.

3. Greater flexibility in planning. Planning restrictions are quite strict in the UK. Loosening the number of restrictions and making it easier for builders will make supply more elastic. This could involve reducing the amount of protected greenbelt land. It could also involve streamlining the regulations home-builders have to meet.

However, this could lead to significant local objections as people protest about the increased building, congestion and loss of green fields. One other solution would be to provide grants for turning derelict brown field sites into new homes.

4. Incentives for local authorities

Home building is a local issue. Local authorities have to deal with opposition to home building, so there is often local political pressure to stop house building. However greater financial incentives, such as allowing the council to keep council tax receipts from new housing developments, could give them a greater motivation to allow home building.

5. Introduction of a Planning-gain Supplement scheme

At the moment, building new houses tends to give the greatest benefit to landowners. Local residents feel they just lose out – depressed house prices, loss of unique village e.t.c. One solution is to make sure local residents near new housing schemes gain some compensation in return for accepting more houses. For example, a new housing development could be accompanied with a bypass or better public transport links. This is interesting from an economic perspective as it is seeking to provide a pareto improvement (one where everyone benefits).

The difficulty is that in the real world, it can be difficult to ensure people are compensated. Some local residents may feel there is nothing to compensate for the loss of a beautiful view. People may also exaggerate how much they lose from a new housing scheme.

6. Government’s Help to to buy

The government’s help to buy scheme is controversial because it is seeking to ease the problem through helping homeowners borrow more money. Critics argue this merely fuels demand and keeps prices artificially high.

However, to some extent, the Help to Buy scheme has provided some incentive for private builders to increase supply. In particular the first part of the scheme which offers buyers an interest-free loan worth up to 20% of the value of a new-build home. This increased demand for new build homes, encourages house builders because they are more confident there will be demand for the new homes.