UK Housing Market
The performance of the British Economy has been exceptional over the last ten years. We have achieved full employment with low inflation and have avoided many of the problems experienced in Europe and the United States.
But the housing market remains an enigma.
It is clear from the graph that in 1971 a watershed change took place in house price inflation.
- Before 1971: With the exception of a single year following the war, house prices remained within the 10% inflation band and roughly followed the trends of general inflation. Throughout the most enormously changing economic conditions, this period was characterised by the availability of low rents. Over the period, a change of quality took place, from rent controls and slum conditions to the low rent and high standards of council housing.
- Since 1971: House prices have been wildly unstable, apparently disconnected from general inflation, even during recent years, which are boasted to be the most stable period of the economy for 200 years. The first explosion of house prices in 1971 was so severe, that it dragged the whole economy in to inflation. Since then, house prices have remained unstable. The overall price trend has also moved to a higher level.
UK house price inflation is unique, for 35 years it has cycled in the 50% inflation band, yet no economic study has spanned that period, to investigate a behaviour not found in Europe or the United States. Although "the UK is probably more suited to monetary union than many of the countries that have already joined" we still think that the independence to control interest rates is important to the housing market. Yet we continue to fail and "we still can't explain the pattern of behavior in the UK". Clearly we need a new approach, the phenomenon is peculiarly British, so we should seek an answer in areas of the economy that are uniquely British.
This paper will suggest that such areas can be found in the unique development of British housing after the war, which made it especially vulnerable to radical changes in the financial structures of housing that began in 1971.
Key Issues
Affordability is the key concern of the voting public. Middle-income families struggle with the necessity, for themselves or for their children, to buy their first home. Young people are becoming dependent on help from propertied parents to get their first foot on the housing ladder. Increased risk is a significant factor in the housing market, which is not clearly revealed by simple economic models of the price/income ratio. The critical sensitivity to risk occurs at the threshold of accessibility. TV adverts now offer loans at 5 times income and Channel 4 has revealed that some mortgage agents encourage misrepresentation to obtain loans at 10 times income. There is no logical alternative to house purchase; a low cost rented sector no longer exists. For historic reasons, this is a uniquely British phenomenon.
The huge discounts of the ‘right to buy’ policy have devastated the supply of rented accommodation by a mere change of tenure, which continues to distort the market. Registered Social Landlords don't come near to making up this lost supply. Private rents and private housing associations are just as expensive as a new mortgage, which makes them a contradictory alternative for trying to save a deposit to buy.
The standards of rented accommodation are falling, not necessarily in quality, but certainly in space and the same can be said for first time buyers. Multiple lets with shared facilities of kitchens and bathrooms offer lower cost and are increasing, but they are unsuitable for couples with children. Crisis management to give special mortgages for part ownership to ‘key workers’ compounds the stress on those not deemed to be ‘key’.
For those on low income or without aid from parents willing to borrow on homes with completed mortgages, there is no solution. The receipt of Housing Benefit becomes a trap, which is difficult to escape. The property-less poor observe as people, once their peers, exploit cheap foreign markets with undreamed of adventures offered by transferring their equity abroad. We are a wealthier nation than ever before, but we are divided more starkly on the basis of property ownership.
The homeownership and rented housing sectors are fundamentally interdependent and complementary, but uniquely in the UK, they are divided by their financial structures. In spite of the critical barrier of accessibility, homeownership is cheap when measured over the period of its consumption, because it benefits from the capital market’s quality of investment. In 1972, the UK rented sector was transformed from an investment-based system into a consumer service, which has evolved into rents equal to the cost of a new mortgage (prices first exploded in 1971 when the intention of the 1972 Act was announced). House prices and the instability of the market are crucially affected by the complementary relationship with the rented sector. Radical policy is required to restore, in a new way, the mechanism of investment to the rented sector.