Affordability of housing in the United Kingdom
Encyclopedia
The affordability of housing in the United Kingdom deteriorated significantly from the late 1990s onwards, with house prices rising faster than earnings and the average age of first-time homebuyers increasing. The issue of housing supply and affordability was recognised as a social, economic and political problem and generated a number of Government responses.
Moving forward, however, to 2011 and the housing market has changed. The property ladder
, partly responsible for the artificial house price bubble in the UK (including London and the South-East), could now be used to describe a way "downwards" rather than "upwards", with most estimates agreeing that house prices will correct downwards by 50% in real terms over the course of a decade (from the time of the 2007 burst of the bubble) . As Tracy Kellett observed in The Guardian
in October 2011: 'Transaction levels are through the floor. Estate agent's have not been able to sell their overpriced stock (and each one of these costs them money) and vendors have often ended up taking a much lower offer six months down the line after their property sat around becoming stale and thus unattractive to the market'.http://www.guardian.co.uk/money/2011/oct/24/selling-home-time-running-out
rose dramatically, generating large increases in home equity
for many homeowners but also making housing unaffordable for other people. Most developed countries experienced sharp increases in house prices in the early years of the new millennium. The UK situation was different in two regards. First, the house price boom started earlier and saw more sustained increases. Second, the regional pattern was fairly uniform. Between 2002 and 2007, house prices in the UK rose by 90%, faster than any Eurozone nation except Spain.
The average (mix-adjusted) house price in the first quarter of 1998 was £81,722, but at the peak of the market in the third quarter of 2007 the average price was £219,256 – over two and a half times higher or a total increase of 168%. Between the first quarter of 2001 and the fourth quarter of 2006 prices increased 60%, again when adjusted for inflation (figures from the Nationwide Building Society
's house price data). House prices at the end of 2006 were 35% higher than they would have been if the long-term trend rate of growth - 2.6% per annum in real terms since 1976 - had been maintained. In 2008, house prices started to fall but they have stabilised as of August 2009. This may reflect the housing market's normal seasonality
or it may indicate a genuine recovery. Some analysts now expect UK house prices to contract by 50% in real terms. Adam Slater, senior economist at Oxford Economics has forecast that "it will take quite a few years, possibly a decade, before real house prices get back to their peak levels”.
The increase in the house prices has made the housing market increasingly difficult to enter. The ratio of lower-quartile house prices to lower-quartile earnings, a measure of affordability used in the Barker Review of Housing Supply
, rose from 4 in 2000 to 5.2 in 2003 and 7.1 in 2006. At a regional level, the problem of unaffordable housing is no longer confined to London
and the South East
, but now affects almost the whole of England. In July 2009 the ratio of house prices to first-time buyers' incomes remained higher than the historical average.
s; products that did not require a deposit became more common- 125% mortgage products appeared. The high rate of lending may have been exacerbated by the buy-to-let phenomenon. In the 1990s the Buy-to-Let market accounted for about 1% of loans taken out for the purposes of buying a house. In 2006, the 330,000 buy-to-let mortgages
that were taken out accounted for 9% of outstanding home loans.
Although mortgages were more widely available, the rise in house prices meant that there was less affordable housing available to people on low incomes. The Joseph Rowntree Foundation
reported what it called "alarming trends in housing supply, availability and affordability". In 2003, the British Government commissioned a report on the lack of supply in the housing market. The Barker Report on housing supply concluded that it was necessary to build an additional 70,000 houses per year to reduce the real price rise to 1.8% per annum. An additional 120,000 houses per annum was required to reduce long term house price inflation to the EU average of 1.1%. The government commissioned a further report by Professor David Miles of Imperial College on the mortgage market. Among its recommendations was that Building Societies should obtain more mortgage funds from the money market in order to increase the availability of mortgages.
The Barker report had also concluded that an additional 39,000 houses per annum were required for UK house building to match household formation. Barker was quoted as saying there were only a net 134,000 new houses for more than 179,000 household formations per year. The figure of 134,000 built in 2002 was contradicted by the National House-Builder Council which reported that there were 160,800 houses built in 2002. In 2006 they report 185,000 new builds, which is above the original Barker report estimate of 179,000 household formations a year. In the 1990s, an average of 158,910 houses were built each year (NHBC figures) against 172,000 for each of the five years to 2006.
Increased divorce rate is another often quoted reason for increasing house prices, but this metric peaked in 1993 - a year of static or falling prices.
The reduced availability of inter-bank lending had a severe effect on companies such as Northern Rock
which had financed an aggressive expansion of mortgage lending by short term borrowing in the money market.
, a member of the Monetary Policy Committee
, to undertake a review of housing supply in the UK. Barker’s interim report was published on 10 December 2003. She found that the number of houses being built in the UK was not keeping pace with demand. In 2001, around 175,000 dwellings were built in the UK – the lowest level since the Second World War. Over the prior 30 years, UK house prices went up by 2.4% a year in real terms compared to the European average of 1.1%. As a result of these price rises first-time buyers in 2001 paid on average £32,000 more for their homes. In 2002, only 37% of new households in England could afford to buy a house, compared to 46% in the late 1980s.
Barker considered a range of factors that might be constraining the supply of housing in the UK. She identified the main constraint as land supply and the housebuilding industry's response to risk, which leads to reluctance to build out large sites quickly. The regulatory relationship and control over the use of land also influences the way in which land is made available for development.
The Barker Review’s final report set out a range of policy recommendations for improving the functioning of the housing market:
In response to the issue of housing affordability highlighted in the Barker Report the Department for Communities and Local Government
created a non-departmental public body
, the National Housing and Planning Advice Unit, to provide advice to the Government, Regional Assemblies
and other stakeholders. The Unit's initial report, Affordability Matters (published in June 2007) argued that there are strong reasons to promote affordability - deteriorating affordability is associated with house price volatility, the diversion of investment from more productive areas of the economy, reduced labour market flexibility, and a poorer standard of living for young people.
Moving forward, however, to 2011 and the housing market has changed. The property ladder
Property ladder
The property ladder is a term widely used in the United Kingdom to describe an individual or family's lifetime progress from cheaper to more expensive housing. According to this metaphor, cheap houses for first-time buyers are at the bottom of the property ladder, and expensive houses are at the top...
, partly responsible for the artificial house price bubble in the UK (including London and the South-East), could now be used to describe a way "downwards" rather than "upwards", with most estimates agreeing that house prices will correct downwards by 50% in real terms over the course of a decade (from the time of the 2007 burst of the bubble) . As Tracy Kellett observed in The Guardian
The Guardian
The Guardian, formerly known as The Manchester Guardian , is a British national daily newspaper in the Berliner format...
in October 2011: 'Transaction levels are through the floor. Estate agent's have not been able to sell their overpriced stock (and each one of these costs them money) and vendors have often ended up taking a much lower offer six months down the line after their property sat around becoming stale and thus unattractive to the market'.http://www.guardian.co.uk/money/2011/oct/24/selling-home-time-running-out
Growth of house prices
Between 1998 and 2007 house prices in the United KingdomUnited Kingdom
The United Kingdom of Great Britain and Northern IrelandIn the United Kingdom and Dependencies, other languages have been officially recognised as legitimate autochthonous languages under the European Charter for Regional or Minority Languages...
rose dramatically, generating large increases in home equity
Home equity
Home equity is the market value of a homeowner's unencumbered interest in their real property—that is, the difference between the home's fair market value and the outstanding balance of all liens on the property. The property's equity increases as the debtor makes payments against the...
for many homeowners but also making housing unaffordable for other people. Most developed countries experienced sharp increases in house prices in the early years of the new millennium. The UK situation was different in two regards. First, the house price boom started earlier and saw more sustained increases. Second, the regional pattern was fairly uniform. Between 2002 and 2007, house prices in the UK rose by 90%, faster than any Eurozone nation except Spain.
The average (mix-adjusted) house price in the first quarter of 1998 was £81,722, but at the peak of the market in the third quarter of 2007 the average price was £219,256 – over two and a half times higher or a total increase of 168%. Between the first quarter of 2001 and the fourth quarter of 2006 prices increased 60%, again when adjusted for inflation (figures from the Nationwide Building Society
Nationwide Building Society
Nationwide Building Society is a British building society, and is the largest in the world. It has its headquarters in Swindon, England, and maintains significant administration centres in Bournemouth and Northampton...
's house price data). House prices at the end of 2006 were 35% higher than they would have been if the long-term trend rate of growth - 2.6% per annum in real terms since 1976 - had been maintained. In 2008, house prices started to fall but they have stabilised as of August 2009. This may reflect the housing market's normal seasonality
Seasonality
In statistics, many time series exhibit cyclic variation known as seasonality, periodic variation, or periodic fluctuations. This variation can be either regular or semi regular....
or it may indicate a genuine recovery. Some analysts now expect UK house prices to contract by 50% in real terms. Adam Slater, senior economist at Oxford Economics has forecast that "it will take quite a few years, possibly a decade, before real house prices get back to their peak levels”.
The increase in the house prices has made the housing market increasingly difficult to enter. The ratio of lower-quartile house prices to lower-quartile earnings, a measure of affordability used in the Barker Review of Housing Supply
Barker Review of Housing Supply
The Barker Review of Housing Supply published its final report on the March 17, 2004. The report was authored by economist Kate Barker and presented recommendations to the UK government for securing future housing needs...
, rose from 4 in 2000 to 5.2 in 2003 and 7.1 in 2006. At a regional level, the problem of unaffordable housing is no longer confined to London
London
London is the capital city of :England and the :United Kingdom, the largest metropolitan area in the United Kingdom, and the largest urban zone in the European Union by most measures. Located on the River Thames, London has been a major settlement for two millennia, its history going back to its...
and the South East
South East England
South East England is one of the nine official regions of England, designated in 1994 and adopted for statistical purposes in 1999. It consists of Berkshire, Buckinghamshire, East Sussex, Hampshire, Isle of Wight, Kent, Oxfordshire, Surrey and West Sussex...
, but now affects almost the whole of England. In July 2009 the ratio of house prices to first-time buyers' incomes remained higher than the historical average.
Mortgage lending
During the period 2001-2007, many lenders began offering loans of increasing multiples of income sometimes to people with poor credit ratingCredit rating
A credit rating evaluates the credit worthiness of an issuer of specific types of debt, specifically, debt issued by a business enterprise such as a corporation or a government. It is an evaluation made by a credit rating agency of the debt issuers likelihood of default. Credit ratings are...
s; products that did not require a deposit became more common- 125% mortgage products appeared. The high rate of lending may have been exacerbated by the buy-to-let phenomenon. In the 1990s the Buy-to-Let market accounted for about 1% of loans taken out for the purposes of buying a house. In 2006, the 330,000 buy-to-let mortgages
Mortgage loan
A mortgage loan is a loan secured by real property through the use of a mortgage note which evidences the existence of the loan and the encumbrance of that realty through the granting of a mortgage which secures the loan...
that were taken out accounted for 9% of outstanding home loans.
Although mortgages were more widely available, the rise in house prices meant that there was less affordable housing available to people on low incomes. The Joseph Rowntree Foundation
Joseph Rowntree Foundation
The Joseph Rowntree Foundation is a British social policy research and development charity, that funds a UK-wide research and development programme. It seeks to understand the root causes of social problems, to identify ways of overcoming them, and to show how social needs can be met in practice...
reported what it called "alarming trends in housing supply, availability and affordability". In 2003, the British Government commissioned a report on the lack of supply in the housing market. The Barker Report on housing supply concluded that it was necessary to build an additional 70,000 houses per year to reduce the real price rise to 1.8% per annum. An additional 120,000 houses per annum was required to reduce long term house price inflation to the EU average of 1.1%. The government commissioned a further report by Professor David Miles of Imperial College on the mortgage market. Among its recommendations was that Building Societies should obtain more mortgage funds from the money market in order to increase the availability of mortgages.
The Barker report had also concluded that an additional 39,000 houses per annum were required for UK house building to match household formation. Barker was quoted as saying there were only a net 134,000 new houses for more than 179,000 household formations per year. The figure of 134,000 built in 2002 was contradicted by the National House-Builder Council which reported that there were 160,800 houses built in 2002. In 2006 they report 185,000 new builds, which is above the original Barker report estimate of 179,000 household formations a year. In the 1990s, an average of 158,910 houses were built each year (NHBC figures) against 172,000 for each of the five years to 2006.
Increased divorce rate is another often quoted reason for increasing house prices, but this metric peaked in 1993 - a year of static or falling prices.
The reduced availability of inter-bank lending had a severe effect on companies such as Northern Rock
Northern Rock
Northern Rock plc is a British bank, best known for becoming the first bank in 150 years to suffer a bank run after having had to approach the Bank of England for a loan facility, to replace money market funding, during the credit crisis in 2007. Having failed to find a commercial buyer for...
which had financed an aggressive expansion of mortgage lending by short term borrowing in the money market.
Barker Report
In Budget 2003, the Government asked Kate BarkerKate Barker
Kate Barker CBE is a British economist.Barker grew up in Stoke-on-Trent. She received a degree in Philosophy, Politics and Economics at St Hilda's College, Oxford in 1979 and worked for a large pension fund in London...
, a member of the Monetary Policy Committee
Monetary Policy Committee
The Monetary Policy Committee is a committee of the Bank of England, which meets for two and a half days every month to decide the official interest rate in the United Kingdom . It is also responsible for directing other aspects of the government's monetary policy framework, such as quantitative...
, to undertake a review of housing supply in the UK. Barker’s interim report was published on 10 December 2003. She found that the number of houses being built in the UK was not keeping pace with demand. In 2001, around 175,000 dwellings were built in the UK – the lowest level since the Second World War. Over the prior 30 years, UK house prices went up by 2.4% a year in real terms compared to the European average of 1.1%. As a result of these price rises first-time buyers in 2001 paid on average £32,000 more for their homes. In 2002, only 37% of new households in England could afford to buy a house, compared to 46% in the late 1980s.
Barker considered a range of factors that might be constraining the supply of housing in the UK. She identified the main constraint as land supply and the housebuilding industry's response to risk, which leads to reluctance to build out large sites quickly. The regulatory relationship and control over the use of land also influences the way in which land is made available for development.
The Barker Review’s final report set out a range of policy recommendations for improving the functioning of the housing market:
- Government should set out a goal for improved market affordability;
- additional investment to deliver additional social housing;
- a Planning-gain Supplement to ensure that local communities share in the value of development;
- a Regional Planning Executive to provide advice on the scale and distribution of housing required;
- allocation of additional land in Local Development Frameworks;
- a Community Infrastructure FundCommunity Infrastructure FundCommunity Infrastructure Fund is a UK government initiative created as a joint venture by the Department for Transport and the Department for Communities and Local Government., it was created following the recommendation of the Barker Review of Housing Supply.CIF was created to fund transport...
to help to unlock barriers to development; and - Local authorities should be allowed to “keep” the council tax receipts from new housing developments for a period of time.
In response to the issue of housing affordability highlighted in the Barker Report the Department for Communities and Local Government
Department for Communities and Local Government
The Department for Communities and Local Government is the UK Government department for communities and local government in England. It was established in May 2006 and is the successor to the Office of the Deputy Prime Minister, established in 2001...
created a non-departmental public body
Non-departmental public body
In the United Kingdom, a non-departmental public body —often referred to as a quango—is a classification applied by the Cabinet Office, Treasury, Scottish Government and Northern Ireland Executive to certain types of public bodies...
, the National Housing and Planning Advice Unit, to provide advice to the Government, Regional Assemblies
Regional Assemblies in England
The Regional Assemblies of England were a group of indirectly elected regional bodies established originally under the name Regional Chambers by the Regional Development Agencies Act 1998. They were abolished on 31 March 2010 and replaced by Local Authority Leaders’ Boards...
and other stakeholders. The Unit's initial report, Affordability Matters (published in June 2007) argued that there are strong reasons to promote affordability - deteriorating affordability is associated with house price volatility, the diversion of investment from more productive areas of the economy, reduced labour market flexibility, and a poorer standard of living for young people.
See also
- GazumpingGazumpingGazumping is a term used in the UK and Australia when a seller accepts a verbal offer of the asking price from one potential buyer, but then accepts a higher offer from someone else. It can also refer to the seller raising the asking price at the last minute, after previously verbally agreeing to...
- GazunderingGazunderingGazundering is the practice of demanding a reduction in price to secure the sale of a property. This is usually done during contract negotiation...
- Real estate economicsReal estate economicsReal estate economics is the application of economic techniques to real estate markets. It tries to describe, explain, and predict patterns of prices, supply, and demand...
- Economic bubbleEconomic bubbleAn economic bubble is "trade in high volumes at prices that are considerably at variance with intrinsic values"...
- Subprime mortgage crisisSubprime mortgage crisisThe U.S. subprime mortgage crisis was one of the first indicators of the late-2000s financial crisis, characterized by a rise in subprime mortgage delinquencies and foreclosures, and the resulting decline of securities backed by said mortgages....
- Subprime lendingSubprime lendingIn finance, subprime lending means making loans to people who may have difficulty maintaining the repayment schedule...
- Mortgage loanMortgage loanA mortgage loan is a loan secured by real property through the use of a mortgage note which evidences the existence of the loan and the encumbrance of that realty through the granting of a mortgage which secures the loan...
- Real estate bubbleReal estate bubbleA real estate bubble or property bubble is a type of economic bubble that occurs periodically in local or global real estate markets...
- Economic crisis of 2008
- List of entities involved in 2007 finance crises
- HousePriceCrash
- The world housing bubble
- Australian property bubbleAustralian property bubbleThe Australian Property bubble is an observation that real estate prices in Australia are valued at more than they are worth. This is a real estate bubble....
- Indian property bubbleIndian property bubbleThe origins of Indian Property Market Bubble can be traced to the interest rate reductions made by the NDA coalition government in the years following 2001. Home Loan Rates fell to a historical lows of 7.5% in early 2004. This prepared the basis for the increase in real estate property prices...
- Irish property bubbleIrish property bubbleThe property bubble in the Republic of Ireland began in 2000 and peaked in 2006, as with many other western European countries, with a combination of increased speculative construction and rapidly rising prices....
- Japanese asset price bubbleJapanese asset price bubbleThe was an economic bubble in Japan from 1986 to 1991, in which real estate and stock prices were greatly inflated. The bubble's collapse lasted for more than a decade with stock prices initially bottoming in 2003, although they would descend even further amidst the global crisis in 2008. The...
- Romanian property bubbleRomanian property bubbleAfter the relative calm of the decade of the 1990s, since 2002 Romania has experienced a dramatic increase in property prices. Between 2002-2007 the median price for an old communist-era apartment rose by a factor of 10 , from around €10,000 to circa €100,000...
- Spanish property bubble
- United States housing bubbleUnited States housing bubbleThe United States housing bubble is an economic bubble affecting many parts of the United States housing market in over half of American states. Housing prices peaked in early 2006, started to decline in 2006 and 2007, and may not yet have hit bottom as of 2011. On December 30, 2008 the...
- Australian property bubble
Government Reports/Responses
- Barker Review of Housebuilding Supply – March 2004
- Barker Review of Land Use Planning – late 2006
- Callcutt Review of Housebuilding Delivery – due to report in November 2007
- Office of Fair Trading market study into housebuilding in the UK due to report Summer 2008
Other
- UK House prices since 1952 – Spreadsheet file from Nationwide Building Society
- UK House Prices from Rightmove.co.uk – Monthly reports sampling up to 200,000 homes each month - representing circa 90% of the UK housing market
- Core Economics animated Real Estate Rollercoaster Ride
- Stamp Duty Calculator