UK Housing Market Crisis

by Abhyuday Singh

Years of unbroken house price growth has pushed the UK housing market into crisis, with the cost of the average English home being propelled up to around nine times the annual earnings, compared with 3.5 times in 1997.The average UK house price was £295,000 in November 2022, which is 10.5% higher than the same time last year whereas the average UK salary for all employees was £28,000, a 6.8% increase from last year. A lot of factors are at play here, such as stagnant supply, turbulent economic conditions and rising costs of production; however there are also potential solutions which could help make housing more affordable for the UK. 

One consideration which can be attributed to the housing crisis is the lack of supply. Approximately 200,000 were being built per year from the start of the 21st century to the 2007/2008 global financial crisis, but soon after this number substantially dropped to around 135,000. It has increased since then but has not recovered to the pre-crisis levels, hovering at around 160,000 per year on average. This is partly due to land scarcity in many parts of the UK, particularly in urban areas, where there is a shortage of available land for new housing developments, making it difficult for developers to build new homes. Another factor is the lack of investment into the housing sector in recent years, which has made it difficult for developers to secure funding for new projects. Moreover, there is a lot of red tape around house building ,which can be time consuming thus it can discourage developers from building homes as well as deterring investment into housing. Furthermore, the costs of construction can increase due to this bureaucracy, but it can also increase due to a shortage of skilled workers, which the UK has been facing in the construction industry, causing developers to pay workers more than they wish to secure their services. All of these factors combined have created a situation where there is a lack of supply of homes, causing an increase in the market price of houses; this situation has also been worsened by the fact that demand for housing has been ever growing, which, coupled with stagnant supply, has caused market prices to rise even further, making it even more difficult for people to find affordable housing.

Another component to consider is the turbulent times of today. Inflation has been rampant, reaching a high of 11.1% in October 2022; this has caused the Bank Of England Monetary Policy Committee to increase the interest rates as an attempt to lower these very large numbers, with the recent rise in interest rates to 4% in February 2023, a 15-year high. The reason why the Bank of England has increased interest rates, is that high interest rates mean that the reward for saving money in the bank outstrips the reward for borrowing money. This will incentivise people to save more money, lowering their marginal propensity to consume and reducing consumption, which, if all other things being equal, will lower the general price level in the economy, thus reducing inflation. However, this is sub-optimal for those in the housing market looking to buy, because most consumers take out a mortgage to pay for their house, but if interest rates are high, this means that consumers will have larger monthly mortgage payments, which would reduce their disposable income and it might prohibit them from buying a house, as it might not be affordable to take out a mortgage.

Now having looked at some of the causes, it is time to also consider some potential solutions. One such solution could be home ownership schemes. These are schemes designed to make housing more affordable by providing financial assistance and support to home buyers. For example, shared ownership schemes allow buyers to purchase a percentage of a property and rent out the rest, which can make the cost of buying a house more affordable to those who can’t buy it outright. This scheme allows for a relatively easy and affordable route into housing, as it reduces the upfront costs of purchasing a property as well as reducing the size of consumers’ mortgage and the money needed to save for a down payment. Additionally, it offers flexibility to buyers, as they can choose to increase their share of the property, eventually owning the property outright, which can provide a stepping stone to full home ownership over time. Having said this, it should be noted that shared ownership involves complex legal agreements which can be difficult to understand and can make it challenging for individuals to fully comprehend the implications of their purchase. Moreover, despite this scheme making homes more affordable, they limit the amount of ownership one has in the property, which can make it difficult for consumers to make changes to the property or sell it without restrictions, making it less attractive. Furthermore, this scheme is not widely available currently and may not be an option in all areas, which can be a problem to potential buyers looking to take advantage of this scheme; however, a solution to this could be to increase the availability by changing the requirements for the scheme, such as any home which a potential buyer can cover the costs of, including rent for the next 10 years perhaps, in real terms and accounting for stability of income, but this might be logistically hard to implement and enforce.

Another potential solution is to reform the planning system. The current planning system in the UK can be slow and bureaucratic, as mentioned earlier, which can hinder the development of new homes as not many firms are willing to enter the market due to this entry barrier. If the planning system is reformed to make it more streamlined, it can increase the supply of houses whilst simultaneously reducing costs for developers. A reformed planning system may be more efficient, which can reduce the red tape and thus time for this phase of the process, encouraging new developers to enter the market and current ones to make more houses, as the costs will have decreased due to less bureaucracy, which would lead to, in the long run, a greater supply of houses in the UK. If there is a greater supply of houses, then the market price would decrease, making housing more affordable. Moreover, a reformed planning system can encourage innovation in the housing sector, as firms are free from complex regulations, giving them more flexibility in trying new and innovative building techniques, which could reduce the costs of construction and thus reducing the market price for houses, making them more affordable. Nevertheless, this potential solution also has potential problems. For example, if the planning system is reformed to make it more streamlined, it can lead to a lack of protection for the environment and communities, which is arguably not great at all as in this day and age these aspects should be taken into serious consideration. Moreover, it would reduce the opportunities for public engagement and consultation, which can limit the power of communities to voice their thoughts in the development of their area, perhaps leading to conflict in the area, which would increase the strain on the police. Additionally, if the reformed planning system is extremely effective, it could perhaps lead to the rapid development of areas that were not previously constructed for housing, leading to overdevelopment and exerting pressure on existing infrastructure and services, which would need time to catch up to the demand of the areas.

Therefore, I think that house prices being too high is not great, despite contrary views of property owners, who prefer high house prices because as the price of houses grows their wealth will also grow. If houses prices are too high, then many people looking to buy houses will be priced out of the market, meaning that they will be looking for alternatives such as renting; however, if there is a large influx of demand for renting property, then the price of rent will also go up, meaning that again those looking for housing will be out priced. This could lead to a situation where people potentially go homeless, or one where the government has to intervene, perhaps by introducing price ceilings, which mean that prices cannot go above a certain level. Having said this, price ceilings come with their own set of problems, namely creating a shortage due to demand being much greater than the supply, as well creating a deadweight loss, which no one wants. Moreover, another reason why I think house prices being too high is not great, is because if people are not purchasing houses, then the economy loses out on the potential consumption that there would have been if people had bought homes. For example, potential consumption could include, appliances, furniture, and much more; this potential consumption could have led to an increase in the aggregate demand in the economy, which in turn would have led to increase in GDP, but as the potential consumption is not being fulfilled, then the economy is missing out on increasing the GDP of the economy by having very high house prices.

In conclusion ,the UK housing market crisis is a complex issue which requires a multi-faceted and very careful approach to resolve. Although the prospects of home ownership schemes and a reformed planning system may seem appealing, it is necessary to also look at potential consequences of these actions and judge if they are worth it.