House prices in the UK have reached astronomical levels as they are now 65x higher than they were in 1970. The average house price has gone from £4,000 to £260,000 in the last fifty years. This growth greatly exceeds that of average wages that have only increased 36x in the same period. Such a disparity between the two figures has created a housing crisis, the prospect of owning a home increasing out of reach for younger generations. Homeownership levels have declined since 2008, from 73% to 65%. This can be attributed to both the restrictions on supply and the ever-increasing demand for homes.
Increasing life expectancy hasn’t exactly helped the younger generations to get onto the housing ladder. The average life expectancy in the UK has increased from 71 to 81 years of age, between 1970 and 2020. Whilst this is great for the elder generations, this has resulted in fewer houses being vacated. Homes that would have become available on the market 40 years ago are still occupied, as life expectancy has increased. This has suppressed supply, leading to fewer homes available on the market thus creating house price inflation. As forcing the elder members of society out of their houses isn’t feasible on both moral and ethical grounds, the government should look to reducing their burdensome planning rules to increase the supply of new homes.
Excessive housing planning laws and regulations have exacerbated the growing gap between house prices and income. The cumbersome planning system has greatly reduced investment into the construction of new homes. This is because of the bureaucracy in place to obtain planning approval, with the time taken disincentivizing property developers and investors alike. Thankfully, the incumbent Conservative government has recognised this problem and has started to take steps to reduce the unnecessary planning restrictions. Reforms to the zoning system will no doubt ensure that property developers have a clear incentive to create new, affordable homes for average civilians, with this process less difficult and off-putting. As the supply of homes increases, housing prices will reduce if demand stays constant.
Population growth from migrants has increased housing demand in the UK. During the 1960s and 1970s, the population growth rate declined, falling from 0.8% to 0% between 1961 and 1976. This trend slowly started to reverse, with the rate averaging at 0.2% across the following two decades. However, immigration began to surge in the 2000s; the population growth rate doubled during this period. This led to population growth outpacing the rate of home construction, creating a shortage in the housing market. The inward flow of immigrants into the country has clearly contributed to the demand-pull inflation currently being witnessed in the housing market.
The Bank of England, through its bank rate manipulations, has contributed to the housing crisis. Following the Great Recession of 2008, the BoE sharply cut the bank rate from 5% to 0.5%. This was to induce demand in the economy, encouraging businesses and consumers alike to borrow and spend money, stimulating economic growth in the process. However, reductions in the bank rate have driven down the interest rates for mortgages. The average mortgage interest rate fell from 3.86% in 2010 to 1.74% in 2020. This has fuelled demand in the housing market, contributing to demand-pull inflation.
Ultra-low bank rates have also increased housing costs in other ways. This is because of the low bond yields of newly issued government bonds. Low yields have created a problem for mutual and pension funds alike, as one of their most reliable income sources has been reduced. This has led to these institutional funds pursuing other, more risky investments with mortgage-backed securities a common option. Increased demand for MBS bonds has led to their price increasing, leading to more money for the investors who hold these bonds, once liquidated. These investors then use these funds to buy real estate, creating a vicious cycle with rising house and MBS bond prices.
Quantitative easing, first initiated in 2008 by the BoE has increased house prices. QE involves the Bank of England purchasing large amounts of various securities, such as government and corporate bonds. In 2011, the BoE purchased £200 billion worth of securities. This policy is designed to increase liquidity in the market, thereby stimulating economic growth. At the same time, QE has involved the purchase of mortgage-backed securities. These funds are then credited to the accounts of the investors who held these securities, improving their liquidity. Investors use their increased wealth to purchase other assets, such as real estate, thereby increasing housing prices through demand-pull inflation.
A combination of both restrictive supply and excessive demand is the perfect recipe for rising housing prices. On the supply-side, longer-life expectancies and regulatory housing planning laws have contributed greatly to the demand-pull inflation in the housing market that we have been experiencing over the past two decades. With this said, factors on the demand side have more heavily exacerbated house prices. Immigration, alongside the Bank of England’s expansionary monetary stimulus through bank rate cuts and QE have fuelled the ever-increasing demand for homes.