The average salary in 1973 was just over £2,000, with an average house price three times that. Fast forward to 2016, and, with an average salary of £28,000, you need 7.5 times that salary to buy a home.
In other words, the average UK income has not risen at anywhere near the same rate at house prices, meaning millions of us are unable (and may never be able) to own a home.
There are several factors behind this out-of-proportion house price boom:
- Low interest rates: the UK housing market is sensitive to interest rate rises, since interest rates affect mortgage rates. For example, when interest rates rose sharply in the early 1990s, mortgages became expensive, causing house prices to fall, with many people subsequently finding themselves with negative equity.
- Low supply, high demand: mortgages have been relatively cheap for a long time, which means that buying a house is attractive relative to renting. This is partly responsible for driving up house prices. Add to that the dwindling housing stock and a growing population, and you have demand that outstrips supply by far.
- Lack of rental market regulation: because the rental market is poorly regulated in the UK, people who rent their homes are vulnerable to high rents (in fact, it is estimated that those who rent privately now often pay as much as two-thirds of their income in rent), insecure contracts, and poor living conditions, all of which continues to contribute to home ownership as being far more covetable.
- Slow real-term wage growth: the average UK wage not only can't compete with house price growth, it is actually £11 a week lower when adjusted for price increases than it was before the financial crash of 2008.
This disparity between income growth and house price growth has some disturbing societal implication, too. For example, a survey of 2,000 people by Space Station and One Poll has revealed that only 3 per cent of people who bought houses between 1988 and 1998 said they saved for longer to buy a better property, compared to 24 per cent of people planning to buy a house today. And while only 7 per cent lived with their parents while they saved for a deposit 20 to 30 years ago, some 16 per cent now do this.
While this picture is undoubtedly worrying, what solutions are there?
- Building more: this has become something of a government mantra, and is in all election manifestos and white papers, but it is true: one way to solve the problem is by reducing pressure on old housing stock with new, affordable housing (that is, housing that does not cost 7.5 times an average salary).
- Building faster: we need to build much more than we are very, very soon if we are to meet the increased demand for housing. One solution is new technologies such as pre-fab housing; another is releasing more land, as currently the amount of land that can be built on in the UK is limited.
- Rent regulation: while rent regulation proposals are frequently met with opposition, there are plenty of examples (Germany among them) of countries that have good rent controls and rights for tenants that make renting an affordable, secure option. This means that people feel less pressure to buy, and house prices are more sustainable.
- Raising the interest rates: an interest rate hike would cause prices to come down, potentially driving them down to more sustainable levels. However, this could be problematic for house owners on variable mortgages and could lead to people losing their homes.
- How to take out a mortgage – a guide for would-be homeowners