By Michael Carberry
Photo: Peter Hall, Unsplash
The calamitous British government’s “mini budget” perceptively analysed by my colleague Stoker in the last edition of Only Connect, which led within a few short weeks to the collapse of Prime Minister Liz Truss’s new government, must rank as one of the most spectacular own goals in modern British political history. As Stoker explains, one important consequence in the fall-out from the debacle was the sharp rise in the cost of government borrowing, forcing successive interventions by the Bank of England and a rise in interest rates to levels not seen for many years. This has serious consequences for tens of thousands of UK citizens with floating-rate or short-term fixed-rate mortgages, who find themselves faced with increases in their mortgage payments, often of several hundred pounds per month, which more than wipe out any benefits they may have received from the former Chancellor Kwasi Kwarteng’s tax cuts, now mostly reversed. At the same time, many experts are predicting that the interest rate rises will choke off demand and provoke a fall in house prices of as much as 10 or 15%, leaving many homeowners with negative equity (i.e., owing more on their mortgage than their house is worth). Unable to pay the increased mortgage payments and unable to sell because they cannot afford to repay the mortgage principal, thousands of families will be faced with re-possession, losing their cherished home and all the hard-earned money they had invested in it, often over many years. For a Conservative government which likes to portray itself as the party of home ownership, this is little short of catastrophic and a sad reflection on the incompetence of Liz Truss’s short-lived administration. But it is also a startling demonstration of the extraordinarily dysfunctional nature of the UK housing market. In this first of three articles devoted to the subject I want to look at what is wrong with housing in Britain. Subsequent articles will look at how successive government policies - not least Mrs Thatcher’s “right to buy” policy - have exacerbated rather than helped the situation, and finally, what could and should be done to improve matters in the future.
Housing is important
The two basic requirements for human survival are food & shelter. It follows that ensuring food security and an adequate supply of decent accommodation should be the first jobs of any government. The general level of welfare in a society is reflected in the standard of housing, particularly minimum housing standards. For my working-class parents, the three factors which transformed the quality of life for them and their six children (as well as millions of other working-class families) in the years after 1945 were the National Health Service, free secondary education and decent social housing. Housing is a better indicator of welfare than GDP. The US has a high GDP but Europeans are constantly shocked at the numbers of Americans living in levels of squalor which would be unacceptable in much of Western Europe. Moreover, as the US illustrates only too well, poor housing conditions are intimately linked with crime and violence. Housing is simply far too important to be left to the vagaries of the market.
Why is there a shortage of housing?
We hear constantly about the shortage of housing in the UK. Demand has increased for several reasons. Firstly, population growth: the UK population has grown steadily since 1955 and is currently estimated at 68.79 million, an increase of 34.5%. Initially the increase resulted from the relatively high birth rate, fuelled partly by the baby booms of the 1960s and 1980s, but since the 1990s the main driver has been net migration. Contrary to popular belief, the UK net migration rate at 2.572 per thousand is not particularly high and lower than many European countries such as Germany or Sweden, as well as Australia, New Zealand and the United States. However, Britain’s population is also ageing which not only contributes to the rise in population but increases the demand for immigrants to maintain and grow the economy to support those no longer economically active. As we are now seeing, the shortage of European migrant workers since Brexit has had a measurably negative impact on the UK economy.
Social and cultural changes have also impacted on the demand for housing. In the 1930s my mother lived with her parents and seven adult siblings in a ‘Room and Kitchen’ tenement flat in Edinburgh with a shared toilet on the landing outside. The four girls slept in the ‘room’ and the four men in the ‘kitchen' with the parents in a curtained bed recess. The family were not poor; all their neighbours lived in similar conditions, but such overcrowding would not be acceptable today. As was normal in those days, my uncles stayed at home in those two rooms until they were over 30 and got married.
Today, most young Brits would like to live away from home as soon as they have grown up. However, more and more students are staying at home and going to university or college locally because of the soaring cost of rented accommodation. A 2021 survey revealed that 43% of British men aged 25 and 25% of British women aged 25 were still living with their parents. 1 in 6 men aged 30 were living in the parental home too.
Old people are more likely to live alone. Whereas before the Second World War most aged parents would have expected to live with their children, now they are more likely to continue living in their own homes, or in sheltered accommodation or in a separate ‘Granny annexe’. My late mother-in-law lived on her own for twenty-seven years, for most of that time occupying a whole house to herself. Finally, in the last fifty years the rising number of divorced and separated people has also increased the demand for accommodation.
Why has supply not kept up with demand?
In terms of classical economic theory, housing lies at one extreme of the price elasticity scale. Whereas with commodities like sugar or rubber, even a slight rise in prices will be immediately reflected in a fall in demand as consumers switch to other suppliers or countries or turn to substitutes (beet sugar instead of cane sugar or synthetic instead of natural rubber) while producers will step up their production to benefit from the increased price. Housing is different. Doing without accommodation is not a choice but if house prices are high in Birmingham, it does not help that housing may be cheaper in Bangalore or Brisbane and, even at a local level, occupants cannot easily switch homes to benefit from slight price differentials. Houses are very expensive to construct, take time to build, and lack of available land (especially in south-east England) and planning constraints all mean that increased demand is reflected more readily in increased prices rather than increased supply.
Moreover, many of the largest house builders - Barratts, Persimmon, Taylor Wimpey etc. - are sitting on vast land banks bought up with a view to developing them at a future date. In theory this is to ensure a steady supply of work by having a pipeline of sites with planning permissions already approved. In reality, in times of rapid house price rises, it is often more profitable for the developers to sit on the land and watch their asset balance increase than to develop it.
Much existing housing is also seriously underused. This was part of the justification for Chancellor George Osborne’s so-called ‘Bedroom Tax’ (a tax on social housing occupants who had an unused bedroom) in 2013 but the policy affected less than 2.3% of the housing stock and while some 40% of tenants targeted expressed a willingness to downsize, there was generally no more suitable social housing for them to go to. The real problem was, and still is, in the private sector. Remarkably, in 201753% of owner-occupied houses were officially classed as “under occupied” i.e., having two or more spare bedrooms. In the private rental sector this was only 17% and in the social rented housing sector 10%.
The wrong kind of houses.
In the UK, there is also a much longer-term problem of inefficient use of land and resources. Traditional British house-building practices have favoured sprawling low-rise development over apartment blocks. In 2011 only 8.2% of owner-occupied houses were flats and half of those were in converted houses. The remainder were semi-detached, detached, terraced or bungalows. This is a very inefficient use of building space especially since many gardens remain uncultivated or are paved over for car parking. It is not really a question of consumer preference. It is simply cheaper, quicker and easier and hence more profitable for developers to build low-rise housing on green-field sites than to build apartment blocks in an urban environment.
Lack of adequate regulation has also contributed to a deterioration of the quality of the housing stock. Over the last fifty years the British obsession with the three- bedroomed semi-detached house and widespread ignorance of square meterage by buyers led developers to build increasingly smaller houses. By 2001 the mean floor area of private dwellings in the UK was only 86.9 m2, meaning that most were actually less than that! A more recent study found an average for new houses of only 76 square meters (compared to 137 m2 in Denmark) and that new houses today were smaller than at any time since the 1930s when my mother lived in those two rooms in Edinburgh. There is also a serious problem throughout the UK of housing falling into decay because owners, principally older people living on pensions but also young families on low incomes, simply cannot afford the maintenance.
What role does cost play?
The main issue for UK house buyers is affordability. Britain has the most expensive housing in Europe. For the reasons set out above, the housing shortage has led to repeated bouts of house price inflation so that a report in March 2021 found that average UK house prices were eight times average UK earnings. The problem is exacerbated by the perception that housing is an investment and that rising prices will make purchasers wealthier. According to a study by Schroders in March 2021 “£100,000 worth of UK property 25 years ago would be worth an average of around £451,000 today”. First-time buyers will therefore pay whatever it takes to get on the housing ladder so long as someone will lend them the money to do so. It was this mentality, coupled with irresponsible bank lending (itself fuelled by the ‘bonus’ culture), which led to the vicious cycle of rising prices and increasing indebtedness culminating in the financial crisis of 2007-8.
In fact, the idea of constantly rising house prices is a myth. Rather than stimulating an increase in the supply of houses, rising prices actually have the opposite effect as demand from those on lower incomes is progressively choked off. It is self-evident and supported by statistics that once house prices exceed a certain fairly low multiple of average earnings (roughly 3.5 times according to an article in the Economist) the situation becomes unsustainable in the longer term. Most ordinary citizens are progressively excluded from the housing market and a collapse in house prices becomes inevitable. This was the case following the Thatcher boom in the late 1980s when average real prices fell by around 35%, and during the financial crisis of 2007-8. Since 1975 there have been six periods when real prices have fallen significantly. It looks highly likely that we are now entering a seventh period.
Even more serious is the increasing gulf between house prices and earnings. According to the Institute for Fiscal Studies (IFS), property prices in England have increased by over 173% since 1997, whereas real incomes for 25–35-year-olds have increased by just 19%. As a result, we have seen a substantial fall in home ownership among young adults, down from 55% in 1997 to less than 35% today. But these are average figures. The problem is much worse in specific areas of the country. According to a BBC survey, prices in many parts of the South-East were up to 20 times local salaries. Even in other parts of the country like the Cotswolds or Devon and Cornwall, prices fuelled by the purchase of second homes by wealthy outsiders, could be up to 19 times average local salaries, making the prospect of owning one’s own home impossible for millions. But without the safety net of adequate social housing or reserved accommodation for local people, young couples are forced to either live with parents or in inadequate and expensive private rental accommodation.
For those young families who have managed to buy their own house, the current situation is little better. Having purchased their homes when interest rates were at historic lows, the catastrophic Truss mini-budget means that most borrowers on floating-rate mortgages are faced with huge rises in their mortgage repayments coupled with a slump in prices. The spectre of negative equity and multiple repossessions is looming with all the trauma and misery that brings for the households affected.
Unfortunately, successive Government policies, in particular the Thatcher ‘Right to Buy’ and the later Conservative ‘Help to Buy’ scheme, have not only done nothing to address the housing crisis they have made the situation much worse. This is a topic which I will address in the next issue of Only Connect.