How did owning a home become so unaffordable in the UK?
As of early 2022, the UK’s economy appeared to be moving steadily, with low mortgage rates and controlled inflation. In recent months though, the dream of owning a home in the UK has become increasingly out of reach for many, while homeowners on a mortgage are experiencing a level of financial stress not seen before. The cost of living and the mortgage crisis is exerting severe pressure on household finances. Let’s delve into the complex factors that have contributed to this challenging landscape.
Structural Issues Supporting House Prices
Low Housing Stock: The UK faces a significant shortage of housing supply. Approximately 300,000 new houses need to be built annually to meet demand, yet only around 200,000 have been constructed on average in the last three years. Stringent planning permissions, especially in green belt areas, have further constrained construction. Demand for housing continues to grow, exacerbating the shortage.
Sustained Population Growth and Net Immigration: Despite modest economic growth and the potential effects of Brexit, the UK has experienced sustained population growth. In 2022 alone, the country recorded a net positive migration of 606,000 individuals, all in need of housing as renters or buyers. This demographic trend has bolstered property prices.
Below Inflation Wage Increases
Over the past 15 years, wages have failed to keep pace with inflation. Average weekly real pay (wages adjusted for inflation) in July 2023 was 1.3% lower than in 2008. In contrast, property prices have outpaced inflation. This widening gap between wage growth and property prices has reduced affordability for homeowners, posing a significant challenge.
Pandemic-Induced Price Rises
The COVID-19 pandemic disrupted global supply chains, leading to increased demand for goods and rising transportation costs. Consumers unable to travel or dine out redirected their spending toward consumer goods. Once vaccines were rolled out, demand for services surged resulting in higher airfares and hotel prices. All of this contributed to inflation getting entrenched in the economy.
Adding Fuel to the Fire
The conflict in Ukraine in early 2022 stoked the inflation fire. Fossil fuel prices soared, and corporations passed on price increases to consumers, sometimes exceeding input cost hikes. Flush with cash from pandemic assistance and very limited spending opportunities, demand did not wane and consumers took these price hikes in their stride. In October 2022, Consumer Price Inflation (CPI) reached a peak of 11.1% !
Bank of England’s Response in 2022
The Bank of England proactively raised started interest rates in early 2022 to combat inflation. Despite 14 consecutive and unprecedented rate hikes, inflation remains a challenge. Economists anticipate the need for 1 or 2 more rate increases before the situation stabilizes. Recession predictions loom, which could force the BOE to reduce rates.
A Financially Strained Government
The UK government faces tremendous fiscal challenges. High expenses, including the £310+ billion cost of COVID-19 assistance and the £40bn cost of Energy Bill Relief scheme, have strained resources. Inflation rates unseen in 40 years have driven demands for higher wages, resulting in 2.4m public sector work days lost in H2 2022 to strikes. The public sector wage bill in 2023 is expected to increase by around £13bn. With UK debt at close to 100% of GDP, the government has no wherewithal for a mortgage bailout.
The Current Scenario
Collectively, these factors have led to staggering interest rate increases over the past 18 months, with mortgage rates hitting levels last seen 15 year ago. Many homeowners are now caught as “mortgage prisoners” prompting some to consider downsizing while others face a “cost of owning crisis,” with negative equity. The government’s Mortgage Charter is expected to provide only temporary relief.
To address this pressing issue, more sustainable solutions must emerge.
