How To Fix A Housing Crisis
In the UK it is estimated that we have a shortfall of half a million homes.
I’m sure you’ve seen this statistic thrown around a lot. But what does this actually mean for the UK’s property market, and importantly, how can we solve this housing crisis to fix the market for future generations?
THE UK’S HOUSING CRISIS
In 2004 the Barker Review calculated that in order to keep up with increasing demand for properties in the UK, we need to be building 250,000 new homes each and every year. Since 2014 many people have argued that this figure needs to be revised upwards to 300,000 new homes a year. 300,000 homes is difficult to visualise, so to put this into perspective, if we assume an average of 2 persons per dwelling, it would be like building a city the size of Nottingham and Coventry combined every single year. Or the equivalent of 100 Olympic villages. That’s quite a lot!
Despite huge demands on the residential sector to deliver more homes, developers and local authorities have failed to meet this demand ever since the target was set in 2004. In 2015, the UK delivered approximately 120,000 new homes, less than half the desired target. Each year we fail to deliver the required number of new homes, the market is left with an even greater shortfall of homes required in order to keep up with growing demand, and an even bigger housing crisis results. The result is a significant backlog of new homes required in the market, and a generation who are growing up with little prospect of ever being able to purchase their own home, branded with the aptly coined phrase ‘generation rent’.
Basic economic theory dictates that as the supply of new homes fails to keep pace with increased demand, house prices will rise. In London for example, house prices are on average 42% higher in 2015 than their previous peak in 2007, despite the intermediary global financial crisis. Data from the Office for National Statistics shows that in 2015 the average UK house price is £274,000, in comparison to £217,000 before the market crash in 2008. Yikes!
‘GENERATION RENT’
As prices surge upwards, the dream of home ownership is becoming an increasingly distant reality for each new generation in the housing market. The average age of the first-time buyer in the UK has increased from 28 years in 1995 to 31 years in 2015. It means more of us are living in rented accommodation than ever before. Coupled with spiralling rental costs, it is becoming harder than ever to save up the money required for a deposit on a first home. Thus the housing crisis.
Those of us in our 20s find ourselves growing up within a generation branded by the media as ‘generation rent’. Home ownership is moving further and further out of reach for our own and future generations.
For our parents’ generation, the division between home ownership and renting was not so stark. Achieving home ownership was far more affordable in their generation than today. During the 1980’s and 1990’s average house prices were four times the average wage. In addition, loan to value mortgages at 100% were regularly offered to first-time buyers, often with no deposit required. Unfortunately for today’s home buyers, those days are now over.
Indeed, between 1999 and 2006 the now infamous Northern Rock Together mortgage allowed buyers to purchase a house without a deposit, take loans up to 25% more than the value of their property and borrow up to six times their income. The idea was that the extra money could be used to make home improvements and buy furniture. Ahhh the golden days… (or the crazy days, depending on how you see it …).
Coming back to the present day, many commentators have predicted that a large proportion of generation Y (those born between 1980 and 2000) will be forever renting if we fail to solve the UK’s housing crisis.
It’s not surprising to see why. House prices have never reached such high levels relative to incomes. According to data from Nationwide, average property prices for first-time buyers in the UK are approximately 5 times their average earnings. Other statistics have put this figure as high as 8 times earnings. Since most mortgage providers now lend a maximum of 4 times your gross earnings (– this is a rough rule of thumb since mortgages are now determined based on an affordability assessment rather than a strict multiple of earnings), buying a property has become increasingly out of reach for first-time buyers.
With such strict lending criteria and house prices reaching an increasingly high multiple of earnings, only those with significant cash deposits saved up and those who can obtain additional guarantees on their mortgage, are able to get onto the housing ladder.
In fact, the average deposit now required by a first-time buyer in the UK is approximately £42,000. This assumes the purchase of a typical starter home at £211,000, with only a 20% deposit and an 80% loan to value mortgage. This negates the fact that to obtain the most competitive mortgage deals you will need at least a 25% deposit, and preferably a 40% deposit if you want the lowest interest rates.
Typically, the only way our generation has thus far been able to get onto the property ladder when you’re not in a job earning at least double the national average salary has been with a helping hand from the ‘bank of mum and dad’. This is far from a sustainable way of propping up the housing market and has forced many of our generation to live at home well into their thirties in order to save up the necessary deposit for their first house purchase.
It is no understatement to say that the UK has a serious housing crisis.
WHAT ARE THE ROOT CAUSES?
So it is evident that the UK has a serious housing crisis. But what are the root causes that have launched us into this mess? Let’s explore them by looking at the demand- and supply-side factors respectively:
Demand Factors
1. Population growth
According to the Office for National Statistics, annual population growth in the UK today stands at 0.6%. Increased life expectancy and increased net migration to the UK are the two main contributing factors. Since the early 2000’s increased net migration has had a greater effect; which at its peak contributed 69% to population growth.
2. Increasing life expectancy
Since 1980, life expectancy in the UK has increased by 2.5 years per decade for males and 2 years per decade for females. This means that someone born in 2015 is expected to live on average 7–9 years longer than someone born in 1980. As people continue to live longer, population growth will continue.
3. Decreasing average household size
The 1950s saw an average of 5 people living per property. Today, this has decreased to an average of 2 people per property. A number of factors have driven this, including more people choosing to live alone, as well as increasing divorce rates over time. Fewer people living per property demands increased numbers of properties in the market.
4. Increased buy-to-let investors
As more investors jump on the buy-to-let bandwagon, a larger proportion of housing stock is removed from the open market to be owned by investors for long-term rental. This decreases the available pool of housing stock to individuals purchasing property for owner occupation.
Supply Factors
For decades the supply of housing (both private and public housing) has fallen far short of the level required to meet demand. But what factors directly affect the supply of housing? Let’s explore some here:
1. Fewer housebuilders
During the 2008 financial crisis many smaller housebuilders went bankrupt or were snapped up by larger housebuilders for their land as the housing market stalled. A mass exodus of construction workers from the industry occurred as construction activity also dried up. As demand for housing has begun picking up again, the capacity of housebuilders to meet this increased demand has been severely restricted.
It is still restricted today.
The shortage of skilled labour in the industry, such as bricklayers, carpenters and plumbers, is a serious problem.
The Financial Times reported that smaller housebuilders building fewer than 100 homes per year completed just 20,000 homes in 2013, as opposed to 50,000 homes per year prior to 2008. A huge opportunity has arisen for new players to enter the market.
2. Decline in state housebuilding
In the 1940s and 1950s, local authorities built more houses in the UK than the entire output from the private sector. Total house building volumes each year stood at around 300,000 homes, some of the highest it has ever been.
By 1959 this trend began to reverse and the private sector overtook local authorities in the number of houses built each year. However, increased house building by the private sector has not been enough to compensate for the fall in house building by local authorities. From 1976 total housebuilding volumes began to steadily decline, and have never since reached the levels experienced pre-1976.
3. The planning system
The planning system has affected the supply of housing in the UK in two main ways.
Firstly in terms of the availability of land. The planning system has not been releasing enough land to meet housing demand for decades. Restrictions in land supply (particularly in areas where people want to live) have made land more expensive. This in turn increases the cost of building new homes.
Secondly, the planning system can be slow and bureaucratic. Difficulties in obtaining planning permission can delay and sometimes restrict the number of new homes being built.
Understanding how the planning system works, what the local policies are for where you want to build, and what factors will determine whether your application will get permission, is of fundamental importance if you are a property developer or self-builder.
WHAT ARE WE DOING ABOUT IT?
With such a crisis in the housing market and with the causes of the crisis now very well established, you would assume that solutions to tackle the crisis would already have been found and implemented. Well, not quite…
Planning reviews
In 2012 the government introduced the National Planning Policy Framework (NPPF), slimming down over 2,000 pages of planning policy to just 50 pages. The aim was to simplify the planning process, making it easier and quicker for planning applications to be granted permission for development in order to stimulate house building. It is still quite early to assess whether the NPPF has had its intended effect, but early evidence has suggested that planning approvals have increased by 20% since its introduction.
Improving loan availability
A number of measures have been introduced to boost the ability for first-time buyers to get onto the housing ladder. These have largely focused on improving loan availability to make financing a house purchase easier, through the likes of the Help to Buy Equity Loan Scheme.
Ironically, the majority of measures introduced by the government will act to increase demand for housing, rather than increase supply. This has the effect of reinforcing and widening the supply / demand imbalance, forcing property prices even higher and making property even more unaffordable for aspiring homeowners.
Some suggest that the answer to fixing the housing crisis is to reduce demand. For example, discouraging overseas investors from buying homes in the UK, removing Help to Buy mortgages, and restricting access to debt. However, focusing on this side of the equation could result in two very negative outcomes:
- The ability for first-time buyers to get on to the housing ladder would be significantly delayed. People may be forced to live in sub-standard accommodation, to live at home for longer, or to live in larger household sizes.
- Attempting to suppress housing market activity, a key driver of economic growth, would not only decrease the overall economic output of the UK, but would also be going against the principles of capitalism.
SO WHAT’S THE ANSWER?
The property market operates much like any other economic market for goods or services; the level of supply relative to the level of demand in the market determines prices. When the level of demand exceeds the level of supply in the market, prices increase. Conversely when the level of supply in the market exceeds the level of demand prices fall. We only need to look at oil price movements in 2015 to see supply and demand imbalances in play. A significantly reduced global demand for oil, coupled with the resultant increase in oil production by suppliers trying to combat the effects of lower oil prices, caused oil prices to more than halve.
The same principles are true for property prices. In areas where demand for property is high, sellers set higher prices and buyers bid against each other in order to acquire properties, which forces property prices even higher.
Fundamentally the UK’s housing crisis comes down to the fact that we simply don’t build enough homes. If we don’t address this, everything else is just fiddling around the edges. Consequently, if we really want to fix the UK’s housing crisis we need to combat the root cause of the crisis: a lack of supply of housing to the market. Tackling this simply means building more homes. The solution to the UK’s housing crisis is obvious, but not necessarily easy.
Article written by Vicky Bromley. Connect with Vicky on LinkedIn.
