Why Are House Prices So High?

As of March 2020 the average house price in the UK was £231,855 according to the Land Registry.

Figures for average UK individual earnings (salaries / wages) are harder to pin down. Much depends on things like the geographical area where you live and your age group, but an income of something between £25k and £30k (before tax) per annum seems to be about right.

These 2 figures are important because they clearly show the extent to which housing has become unaffordable for ordinary people on average incomes.

For example, back in the early 1980s you could buy an ordinary 3 bed Victorian terraced house in South London (albeit in a ‘less desirable’ suburb) for around 3 or 4 times average salary. These same houses are on the market today at not far short of £1 million!

The problem is, house prices have rocketed over the last 40 years while wages have only grown at a snail’s pace. Result: few people can now afford to come up with enough money for a deposit to buy a home. And since most mortgage lenders will only lend you a multiple of 3 or 4 times your income, it’s often impossible to make the sums add up.

The above graph from Nationwide clearly shows the mismatch between earnings and house prices since 1990. The current multiple of earnings needed to buy an average house is shown as around 6 times. But this looks pretty conservative. The ordinary terraced house in South London mentioned above today costs more than 20 times average earnings!

So why has this happened?  It’s partly down to supply of housing not keeping up with demand. UK population typically increases by about a million every 3 years (equivalent to a city the size of Bristol every year). But house building rarely exceeds 150,000 new dwellings per year.

Since the 1980s UK governments have found that stoking house price booms has been a handy short term way of boosting the economy.  Rather than devising a sophisticated long term industrial strategy (like Japan, S Korea, Germany and China) to develop the economy with exports, it’s a lot easier to stimulate house price inflation to quickly get things moving (and get re-elected).  Generous tax breaks for Buy-To-Let Landlords further boosted demand, and hence prices. And as property values increase, homes are used as piggy banks full of cash that can be released by re-mortgaging. Party time for homeowners!

Meanwhile the banks discovered that lending on property was a lot easier than lending to industry. The more money banks have thrown at the property market the more prices have risen.  And as the Bank of England has slashed cut interest rates to an all time low, it made monthly repayments lower, enabling people to take on even more debt.

But property booms have an unhealthy downside. Because the economic foundations of speculator-driven, debt-fuelled booms are fundamentally weak, it has resulted in periodic crashes.  Another paradox has been the provision of generous ‘Help-To-Buy’ government support for the newbuild property market. On one hand this has helped a minority of buyers who only needed to raise a 5% deposit on new homes. But by artificially inflating demand for subsidised new homes it has caused prices of new housing to rapidly increase making them less affordable for the vast majority.

As an (unintended?) result of government largesse, the big corporate homebuilders (such as Persimmon Homes) have made enormous profits, many grossly ‘rewarding’ their directors with excessive bonuses – some as high as £75 million. All this thanks to government funded sales boom that made prices unaffordable for the majority.

The trouble is, using the housing market as a short cut for boosting the nation’s economic growth, has in the long run made home ownership unaffordable for younger generations.






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