Part one of “Home Truths”, Liam Halligan’s in-depth investigation of the UK housing crisis.
“The housing shortage isn’t a looming crisis, a distant threat that will become a problem if we fail to act. We’re already living in it”.1
Housing is increasingly unaffordable in many parts of the UK, with prices and rents rising much faster than earnings because far too few homes have been built. Since the 2008 financial crisis, the homes shortage has become more acute – sending affordability to the top of the political agenda.
The rate of house building has long lagged the UK’s natural population growth and net immigration. Since the mid-1980s, an estimated 2.3 million too few homes have been built.2 The seminal Barker Review of 2004 presented “considerable evidence” of a homes shortage, suggesting 245,000 new homes were needed each year to match household formation.3 For decades, building has fallen way short – as shown in Graph 1.
From 1979 to 1990, under Thatcher, 220,404 new homes on average were constructed each year by private builders, housing associations and local authorities.4 That fell to 194,310 under Major, as fewer council houses were built, before rising gradually under Blair, then plummeting under Brown – as small and medium sized builders (SMEs) were wiped out during the credit crunch. During the Cameron years, 2010 to 2016, an average of only 141,132 homes were built annually.
New household formation is now estimated at around 270,000 per year, 25,000 higher than when the Barker report was published. Yet just 178,450 homes were completed in 2016-17 – still 50% adrift of annual demand, to say nothing of the shortfall generated over recent decades.5
From World War Two until the mid-1990s, rapidly rising wages and steady building made house prices manageable for most aspiring homeowners. Between 1997 and 2016, though, amid slow building and much faster population growth, the average house price rose 267%, while average incomes grew just 68% – as shown in Graph 2.
Since 1997, while house prices have soared, equities have been broadly flat (volatile, but ending up roughly where they were). This has attracted speculative investment flows to housing, bidding prices up further. Similarly, since 2009, ultra-low interest rates related to quantitative easing – resulting in negative real returns on government bonds – have pushed yet more speculative money into property.
The UK-wide median house price is now 7.7 times median annual earnings – an all-time high and up from 3.5 times in 1998. But the extent of the homes shortage varies across the country. Official regional data on housing demand and supply in Graph 3 suggests a cumulative building shortfall since 2000 of 343,000 homes in London and 96,000 across the South East outside the capital.6
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