The UK Housing Market

Various countries and cities across the world have suffered from rising house prices over the last few years — especially major cities like New York and Sydney. But today, we’re going to focus on a country that faces particular challenges: the United Kingdom.

After house prices have skyrocketed and demand has outpaced supply, it’s become harder than ever for young people and renters to make the transition to homeowners. But what exactly is happening? Why is the UK facing these challenges? And will the recent market conditions sparked by the global pandemic change anything? We’ll answer this question and more as we take a deep dive into the workings of the UK housing market. Buckle up, because it’s going to be a wild ride!

A brief history of the UK housing market

Let’s rewind a little.

If your grandparents (or even parents) are homeowners and you’ve ever asked them how much they bought their current home for, the answer has probably surprised you. Houses worth hundreds of thousands of pounds now might have been bought for £20,000 a few decades ago — or, if you go long enough back, four-figure sums.

In 1969, the UK’s average house price was £4,312; by 1980, that figure had climbed to £22,676. But guess what the average was by 2020? £224,337. Ouch.

As the graph below shows, house prices in the UK didn’t exactly rise gradually over time. They increased relatively slowly between the 60s and the 90s, before shooting up exponentially around 2000. However, the housing market suffered a temporary collapse as a result of the financial crisis, only to strengthen again from 2010 onwards as the economy came out of recession.

What happened?

We’ll get into the factors that affect house prices later, but for now, it’s just important to know that UK house price trends saw a dramatic change rom 2000, with growth punctuated only by the financial crisis.

Is it normal for house prices to rise over time?

As anyone with the slightest knowledge of economics will know, rising prices over time isn’t a new phenomenon. A little thing called inflationary pressure increases prices every year, eating away at our money unless we invest it smartly.

Although the inflation rate varies every year, it usually stands at around 2%. Basically, with low and stable inflation we can expect house prices to rise annually by at least the amount of inflation, and generally rising above the inflation rate, assuming that the economy is doing well.

But that’s not to say that the increase in house prices the UK is experiencing now during the Covid pandemic, or indeed at any time in the past, is in any way 'normal'.

The graph and figures above were calculated using nominal house prices, meaning that they’re not adjusted for inflation. This matters because inflation determines how much money is actually worth.

So, does switching to looking at real house prices, which remove the effects of inflation, change anything? Yes and no.

The graph below might look slightly different, but ultimately, it shows the same trends. Most importantly, it still demonstrates the steep increase toward the end of the nineties.

Just to really hammer the point in, here’s a quick example of just how unprepared the average Brit was for house prices to rise so drastically.

The case of shared appreciation mortgages

In the 80s and 90s, many homeowners decided it was a good idea to sign up for a shared appreciation mortgage (SAM). Don’t be scared by the lengthy title — this just means that they used their house’s value to take out an interest-free loan. But there was one catch: they would owe 75% of the house value’s appreciation when they sold the property or died.

At the time, housing prices were only rising moderately over time, so this seemed like a good deal. But as we’ve seen, house prices unexpectedly shot up around the end of the 90s, leaving participants in this scheme with a larger loan than they’d ever bargained for.

Because house prices increased so much and so fast, some people have ended up with a loan of more than £150,000, despite originally borrowing just £15,000 — working out as an extortionate interest rate.

What affects housing prices?

Now you know that the UK is facing something of a crisis, the next logical question is: why? In basic economic terms, there are two forces that can change the price: supply and demand. Housing is no exception. In short, demand for housing outstrips supply!

UK house prices

When the downward-sloping demand curve shifts to the right or the upwards-sloping supply curve shifts to the left, the price of housing increases. Indeed, as the graph shows, even when supply increases, the increase is not sufficient to compensate for the greater in demand.

This should be an intuitive concept: when supply cannot meet demand at the existing price of houses there is only one way that house prices can move - they are driven upwards until a new equilibrium price is arrived at.

Let’s take a closer look at which factors could change demand and supply.

Factors that affect demand

One of the biggest factors that affect demand is the size of the population. It goes without saying that more people equals greater demand!

What’s especially significant now is the aging population the UK faces: fewer older people are moving out of their homes, yet there are just as many young people trying to buy a home. To add to this, social trends are also changing. It’s more common for people to remain single in later life or divorce at a later age — and the more people want to buy a house as an individual and not as part of a couple, the more houses are needed overall.

Greater income also increases demand — as well as encouraging previous renters to buy, it can encourage homeowners to buy second houses or holiday homes. Similarly, lower interest rates should increase the demand for housing, as it makes mortgages more affordable. As interest rates have fallen, so have mortgage rates, making borrowing increasingly affordable.

Factors that affect supply

The most obvious factor you’d expect to affect housing supply is building costs, like raw materials and labor. A slightly less obvious consideration is government policy. The more difficult the government makes it to build housing or obtain planning permission, the more supply is likely to decrease, or increase at a modest rate.

Finally, technological advancements can increase supply by making it easier to build new houses, but often lack of available land more than dampens any gains from new house building methods. Also, it is clear that some building practices have been proven unsafe (the Grenfell tragedy) which may but a break on house building.

How will Coronavirus affect the UK housing market?

When the COVID-19 pandemic was first realised to be a global crisis in March 2020, stock markets across the world dropped rapidly. Logically, you’d expect the housing market to follow suit. The less disposable income people have to spend, the lower the demand should be for housing, right?

But nothing is ever simple! In fact, housing prices have risen at the fastest rate in four years during 2020. Why?

For one, the government has incentivised people to buy by temporarily cutting stamp duty (a type of tax on buying property), which has incentivised more people to buy. Also, remaining in lockdown may have encouraged some people to move from the city to the countryside or from renting a flat to buying a home. Both of these demand-increasing phenomena could have contributed to price increases, although the future remains uncertain. On the supply-side, house building has slowed down as Covid restrictions have been put in place.

Final words

As you can see, the UK faces many challenges ahead due to the rapid increases in its housing prices and the resulting unaffordability. With the impact of COVID-19 on the economy still remaining unclear, the future appears even more uncertain.

If you were charged with making a policy to combat the problem, what would you suggest?