Tuesday, September 6, 2011

Affordability of Housing in UK

One feature of the UK economy is the lack of affordable housing - even in the middle of a recession and a slump in house prices. The truth is that the fall in UK house prices was really quite moderate when we consider:
  • Other countries (Ireland, US, Spain) saw a much bigger fall in house prices
  • Long term measures of affordability like house price to earning ratios and affordability of mortgage payments.

Average house prices in the UK - not much of a slump.

Annual % change in UK house prices. House prices are forecast to be mainly flat during 2011.

Since the onset of the credit crunch in 2008, UK house prices have fallen. But, they still remain relatively high.

If we look at house price to earning ratios, the ratio of house prices is higher than at the end of the Lawson boom when house prices were skyrocketing.

Limited house price falls and stagnant wage growth have kept house price to earning ratios above 4.4.


One of the factors behind the continued persistence of high house prices is the climate of low interest rates. This has made mortgages more affordable.

Yet, despite ultra low base rates (0.5%), first time buyers are still spending over 30% of their take home pay on mortgage payments. This is because:
- some mortgage rates are considerably higher than base rates.
Many first time buyers still have a large mortgage because of high house prices.

Shortage of Supply

To meet the growing number of households in the UK, we need to be building around 250,000 houses a year. However, that doesn't happen. We have been averaging around 150,000 - 175,000 houses a year. Meaning demand continues to grow faster than supply. The recession has caused a short term decline in demand. But, the long term pressures remain. Unless the issue of supply is tackled, we are likely to see house prices continue to be squeezed up.

Outlook for Housing Market.

Given increasing chances of a double dip recession, we are likely to see continued weakness in demand. However, it is hard to see a sharp fall in house prices you may get if the UK had a surplus in supply. House prices are likely to continue to stagnate during the prolonged downturn. But, when the economy recovers (and could be quite a few years) house prices are likely to restart their upward trend.


1 comment:

Basudeb Sen said...

Downward stickiness of house/ home prices even during recession or slow down is that investment in construction dips sharply the nearly zero soon after and some time just as the recession starts and people are in no mood to sale old house to buy a new better one.