House prices are out of control
The graph below shows how house prices have grown at a rate more than twice as fast as earnings over the Queen’s 90-year lifetime, rising nearly 46,000%. Earnings have dragged behind, growing by 21,839% in comparison.
The relationship between earnings and house prices began to break down in the 1980s, after sweeping financial deregulation began in the 1970s. This deregulation of the credit market kick-started a shift towards a preference for mortgage lending over other types of lending, with domestic mortgage lending expanding from the equivalent of 40% of GDP, to 60% since the 1990s.
If the London minimum wage had grown at the same rate as house prices, it would be 90% higher
The minimum wage lags behind. If the UK minimum wage had grown at the same pace as house prices it would now be over 40% higher than the George Osborne’s National Living Wage – at more than £10 per hour rather than the current £7.20.
In London, the minimum wage would be nearly £14 an hour if it had kept up – 90% higher than the current rate.
But even if it had kept up with rising house prices, this amount would still not be enough to save for a deposit and cover mortgage repayments. As Shelter pointed out last week – by 2020 first time buyers in London would need a deposit of £138,000 – it doesn’t take a mathematician to see these numbers just don’t add up.
Why is this happening?
The last two decades have seen UK house prices spiral out of control. We’re often told that building more homes will fix the problem, in other words that it’s a simple case of limited supply. But to really understand the stark departure of house prices from wages, we need to take a closer look at what’s fuelling demand. It is the demand-led drivers of the current affordability crisis that no one is talking enough about:
Banks are lending more for mortgages: a preference for bank lending against property – including to people who can only afford loans with the help of government schemes – inflates house prices as there’s more money chasing the existing homes, this creates a self-fulfilling cycle of larger loans relative to income and further price rises. The recent growth in mortgage lending is largely down to a surge in buy-to-let mortgages as first time buyers remain priced out.
Investors bid up prices: mortgage lending is growing because buying up second and third properties is popular with asset-rich baby boomers able to take out mortgages against their homes. They are competing with wealthy investors from the UK and overseas able to buy outright. First time buyers don’t get a look in.
The government is fuelling personal debt: instead of ensuring there is enough genuinely affordable housing with secure, social or private rents to house people, the government is seeking to subsidise homeownership against all odds – with loans to get loans for people priced out. But it’s not working – these schemes are only accessible to a few, and are pushing prices up more.
These are the deep-rooted causes driving our housing affordability crisis – simply building more homes for private sale in this context is not enough – and it isn’t actually feasible. The high level of demand in the housing market has had a huge impact on the price of land. And if land costs a lot, there’s a perverse incentive for big developers to trickle out housing supply slowly to keep local prices up.
Urgent reform of the systems behind the housing market is needed
Mortgage debt cannot outgrow incomes forever, even if it is subsidised by governments. At a certain point, people will begin to cut back as more and more of their wage packets are taken up with mortgage repayments. Rather than waiting for this inevitable crash, is a different path possible?
Our focus needs to be on stabilising house prices and diversifying housing supply – ensuring there is a range of affordable and secure housing options.
— source neweconomics.org