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The UK housing market has stalled. The latest estimate for prices from the Nationwide Building Society is that they have climbed by 1 per cent over the past year; adjusting for general inflation, that’s a fall of some 2.5 per cent in real terms. That is good news for home-buyers: since average earnings are 4.5 per cent higher than a year ago, they are 3.5 per cent more affordable.
But what will happen next? Buying a home is such a huge financial decision that anyone doing so needs to have some feeling for what might happen in the medium and long term. If they do continue to become more affordable, that would be great for anyone buying, of course, but it would mean that, as an investment, they will be less of a winner for current owners.
At worst, what is happening in London at the moment, where nearly 15 per cent of homes are sold at a loss, might become a more general and prolonged experience.
No one can make more than a best guess at what will happen, but my judgement is that the house price boom is over for a generation.
In cash terms, the general trend will continue to be upwards because inflation is not going to go away in the foreseeable future. Indeed, there may well be another surge in price increases similar to the one we have just experienced. There will be short-term swings as the economic and interest rate cycles work their way through. There will be regional shifts, with some parts of the country outpacing others.
But in real terms, it seems likely that prices will remain stable or will fall slightly for the next two decades. If that turns out to be right, we should welcome that.
The best way to look at long-term trends in house prices is to see them in relation to income – to compare the average price of a home in any particular year with the average earnings of that time. We know a lot about this, for we have data on the ratio between prices and earnings going back to the 1840s. The most recent numbers for England from the Office for National Statistics show the median house cost is 7.7 times that of median earnings. That is down from a peak of 9.1 times in 2021, and by my quick tally, will have fallen to around 7.1 times now.
But on a very long historical view, that is still quite high. Back in the 1840s, house prices were more than 12 times higher than earnings, but they fell steadily through the rest of the 19th century and the Edwardian era, so that by the First World War, they were down to little more than twice as high as earnings.
Then they recovered and from the 1920s right through to 1999 they ranged between four and six times as high as earnings. There were peaks and troughs. Some people may remember the surge in the early 1970s under the Edward Heath government, and the slump that followed. There was a similar boom around 1990, with a decline afterwards.
For people who bought at the top, these were tough times, and the expression “negative equity” was coined to describe the situation where, as a result of falling prices, the value of the home was less than the size of the mortgage on it. But overall, for 80 years, prices were reasonably stable.
Then in the early 90s they exploded, rising to a peak of more than eight times earnings by the time of the financial crisis of 2008, the highest they had been since the early 1900s. They then fell back after the crisis as banks and other lenders cut back on mortgages, only to recover again from around 2012 onwards to reach that peak in 2021.
We are not yet back to that established range of four to six times earnings, but we are on the way. We experienced something in the first two decades of this century that had not happened in the previous 175 years.
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Economists still disagree about the exact reasons for the surge in house prices from 2000 to 2020. But it is pretty clear that it was associated with overly lax provision of credit by the banking system and, more recently, by overly lax monetary policy by the Bank of England – all that quantitative easing and so on. Lessons have been learnt and it is hard to see the financial authorities making the same mistakes again.
If that is right, we will get back to more normal times – the sort of times we experienced right through that 80-year period in the last century. There’ll be swings, probably periods when prices head down in money terms as well as real terms. And there will be mini-booms when they shoot ahead. But the overall pattern will be one of prices gradually becoming more affordable.
Homes will still be an important and valuable investment – but they will first and foremost be places in which to live, not a fast-track to a fortune.
Further thoughts
That data about the ratio of house prices to incomes over the past 175 years was picked up by the investment group Schroders a couple of years ago when house prices relative to earnings were at their peak.
There are a lot of other data sets highlighted in the report, including the number of housing completions, which during the latter part of the 19th century fluctuated between 50,000 and 150,000 a year. They slumped during the First World War for obvious reasons, then had an extraordinary boom through the 1930s, reaching a peak of more than 350,000 a year – all those semi-detached homes along the arterial roads in the suburbs of our major cities. The report notes that in the 1930s, “more than 2.7 million homes were built… with more than 2 million being built by the private sector alone”.
Then again, they slumped in the Second World War, and recovered to peak at over 400,000 in the 1960s. Obviously, there had to be a huge rebuilding effort to replace the properties that had been destroyed by bombing, but this was also a period when, under the guise of “slum clearance”, huge numbers of homes were destroyed. It notes: “An average of around 67,000 homes a year were demolished or closed down between 1955 and 1980, peaking at 95,000 in 1971.”
And now? Well, you know of the Government’s commitment to building 1.5 million homes during the life of this parliament. You don’t need to be a mathematical genius to see that this would be 300,000 a year. But the country has not reached that level of building since the 1970s. Completions have been around the 200,000 a year level since then. It is very hard to see anything like that target being achieved.It gets worse. We build homes that are too small. They have been decreasing in size every decade since the 1950s. No wonder family size is shrinking – though, of course, there are many other features driving birth rates down.
I have no easy solution to all this, except to suggest that we should look at other countries, ask why they build larger and nicer new homes, and try to learn from them.
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