The UK Housing Market Has Changed Forever

It’s hard to believe but there was a time in recent memory, the average worker could buy an average house for four times their salary.Now house prices are out of reach

Who is still buying?

0:00 Intro
1:15 Winners and Losers
3:13 Real House Prices
4:55 Why Can’t We Fix
6:10 Who is still buying
8:51 Why we can’t build
10:30 Weakness Economy

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The postwar period was something of a golden age for home ownership. Home building rates were high and the average worker could buy an average house with a standard mortgage just four times your income. Home ownership rates soared to a peak in 2008 of 72%. It was a great British dream. Own your own property. And those who bought also saw their wealth increase to unprecedented levels. In 1983, average house prices were £27,000. Today, it is £270,000. And if you’ve been lucky enough to buy a council house at a 50% discount, it was more like a 2,000% gain. Even if you took into account inflation and wages, housing seemed a one-way bet. From the mid 1990s to 2008, real house prices doubled. and those whose house was their primary residency, no capital gains tax. Understandably, the soaring prices combined with relatively low interest rates caused a boom in bite to lead. Prices were going up, giggles were good, tax breaks numerous. Buy an old house, install some double blazing, and flip it for a huge profit. And that’s before all the rental income on top. However, this so-called golden era of housing investment had a darker side. It created a system of winners and losers. The surge in house prices faster than inflation and wages meant that many who had benefited from the housing ladder were metaphorically pulling the ladder up with them. For a new generation entering the housing market, buying a house was now more of a nightmare than dream. Nine times your income, more in the south and London where the best jobs were. But 2008 was the first major turning point. House prices crashed for the first time since 1991. A 20% fall punctured the irrational exuberance of investors. A reminder that there is no iron law which says house prices have to keep rising even if you do have historical shortages. But the credit crisis and the subsequent economic stagnation did more to distort the market. We had 13 years of zero interest rates, quantitative easing, and in the aftermath of a housing crisis, it was once again bite-led investors who snapped up houses with cheap mortgages. House price to earning ratios once again rose to record levels. And in an era of stagnant wages, affordability worsened. Home ownership was now linked to parental wealth like never before. Rather than fix housing problems through increasing supply, the government chose mainly easier options, help to buy, given more to borrow, and buy to let investors were also hit with higher stamp duty, high capital gains, and phasing out mortgage interest relief. Since 2016, with more regulation and high tax, the blet mortgage segment has slumped. But it’s not just about higher regulation and high tax. House prices are no longer the one-way bet of previous decades. And this is one of the big changes in the UK housing market. Adjusted for inflation, house prices are still lower than 2007. Whilst the US stock market has given high returns and gold is rising faster than inflation, buying a house is no longer a guarantee of easy gains. Now, whilst there have been no major crash in nominal prices, the problem is that house price affordability is so stretched that there’s little room for any new boom like we saw in the 80s and ’90s. The reality is that despite lower real house prices, we are still paradoxically at very high levels of unaffordability. Prices are still out of reach. A whole generation of households, mostly, though not exclusively young, are trapped by a housing market that is just not working. The bare truth is that without getting help from wealth, it can seem almost impossible to buy unless perhaps you move up north to Scotland or Humbersside or the Northwest. By the way, those areas have seen the biggest price rises in recent years. The egalitarian nature of the old housing market is no more and it’s causing economic and social problems. A prospective buyer currently has to save for nearly 18 years to get a big enough deposit compared to just 3 years in 1986. And for a working age population experiencing stagnant real wages and rising student debt, there seems to be little hope. And the alternative of renting is equally unpalatable. A relative shortage of rental properties compared to the rising population means that rents have also been rising faster than inflation and burden households with record housing costs as a share of income. And of course, it’s hard to save for a housing deposit when so much of your income goes on an expensive rent. Given the continued crisis in housing prices, why is it proved so difficult to do anything about it? And does it mean that that old so-called golden era is now out of reach? Well, the housing market has fundamentally changed. And this is why it’s so difficult to put the genie back into the bottle. Firstly, the postwar period was an era of rising wages. But since 2008, that postwar growth of 2% a year has slowed down to only slightly above zero. This is why falling real house prices have done so little to improve affordability. Secondly, in the 80s and ’90s, there was a widespread financial deregulation which led to a surge in the type and scope of mortgage lending. It led to a big growth in demand which before had been curtailed by strict regulations. In 2005, I bought a house with an interestonly self-certification mortgage just a few years before the big crash. In the late 1960s, household debt as a share of income was under 60%. By 2008, that had nearly tripled to 158%. The rise in wealth was also masked by this rise in household debt. The other good question is that if households have been priced out of the housing market, who is actually buying the houses to keep prices inflated? Well, firstly, inherited wealth is increasingly important. The value of estates is steadily rising, which is hardly surprising. If house prices go up, so will the value of estates. And where does this money end up? Well, it mostly goes back into the housing market. If you’re renting and inherit £100,000, what would you do? Finally, you can buy. But also, parents increasingly want to help their children before they die. Parental gifts to help people buy has more than doubled since 2007. And this is only going to become more dramatic in the coming years. The baby boomer generation will be passing on unprecedented wealth. Where will this wealth end up? Well, you guessed it. A lot of it will end up in the housing market. So the housing market has become a place to recycle its own wealth. Some call it a Ponzi scheme, although a Ponzi scheme isn’t quite the right term. Also, the other factor is that whilst private buy to let investors have been dropping out of the market, we’re seeing a rise in private companies, institutional buyers, the likes of Lloyds, Barclays, US private equity like Black Rockck. They’re all happy to buy up UK property as a long-term investment. buying with cash, they are less worried about quicker wealth gains, but see it as stable returns in the long term. And the sad thing is that as rents keep rising, become pay out more housing benefit. In effect, private equity investors partially subsidized by the government. And if you want to see a graph of how the UK housing market has really changed in the past 40 years, well, we used to spend money building houses. Now we spend money subsidizing private renters. Now, UK home building reached a peak in the early 1970s at over 400,000 a year, and that included significant amounts of social housing. But in 1980, of course, faces started to sell off council houses, but there was no real reinvestment. The social housing stock fell and the private sector building was pretty limited. Compared to European countries, the UK built fewer houses and according to some think tanks, there’s a shortage of over 4 million houses. And on top of a low house building rates, the UK population has also significantly increased, largely driven by very high levels of net migration, reaching a peak of nearly 1 million in 2023. And with house buildings struggling to get above 200,000 a year, let alone anywhere close to the gum’s target of 300,000 plus, the fundamental shortage is there to keep prices and rents elevated. Now, as any commentator will say, we’ll just build more houses. But the problem is it’s actually really expensive to build houses. We use the same laborintensive techniques as back in the 1930s. This is why the cost of constructing houses has increased faster than inflation. In 1960, a typical three bed house may cost around 700 to 1,000 to construct. Today, that’s in the region of 162,000 to 198,000. Even since 2000, construction costs have more than doubled. It’s not just higher labor costs, but more expensive raw materials, more regulations, and more risk from planning obstructions. The other aspect of a housing market is that government policy is always torn in two ways. There is the awareness that housing is too expensive and this holds back the economy. But there are also powerful political pressures fundamentally opposed to change. A recent opinion piece from the times by Matthew S talks about the need to address inequality through big changes in tax structure eg a land tax end to private property relief but of course these would be bitterly contested and the UK currently lacks the boldness to really radically change tax policy. The government have made a big effort or talk a lot about building one and a half million new homes but once in power they realize the enduring political strength of nimism. Take the Lib Dems. They managed to straddle the political tightroppe by having a nominal national target of 380,000 new homes a year, but often win local constituencies by opposing any new building. Now, what about the weakness of the UK economy? Doesn’t this mean that house prices may be vulnerable to fall in the coming years? Certainly, in recent months, the labor market has weakened and the economy has continued its trend rate of very low, if non-existent, economic growth. even as inflation remains above target. But at the same time, if the economy does continue to stagnate, it will likely mean lower interest rates, which of course will only make it relatively more attractive to buy rather than rent. And given the difficulty of building houses once again, mortgage criteria have been weakened, risking a new rise in mortgage lending for firsttime buyers. So, this is how the housing market has changed. It’s become unaffordable and the political solutions are often for some reason unpalatable. We are torn between housing insiders and housing outsiders. But this division of wealth will only be a source of rising tension. And it is worth fixing. And that will require some, you could say sacrifice from those housing insiders, those who’ve owned a house and benefited from it. Well, thanks for watching. Do consider subscribing and check out these other videos on the housing market such as the most recent predictions for house