Continued house price rise may result in social problems

The rise in house prices that has gone on for so long may actually result in increased economic and social problems within a few years. A thinktank report suggests that the housing boom has made a lot of housing unaffordable for many people, especially the young and single parent families, and key workers such as teachers, nurses, police, fire fighters.

The National Housing and Planning Advice Unit says that strong demand for housing and a shortage of supply will mean that the problem will be exacerbated over the next twenty years or so.

The report claims that by 2026 even the cheapest quartile of houses will cost ten times as much as the average earnings of the poorest quarter of the population. The situation is not new, but is a worsening trend. Ten years ago houses cost only four times as much as earnings, and currently they are seven times.

Although the planning unit add a note of caution to their report by saying that the forecasts are uncertain, there can be no denying the trend and the market will almost certainly rise in the next twenty years, even though the most recent house price figures, for May, do show a slowing of the upward trend. House prices in May went up by an average £500 or 0.3%

There is fundamental long-term imbalance between housing supply and demand. Even if there is a house price crash in the near future, or maybe even more than once in the next twenty years, such a temporary set back would be a blip in the general trend upwards.

Over the next few months a rise of base interest rates to 6% would give the housing market a challenging time, but is not likely to lead to a crash. That sort of thing would be headed by worse economic circumstances than we have now, such as large job losses.

Interest rates have been put up four times since August 2006, by a quarter percent on each occasion. The forecast is for interest rates to reach 6% before the end of the year. If that does come about, it will be their highest level since January 2001.

The National Housing and Planning Advice Unit was set up following a recommendation by a Bank of England Monetary Policy Committee member, Kate Barker, who reported on the UK housing market two years ago. The purpose of the unit is to help regional assemblies and councils with analysis of where building new homes would have the most positive effect on affordability.

A model developed at Reading University to understand relationships between housing supply, people’s incomes, the job market and demographic trends is used by the Planning Unit.

In the south east of England and London, the bottom end of the market has seen its affordability stretched to over eight times income. In the north it is currently five times.

Most homeowners take comfort in the rising value of their house and have seen the value of their homes go up dramatically in recent years. But for those not yet on the housing ladder the rise spells frustration as the possibility of buying a home gets further and further out of reach.

This has increased the trend for private rentals, which has in turn pushed up rents. Some people have been driven into the hard-pressed social renting sector. Deprived areas will only see the situation get worse and thus deprivation will get worse. As people lose the ability to move, the labour market will suffer and then the economy will suffer. Additionally more government money will be needed to deal with subsequent social problems. That is taxpayers’ money.

The government has projected that the number of households will expand by 223,000 per year over the next 23 years. Housing supply can’t keep up: in 2006-7 168,000 dwellings were built. A change to the planning system was recommended by Kate Barker’s report in order that housbuilding could be speeded up.

The housing and planning minister Yvette Cooper said the analysis was powerful and demonstrated how vital it is to build more homes. She said that implementation of the plan was urgent to support those areas needing more housing. She said that some are opposed to the building of more houses, but they should recognise the deeply unfair consequences that might result from failure to build.

It is interesting to note that 2006 saw the first drop in home ownership for over 50 years. Also, the number of first-time buyers last year was at its lowest for 30 years. House prices went up last year, and demand continued to rise, yet the 168,000 new homes built in 2006 was under half the peak since the War of 350,000 which were built in 1968. And the last housing boom of the late 1980s saw many more houses being built each year.