By Jack Percival
In modern-day Britain, one would be hard-pressed to find a more depressing activity than a long scroll through the To-Buy section of a real estate website. As of 2023, house prices in England were 8.26 times higher than average annual earnings (up from a rate of 3.54 in 1997). A cursory glance at Savills’ properties in Saffron Walden, Essex, crowned as ‘best place to live’ this year by the Sunday Times, reveals modest new builds selling at no lower than half a million pounds. The average house price in the town stands at £607,100. This is a problem that has shown no sign of abating in recent years, despite much lip service from successive governments and a range of economic and infrastructure initiatives.
It comes as little surprise therefore, that home ownership among younger generations has plummeted. Data from the latest census revealed that around 5 million adults still live with their parents. This raises concerns for a whole host of political and social reasons – the lack of affordable housing looks set to chip steadily away at social cohesion in the UK. The issue has the potential to permanently alienate a generation, driving those who lose out in the property market towards populism and weakening faith in the political establishment.
So what has led to this sorry state of affairs? The conventional wisdom has long pointed to a lack of houses in the UK – less supply causes higher demand, and thus successive governments and councils have pledged to turbocharge Britain’s housebuilding. Most recently, the Housing Secretary and the Mayor of London announced last week in October that they would be implementing ‘emergency measures’ to increase the number of homes being built in the capital, including enumerating various powers to the mayor to fast-track builds,cut red tape and reduce development levies. More generally, Labour have committed to building 1.5 million homes by 2028.
However, recent studies suggest the solution is not as simple as flooding Britain with new builds. Firstly, claims that house prices will fall significantly if stock increases seem to have been overblown given the existing economic environment. The wide access to mortgages and low interest rates increase competition for homes regardless of house numbers. In a 2019 paper, analysts from the Bank of England argued that the decline in real risk-free interest rates was the primary cause of the sky-high prices we see today. Indeed, more recent developments have proved that these prices are extremely sensitive to the availability of cheap credit – when interest rates soared after the September 2022 mini-budget, house prices fell by 5%.
There may also be an issue with ‘price stubbornness’ amongst owners and developers in the UK, after decades of high asking prices, many sellers are reluctant to accept lower offers, even if no buyer can come up with a more lucrative amount. Instead, a kind of Mexican stand-off ensues in which buyers expect astronomical yet stagnant house prices to fall, and sellers hold out for an outstanding offer. These sorts of cultural blocks are not particularly sensitive to further supply increase, and neither side looks set to holster their weapons any time soon.
Moreover, there is a case to be made that the UK does not actually have a shortage of housing. As of October last year there are around 720,000 empty homes in England alone – 265,000 of which are classed as Long-Term Empty,vacant for over six months. There are three major reasons for these striking figures. The first of which is the difficulty that owners and developers face in restoring derelict properties – financial incentives to fix up empty homes vary by region and are often insufficient. The successful Empty Homes Programme, established by the Cameron government to give grants to homeowners renovating empty properties, ended in 2016 due to budgetary constraints. Furthermore, the premium council tax rates that local governments impose on vacant homes could potentially be disincentivising councils to fill these residences.
There is also the issue of the probate system. Wills must be checked by HM Courts and Tribunals Service and any inheritance tax paid by the recipient before property can be distributed. This process can take months to complete, potentially years if there is uncertainty or litigation. However, a recent government memo claims that after a period of ineffectiveness, investment and recruitment efforts have reduced wait times to a month.
Lastly, we can look at the empty homes that are bought as a reliable investment or wealth store by landlords and overseas investors. This issue is particularly pronounced in London, where in 2023, 20% of new homes in the capital were sold to foreign owners, but UK-based second-home owners have also caused major issues for communities within popular holiday destinations, such as Devon and Cornwall. Ultimately, this particular contributor to the housing crisis is for now largely restricted to these two types of locations and occurs on a relatively small scale. However, a trend across the pond of Wall Street-backed investors buying up large swathes of real estate is concerning US politicians, and may cause policy makers in the UK to conclude that stronger preventative legislation is needed to protect buyers.
There seems to be ample opportunity for the Labour government, in addition to its ambitious building plans, to pivot towards harnessing the wealth of existing dwellings. In an environment where councils are given both the latitude to repossess vacant properties and the funding to offer generous grants for their renovation, there is no reason why viable houses cannot bolster Britain’s home-owning ambitions in a meaningful way. In the war on unaffordable housing, the government would do well to harness the 1940s spirit of ‘Make Do and Mend.’
The views expressed in this article are the author’s own and may not reflect the opinions of The St Andrews Economist.
Image Source: The Graphene Solution