Housing – bringing it all together, why prices are high and access to housing is unequal
rpwills
Mar 18, 2024
7 min read
The two previous blogs looked at the two alternative explanations for the rising house values and price of housing in the UK with the problems that has created. To summarise, one approach states that lack of supply is responsible for increasing house prices, the alternative approach suggests that low interest rates following the Great Financial Crisis led to a search for gain with investment in property leading to house prices rising.
A model
Increases in house prices can be largely attributed to their function as assets, where buyers/investors seek returns when interest rates are low and returns elsewhere are limited. Earnings also push up prices as people have more money to spend. Regional variations arise from a combination of factors – people moving to the area with significant resources, competition with second home and holiday lets buyers. Increased competition may also arise if investors buy property in an area under buy to let. At the same time access to resources for housing vary. Changes in housing support levels, tighter controls for first time buyers and a more flexible labour market have all made it difficult for some households to afford rents or buy a property.
Detailed analysis
Analysis of the literature about the second approach also indicated that increasing earnings were another factor pushing up house prices. So can we create a model which explains how the housing market works?
We can make the case that the two main drivers behind increases in house prices are the role of houses as assets and general increases in earnings. But as a Bank Underground paper noted, house prices and changes in house prices vary by area across the UK. Some of this may be attributable to earnings being higher in some areas than others. For example, in London and South East England prices have been above the average for some time while in contrast areas in the north of England are lower.
A recent report identified Burnley, Hyndburn, Pendle and Blackpool all in Lancashire as having the lowest house prices while the highest were London boroughs – Kensington and Chelsea, City of Westminster, City of London, Camden and Hammersmith and Fulham. [Bratley, M., Jan 7, 2024, What is the cheapest area to buy a house?, IFA magazine. https://ifamagazine.com/what-is-the-cheapest-area-to-buy-a-house/]
Why the variations in house prices?
The most obvious factor is earnings levels which vary by local authority. However, house prices in an area are not solely attributable to the earnings of residents in that area. They also reflect the earnings levels of people who move to the area or who purchase properties in the area. In these situations particularly the latter the earnings and also funds available will be higher than in the local area. People who move from a more expensive area will gain additional capital when they sell and move to an area with lower house prices.
So a household moving from London or the South-East of England will have more funds available to spend in a region like Cornwall – able to outbid local residents. It is also possible that some of these households will have built up additional capital due to their high earnings in the past, again this will give them additional resources with which to buy property.
Remortgaging is one way those with assets can finance the purchase of additional properties to use as second homes, holiday lets or buy to let.
“A number of businesses exist which give advice on how to remortgage “An interest only buy-to-let mortgage is a standard way to start a property portfolio, a holiday let mortgage will enable you to buy a property with a plan for short-term lettings, and if you want to move to a new property but keep your original home and rent it out, the let to buy system enables you to alter your mortgage terms appropriately.All of these three types of letting processes can be financed through a remortgage deal, either a full remortgage or a second charge on your primary property.”
There is also the international market to consider, especially prevalent in London, where international investors buy up property – either to use as an alternative home or to turn into holiday lets. As these investors usually have considerable funds available the impact is further pressure on properties available to residents and prices.
Supply
Generally in most areas supply is such as to provide sufficient numbers of dwellings for people to be able to rent or buy. But supply can be a misleading concept. Supply is usually understood to mean simply the number of new dwellings that are constructed and therefore available. Yet not all new dwellings (or existing ones) are necessarily available - they may be bought specifically for second home or holiday let use, they may be aimed at the luxury non-local market. Additional supply is not additional supply if taken out of the residential use sector.
In Cornwall, there are at least 23,100 second homes and holiday lets. There are also 5,600 properties of unknown status and and 6,300 empty properties. Using figures from the 2021 census and the Valuation Office Agency (VOA), gives a total of 60,000 rented properties in Cornwall. But of those, 18% or about 11,000 are rented out as holiday lets. Obviously this reduces the number of properties available for renting and possibly increases rent levels. Those seeking to rent are effectively in competition with the holiday lets market.
Access to resources
Households have different levels of access to financial resources which impact on whether they can rent or buy and the type and quality of housing. Reference has been made to the fact that affluent households have extra power when it comes to the housing market enabling them to buy additional property. Those on low incomes and younger people have also seen their financial position eroded.
Home ownership levels have fallen since the Great Financial Crisis with younger first time buyers (FTBs) bearing the brunt of this change. Mulheirn has identified the main reason for this. “The dominant cause of the collapse was the abrupt slowdown in mortgage lending to FTBs, which almost halved between 2007 and 2008, and did not recover until around 2014. This was reflected in a sudden drop in the median LTV for new FTB loans, from 90% in 2007 to 75% in 2009. Had new FTB mortgage issuance persisted at its pre-crisis rate, home ownership would not have fallen in the subsequent years.”
[Ian Mulheirn, August 2019.’Tackling the UK housing crisis: is supply the answer?’, UK Collaborative Centre for Housing Evidence.]
The problems of FTBs are commented upon in other reports. “With higher rental fees, less lenient lenders and larger deposits required to secure a mortgage, it could take a lot longer for those currently aged between 25 and 34 to get onto the property ladder.”
Those renting have also faced difficulties as a Resolution Foundation report shows. “In 2018, we estimate that SRs were 2.5 times as likely to work in a minimum wage job (defined here as one paying at or below the wage floor-plus 5p), compared to non-SRs.19 Why might this be the case, ….. the Clarion residents survey also indicates that significant numbers of SRs with high poverty risk are in casual, zero-hours contract or part-time work, all types of jobs which we know go hand-in-hand with a pay penalty.”
Judge,L., & Slaughter,H., February 2020, Working hard(ship) - An exploration of poverty, work and tenure, Resolution Foundation.
They go on to say “If benefits were as adequate today as they were in 2010, a single parent with two children would need to work 16 hours per week on the National Living Wage (NLW) to exit poverty; with current levels of in-work support, the hours requirement rises to 23. Likewise, a second earner in a couple (with the first earner working full-time on the NLW) would have to work 19 hours today in a NLW job in order to no longer be living in poverty, compared to the 9 hours they would need to have worked in the absence of benefit cuts.”
[Judge,L., & Slaughter,H., February 2020, Working hard(ship) - An exploration of poverty, work and tenure, Resolution Foundation.]
Mulheirn includes benefit cuts in his analysis of why those renting have faced affordability issues. “Growing housing affordability problems in the rented sector appears to be due to a combination of slow wage growth for young people, erosion of the social housing stock, and housing benefit cuts. Tackling these problems directly would be a far more potent (and less economically costly) way to improve affordability than boosting market supply.”
[Ian Mulheirn, August 2019.’Tackling the UK housing crisis: is supply the answer?’, UK Collaborative Centre for Housing Evidence.]
Conclusion
Increases in house prices can be largely attributed to their function as assets, where buyers/investors seek returns when interest rates are low and returns elsewhere are limited. Earnings also push up prices as people have more money to spend. There are then regional variations to consider, these arise from a combination of factors – people moving to an area with significantly greater resources than existing residents; competition with second home and holiday lets buyers. Increased competition may also arise if investors buy property in an area under buy to let, seeking to gain from the private rented market. At the same time access to resources for housing vary. Earnings levels vary considerably resulting in many households unable to ‘compete’ in the housing market. Changes in housing support levels, tighter controls for first time buyers and a more flexible labour market have all made it difficult for some households to afford rents or buy a property.
Summary Private pension wealth is related to an individuals earnings and capacity to save money for a pension. Higher earners put more into their pension pots than lower earners. Higher earners also
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