The lack of food and adequate shelter are serious needs facing human beings around the world. Hence, the housing market and affordable accommodation are on the top of the Government’s agenda. The 2015 Government set out an ambition to deliver 1 million net additions to the housing stock by the end of the Parliament, which was expected to be in 2020. As a consequence of a substantial influx of migrants over the years, the UK housing supply of residential properties needs great improvements. Estimates have put the number of new homes needed in England at up to 345,000 per year, accounting for new household formation and a backlog of the current need for suitable housing. In 2019/20, the total housing stock in England increased by around 244,000 homes. This around 1% higher than the year before – and the number of new homes supplied annually has been growing for several years – but is still lower than the estimated need (UK Parliament, 2021).
Besides, the trends in movement from rural to urban areas further increased the need for developing a sustainable housing market in the UK. According to the Scottish Government, some of the nation’s communities are facing significant population growth while many others, notably the west coast authorities and those in rural areas, are facing depopulation as people move to larger cities for employment and education opportunities. A lot of this increase is concentrated in those authorities within commuting distance of Edinburgh, while local authorities in the west, such as Argyll and Bute, East Ayrshire, North Ayrshire, are at the other end of the spectrum. For those areas dealing with an increase in the population, this brings its own significant challenges in providing the infrastructure and services – housing, education, transport, and health.
UK Housing Market
A monthly published UK House Price Index (UK HPI) uses house sales data from HM Land Registry, Registers of Scotland, Land and Property Services Northern Ireland and is calculated by the Office for National Statistics. UK HPI captures changes in residential properties' value using sales data collected on residential housing transactions, whether for cash or with a mortgage. As of January 2021, the UK's average house price is £249,309, and the index stands at 130.76. Property prices have fallen by 0.4% compared to the previous month and risen by 7.5% compared to the previous year (source: Land Registry).
Figure 1. UK HPI: Jan 1990 – Jan 2020. Source: UK Land Registry
During the 1990s and early 2000s, the United Kingdom's rented sector experienced the rise of buy-to-let (BTL) ownership by many new private landlords (The Chartered Institute for Securities & Investment, 2020). The British Government promoted home ownership by introducing tax incentives, including exemption from the capital gain tax for the taxpayer's own principal private residence. In April 1990, the average house price was £57,726, while in January 2021, it was £249,309- an increase of £191,583. According to the Bank of England, the average inflation rate of 2.9% a year between 1990-2020 caused the rise of prices for goods and services worth £57,726 in 1990 to £134,179.59 in 2020. To summarise, the average price of goods and services rose by 132% from 1990 to 2020 due to inflation, while the average house price in January 2021 was 332% (not adjusted for inflation) greater than in April 1990.
Savills, the real estate company, suggests that growing population and affluence, and limited land or housing supply are the main factors for house prices to grow more than general inflation. The British population had grown by 19.3%, from 57,134 in 1990 to 68,207 in 2020. This is the most significant increase in population compared with other major European countries whose size of the total population is nearest to the United Kingdom in 2021 (see figure 2).
Figure 2. Change in population in five European countries: the UK, Spain, France, Germany, Italy (source: Macrotrends. Available at https://www.macrotrends.net)
The UK's overall level of house building has declined since 1980, with 140,880 houses built in the financial year 2013/14 – a fall of more than 44% from the 251,820 built in 1979/80. In the 2015 publication, the Office for National Statistics briefly described the effect of increasing demand and limited housing supply with the following passage:
‘‘Since 1980, there has been considerable fluctuation in the UK housing market. Overall, there has been growing demand and relatively limited supply growth. House prices have been increasing, and first time buyers are finding it more difficult to get on the property ladder - while home ownership among younger age groups generally has declined.
If the number of households in England grows to 24.3 million in 2021 as projected, this would be equivalent to an additional 221,000 households per year. Housing is therefore likely to remain an important topic in the future’’.
With $97,452 of median wealth per adult, the UK is placed in 12th position globally in terms of countries with the wealthiest people (source: lovemoney.com). This puts the UK before economic powerhouses of the United States, Qatar, Norway, Italy, Austria, Spain, or Singapore, with London being the 5th richest city in the world (source: CNBC).
Government Housing Policy
The consultation paper published in August 2020 concerning the new planning system for the housing market in England has been called by its Government as the radical reform that no one has seen since the Second World War. The Government led by the Conservative Party believes that the long-term failure of successive Governments to build enough housing to meet the growing need is widely accepted. The 2015 Government’s Housing White Paper, Fixing our Broken Housing Market (February 2017), opened with the following statement:
‘‘Since the 1970s, there have been on average 160,000 new homes each year in England. The consensus is that we need from 225,000 to 275,000 or more homes per year to keep up with population growth and start to tackle years of under-supply. This isn’t because there’s no space, or because the country is ‘full’. Only around 11 per cent of land in England has been built on. The problem is threefold: not enough local authorities planning for the homes they need; house building that is simply too slow; and a construction industry that is too reliant on a small number of big players’’.
The current planning system is too complex and traces back to the end of WWII when the Town and County Planning Act 1947 was established. The planning system in the UK can be described as discretionary rather than rules-based. It means that nearly all decisions to grant consent are undertaken on a case-by-case basis, rather than determined by clear rules for what can and cannot be done. As a result, it affects innovation, increases planning risks, and pushes up capital costs. The planning consultation paper suggests that there is not enough focus on design and little incentive for construction companies and developers to build high-quality new homes and places. The Government published the consultation paper: ‘‘Planning for the future’’ to undertake fundamental reform of the planning system to address its underlying weaknesses and create a system fit for the 21st century.
The Government aims to increase the housing supply-side by controlling net additions to the housing stock. Net additions are a sum of newly-built homes, converted homes through the change of use minus demolished residential buildings, for example, due to the urban regeneration. In 2019/20, the total housing stock in England increased by around 244,000 homes. This is around 1% higher than the year before - the amount of new homes supplied annually has been growing for several years – but is still lower than the new target of 300,000 homes.
Since 2015, the UK Government has introduced various schemes to encourage home ownership, including Lifetime ISAs, Equity Loan, Right to Share Ownership, or New First Homes. Lifetime ISA, Individual Savings Account, allows people to put in up to £4,000 each year until the age of 50. The Government will add a 25% bonus to savings, up to a maximum of £1,000 per year. It is possible to hold cash and shares in Lifetime ISA or have a combination of both. To learn more about each scheme, click on the link below:
Any thoughts?
As a result of affordability constraints in the sales market, the private rented sector doubled between 2002 and 2018, accounting for 4.5 million households. This trend was mainly seen in the London market, where private renters accounted for 29% of all tenure types, compared with 19% nationwide (Knight Frank, 2020). This trend, along with high house prices and the undersupply of housing stock, calls for more comprehensive national reform in the housing market. Although the Conservative party has now pledged for many years that such reform will occur, we are still to see the tangibles of the promise.
Sloman & Garratt (2016) say that housing is one of the most critical markets in many economies. It is a significant component of the household sector’s wealth, calculated as the sum of the household’s financial and non-financial wealth less their financial liabilities. Between January 2018 and March 2020, private consumption accounted for approximately 65% of the UK GDP. Therefore, if the average household wealth, also known as ‘net worth,’ is high, then the economy will prosper. For this, we need a strong housing market supplied with a sufficient number of affordable houses available to meet the demand of the rising population, further enhanced by appropriate design to meet the challenges of the 21st century. Other factors such as availability and the cost of mortgages play a vital role in the housing sector. Therefore, there is no doubt why the residential property market will always be of interest to macroeconomists.
Bibliography
House of Commons Library (2020). Stimulating Housing Supply - Government Initiatives (England) [online]. Available at https://commonslibrary.parliament.uk/research-briefings/sn06416/
Office for National Statistics (2015). Housing and Home Ownership in the UK [online]. https://www.ons.gov.uk/peoplepopulationandcommunity/populationandmigration/internationalmigration/articles/housingandhomeownershipintheuk/2015-01-22
Scottish Government (2021). Cabinet Secretary for Economy, Fair Work and Culture.A Scotland for the future: opportunities and challenges of Scotland's changing population [online]. Available at https://www.gov.scot/publications/scotland-future-opportunities-challenges-scotlands-changing-population/pages/8/
Sloman, J., Garratt, D. (2016). Essentials of Economics. 7th edition. Pearson: Harlow
UK Government (n.d.). HM Land Registry. UK House Price Index [online]. Available at https://landregistry.data.gov.uk/app/ukhpi