We face multiple Housing crises all at the same time. Mortgage rates are soaring, yet renters face a broken market for years with rising rents and a shortage of properties.

Buying is out of reach for many, but renting is just as bad. There is a growing division between an elder generation who have paid off their mortgage and the younger generation who face high living costs. How did we get into this mess and more importantly is it possible to fix such a crisis? And is a house price crash, just what we need to reset the market and make it fairer for all?

Unaffordable rents

A lot of renters are paying over 30% of their income in renting, which is considered to be the definition of unaffordable.

The UK is one of least affordable in the world. And it is even worse for those in London or on low income.

The first problem with the UK Housing Market is the sharp decline in social housing in recent decades.

Since 1980, despite a rising population, the UK has seen a net loss of 1.4 million social homes – sold under the right to buy, but not replaced. In 1980 31% (5.4m) of homes were in the social sector, by 2022, this fell to 17% or (4m) The consequence is low-income households have been forced into a bloated private rented sector, ill-equipped to deal with the rise in demand.

Since 1988, the number of households in the private rented sector has soared by 2.5 million. Yet, the supply of rented accommodation has not kept up and this is a key factor behind soaring rents. Given the cost of renting, it is understandable that generation rent would love to be able to buy their own house and escape. But, this brings us to the other housing crisis, house prices becoming detached from incomes. In 2022, the ratio reached nine times income, a complete contrast to the post-war period with income multiples of around 4.

2022 HPE = 9.0 (ONS measure)

The Great Divide in UK housing

Renters face a real challenge to save a sufficient deposit. With average deposits rising to £62,000, it can take on average 10 years to save for a deposit compared to 6 years in 2012. Of course, not helped by high rents, student loan repayments, falling real wages and high inflation. This has led to another divide – between those who can tap parental help and those who can’t. Gifts and lending from parents have been a key factor in enabling some to get on an overvalued property ladder – further inflating prices and leaving a generation who can’t borrow from parents in despair at the unfairness of the housing market. And this is a real problem the housing market is creating a powerful divide of wealth and living standards.

Increase in young people living with parents to save costs.

Given the unaffordability of housing, government policies have often focused on the demand side. The Right to Buy is a government subsidy which enabled first time buyers to get a bigger mortgage. But rather than putting out the fire, it is like putting more fuel on. It is a reflection of the short-term political fixes that have dominated the market. According to report by New Economic Foundation, the government has spent more on help to buy than home capital grants.

Even for those who were able to buy a house recently, the great British dream of home-ownership seems to be turning into a nightmare with mortgage rates soaring in response to high inflation.

The Financial Conduct Authority has warned that 750,000 UK households are currently at risk of defaulting on their mortgage, and that was before the recent rate rises. For 13 years, buying a house has been very cheap because of ultra-low interest rates. It was these cheap borrowing costs that have supercharged the housing market, causing prices to soar. But, now the period of low-interests is over, and mortgage calculations have been thrown into disarray. The percentage of income spent on mortgages is soaring back to levels seen in the 1990s and 2009 crash. Not only that but with prices falling, recent buyers face the risk of negative equity.

In the past two years, inflation has soared way beyond the government’s target. Belatedly, the Bank of England have increased interest rates to reduce demand and reduce inflation. The problem is that higher interest rates do not affect people equally. Those who are debt free with savings, will actually see an increase in income from rate rises. Interest rates are less effective in reducing inflation than in the past because there has been a decline in home-ownership rates and a rise in equity in houses. The effect is that some homeowners, especially recent buyers will face great financial hardship as we try to reduce inflation through higher rates. This is the problem, to get inflation back to target may require punishingly high interest rates.

Mortgage bailouts?

At this point, there have been calls to bail out mortgage holders. However, there are a number of problems with this. Mortgage holders are more likely to be better off so would it be unfair to bail out those who have benefitted from cheap interest rates and capital gains. Also, if we bail out mortgage holders, it will reduce the effectiveness of interest rates in lowering inflation. Ironically, the best way the government could help is to use fiscal policy (e.g. higher taxes on the wealthy) to help reduce inflation and not just rely on interest rates.

However, the rise in interest rates means house prices are likely to fall substantially over the coming two years.

Some predict falls of 20-30%. If we see a crash of 20% we could see a considerable improvement in affordability. If prices do fall substantially, it gives a chance for renters to be able to buy. But it will be a painful readjustment for many. Falling house prices will contribute to recessionary pressures and the mortgage crisis is going to hurt not just recent homeowners, but probably renters too. With mortgage costs rising, new expensive legislation and the prospect of house price falls, many buy-to-let landlords are looking to sell.

The BBC highlights a London landlord who claims recent interest rate rises mean it is now unprofitable to let. Any buy to let landlords with only 75% loan to value will be nervously looking at the prospect of house price falls. Even limited selling by Landlords will only reduce the supply further at a time when renters are seeing available lets being snapped up.

Rent Controls?

One solution to high rents is the prospect of rent controls. The London Mayor Sadiq Khan wants to see rent controls. However, if you introduce rent controls it will be of benefit to some tenants, but also raises the risk of a further decline in supply as landlords are less attracted to the private rented sector.

Rent control without increasing supply of rented accommodation would do as much harm as good. This is a simple supply and demand diagram, highlighting how a maximum rent would reduce supply, and in theory, cause homelessness of Q3-Q1.

Cash Buyers and foreign investors

Rising interest rates also raises the power of cash buyers. The recent depreciation of the pound has increased the buying power of overseas buyers. In 2022, 12% of homes were bought by investors, and this is set to rise in 2023 with big corporate investors best placed to buy as prices fall. Between 2010 and 2022 foreign ownership of UK housing rose from 88,000 to 250,000 (Property Industry Eye). This amounts to £90.bn of property, of which £45bn is in London. It is roughly around 1% of the UK housing stock. Recently Canada placed restrictions on foreign buyers in a bid to make home ownership more affordable for Canadian citizens. House prices have fallen in Canada, but outside the capital, restrictions on foreign ownership has a relatively marginal impact on the housing market.

Would increasing the supply of housing solve the crisis?

Would increasing the building of houses solve the housing crisis? In some parts of the country, there is a shortage of housing, and in particular, the shortage is felt in the renting sector and social renting sector. But, the supply of housing affects prices less than we might imagine. If the government had build 300,000 houses a year since 1996 (which is 4.8 million), prices would only be 7% cheaper than currently. (Positive Money). If we built 300,000 homes a year for 20 years (which I doubt any government would do because of NIMBY pressures) it is estimated prices would only fall 10% due to supply factors (Tackling supply of housing in UK) The point is the housing crisis is much more complex than a shortage of supply. The past surge in prices is more to interest rates than supply shortages. (BTW: Not good news for house prices.)

Housing Benefit

(Source: New Statesman)

Another crazy aspect of the UK housing market is the spending on housing benefits. Because we don’t have affordable social housing, in 2022/23 the UK spent £23 billion a year on housing benefit so low-income groups can afford private renting. A House of Lords committee found that tenants who previously would have been living in social housing – now live in expensive private rented accommodation and subsidised by government benefits.

In effect rather than invest in social housing, government spending is subsidising private landlords. In the past 10 years, the government has spent over £150bn on housing benefits, but this is not an investment only a transfer to the private sector. In a bid to bring down the costs, housing benefits have been frozen. But, whilst benefits are frozen, and rents rise, this is causing more hardship. The IFS report only 5% of rents on Zoopla can be met by housing benefits.

At the same time stamp duty rates and thresholds have been cut, costing taxpayers £8bn. Rising energy prices have thrown in sharp relief the need to improve the quality of housing e.g. better insulation. The government has recently required landlords to make properties meet energy regulations. It is a good intention, but unfortunately, the sudden jump in costs for landlords is encouraging some to sell, worsening the shortage. If ever there was a good use of government borrowing, it would be to fund investment in insulating homes directly.

Buying Houses for Social Sector

Another opportunity from a house price crash would be to try and rebuild the social housing sector, perhaps buying from landlords as well as building social builds, and also extending the build-to-rent scheme. A slow and steady house price decline would take pressure off the unaffordability of housing, it would help more get out of the rented accommodation and ease demand. Housing supply needs to increase, but it needs to be better focused to the needs of increasing supply in the rented market.

Related

• Bad News for UK Housing Market
• Is there really a Housing Shortage in the UK?
• Will the Housing Market become less overvalued?