The ONS has released the latest House Price index figures which show for the second month in a row, house prices have edged up amid “tentative signs” of recovery for the UK housing market. The price of a home rose by 0.2% month on month in February, following a surprise increase in January. The average house price has risen from £162,254 in January to £162,638. A small rise perhaps, but this will be welcome news for homeowners, but not so much for first time buyers. The Government’s Funding for Lending Scheme – which encourages banks and building societies to maintain or increase lending levels – has successfully increased mortgage availability, which may have helped with the increase, but also the number of houses being built is far below the required level.

Are UK Homes too Expensive?

UK houses still feel expensive, not least by the measure of the house price to earnings ratio. Traditionally mortgage lenders would lend based on three to three and a half times annual salary. Current average house prices are nearly 7 times the average annual salary. Looking at earnings to house price ratio in this sense does simplify the issue. Over the past 30 years there has been an increase in couples where both partners are working. So with two salaries combined the average house price is once again 3.5 times annual salary. Again this does not fully answer the question. Particularly when you introduce the additional cost of childcare that comes with two parents working; along with other factors, such as rising energy and food costs, all eating into families income. If we look at wage rises over the last 20 years, salaries have increased from £5,600 to nearly £24,000 – an increase of over 320%. However when inflation is taken into consideration the rise drops to just over 50%. By 2008 in real terms (after taking into account inflation) house prices had risen by nearly 200%. This couldn’t continue… and it didn’t from the peak house prices have fallen to a more manageable level, but still remain out of reach for the average first time buyer.

Housing Supply

There is currently a shortage of housing in the UK – or at least houses people want to live in and can afford to buy. The Government has promised to build an additional 50,000 homes by the end of 2013,  however to meet demand over 100,000 new homes will be needed each year – with some estimating over 300,000 should be build this year to ease the housing crisis. At the current rate of construction it would take over 200 years to replace the current housing stock. Given that the UK already has some of the oldest housing in Western Europe, and that most new homes are only designed to last 60 years, it is clear far more homes need to be built. This shortage of housing is inevitably going to have an impact on the housing market. In an open market, with high demand and low supply prices will be high. However there is a contradiction – affordability. Houses are only worth what people can afford pay for them. With access to mortgages limited people cannot afford to buy then prices should fall. Rather than allowing house prices to fall to affordable levels – something that would be disastrous for homeowners with little or no equity, the government has introduced schemes to artificially inflate house prices. These include shared ownership schemes, the Funding for Lending scheme, which potentially could allow people to buy homes they can’t really afford (one of the main causes of the credit crunch!)

So What’s the Solution?

Keeping house prices high is good for homeowners and has several benefits for the wider economy. However it is not sustainable. Continuing growth in house prices with wages stagnant or dropping will mean the majority of young people will never be able to buy their own home. Increasing wages would make houses more affordable, but would also increase the cost of everyday goods and services. At a time when companies are struggling to remain competitive within a global market, wage rises are simply not an option. To put it simply, there isn’t one – at least not one that will please everybody. There are few who would argue against an increase in supply. However a side effect of this will be a drop in prices – something that could cause homeowners to fall into negative equity and ultimately result in repossessions and further price drops. Perhaps a move away from home ownership, with an increase in social housing could solve many of the problems. Young people could move into suitable homes, with reasonable rents allowing them to save for a mortgage. With the current focus on austerity it is highly unlikely the Government will invest in Social Housing.