Peter Saunders is professorial research fellow at Civitas. He is the author of Restoring a Nation of Home Owners, published this week by Civitas.
In the last century, home ownership in Britain rose from around 20 per cent to 70 per cent of households. But since 2000, this has gone into reverse. Home ownership is now down to 65 per cent, and among the under-35s, it has dropped from 60 to 40 per cent in just fifteen years.
Surveys show the great majority of people still want to own their homes. The problem is that home ownership has become increasingly unaffordable.
For most of the post-war years, average house prices were roughly three or four times average earnings. This kept housing affordable. There were dramatic house price surges in the early seventies, late seventies and late eighties, but on each occasion, prices came back into line with earnings a few years later.
The house price bubble since 2000 has been different. Average earnings have risen 51 per cent, but average house prices have spiralled by 132 per cent, and there is no sign of them coming back into alignment. The ratio of average house prices to average earnings is now five to one, and in London it is nearly nine to one. This has driven home ownership beyond the reach of many younger people.
Many analysts say the cause of the problem is that we’ve not been building enough houses to keep up with demand. But the evidence does not support this.
In the last forty years, Britain’s population increased by 13 per cent but the total housing stock went up by 43 per cent. True, the number of households expanded has faster than population size (more people live alone, for example), but even allowing for that, we still have as many dwellings per household as in 1971.
Of course, we need to keep building – especially around London where the pressures are greatest. But research commissioned by the Government shows that even if we increased annual house building by 50 per cent until 2030, the impact on house prices would be tiny.
The reason housing has become so costly has much more to do with demand than supply shifts. Two factors in particular stand out.
One is that, from 2000 to 2008, the government and the Bank of England allowed lending for house purchase to get out of control. They focused on keeping inflation, measured by the Consumer Price Index, at around two per cent, but the CPI does not include the price of housing. As house prices rose, millions of people clamoured to get into the market, the banks made borrowing too easy, and government did nothing.
In 2008, when the global crash came, easy access to credit dried up and house prices fell – but only by 15 per cent, back to 2005 levels. A much bigger price correction (30 or 40 per cent) was needed to bring prices back into line with earnings, but it never happened.
The reason prices stayed high was that interest rates were cut to record lows. This meant that, provided you could still qualify for a loan, you could now borrow at historically low cost. So ever-bigger sums are still being loaned so people can buy houses which are increasingly over-priced. The bubble never popped.
To make matters worse, two million new landlords have entered the market since 2000, and they have driven prices even higher. Total Buy-to-Let lending is now twenty times higher than it was in 2000, and 80 per cent of all new mortgages last year were taken out by landlords. First-time buyers often can’t compete.
Clearly, for housing to be affordable for more young buyers, prices have to drop. But the government and Bank of England are scared of doing anything that might crash the market. Instead, the government has been pouring fuel on the fire with its Help to Buy scheme. By topping up people’s deposits and guaranteeing their mortgage payments, this has stoked demand and driven prices even higher.
There’s no easy fix, but in my new report I make two key suggestions.
First, extend the Right to Buy to private sector tenants. Like tenants in the social rented sector, allow private tenants of three years’ standing to buy their homes at a discount from their landlord (but exempt recently-built homes from the scheme). Discounts should never make sale prices lower than what the landlord originally paid for the house, and landlords should be partially compensated by generous Capital Gains Tax offsets. Those obliged to sell to sitting tenants would then still make a good return on their investment.
Secondly, require the Bank of England to target the house price: earnings ratio in addition to CPI. Control over lending should be used as a matter of course to ensure house prices never again escalate out of reach of the next generation of buyers.
A gross generational unfairness has arisen in the opportunity to buy a home. We need to rectify it before Generation Rent gets shut out of home ownership for ever.