Some data on the UK housing problem.

We hear a lot about the housing crisis and following on from a discussion on Richard Murphy’s blog I thought I would have a look at the data. Ideally all discussion should begin with data—in data there is truth—but we should remember that data-ists have enormous freedom as to what data to choose and how to present it.

House affordability is given by the ratio of house price to income, so below I plot average house prices (data from Nationwide), average* weekly incomes (data from ONS) and the ratio of house price to annual income between 1960 and 2015.

This post shows the ratio going back to 1945 which a significant post-war peak in 1948. There is a theory arising in the US market in the nineteenth century that property follows an 18-year cycle (the time to grow-up and leave home) which roughly works until 2008 when the affordability ratio failed to revert to the long term average. Looking at the data, I was surprised that the affordability ratio was the same in 2000 as in 1960, and that the great divergence all happened between 2000 and 2007.

Now, houses are unlike any other commodity for many reasons. In particular, most people buy houses on credit so the effective cost of credit or real interest rates matters in addition to income, supply and demand. When credit is too cheap – like in the Barber boom in 1972-74 and the Lawson boom of the late 80s, house prices increase faster than income. Boom is followed by bust because the real economy need time to catch up with the credit overgrowth. In 1997, New Labour made the Bank of England independent to prevent a repeat of the politically influenced booms of Barber and Lawson. Unfortunately, what happened next—let’s call it the Brown/King boom—was an even larger boom. We could and should ask what was the Governor of the Bank of England thinking between 2001 and 2004 when rates were being lowered from 6% to 3.5% even though house prices where rising rapidly above their long term average. Why was he not reading this years Sveriges Riksbank (aka `Nobel’) prize winner – Richard Thaler? In 2003, Thaler wrote that:

buyers in most of these markets perceive little risk in their housing investment, have unrealistic expectations about future price increases, and hold economically implausible beliefs about home price behavior—findings consistent with a bubble.

He was talking about the US, but the same signs were there in the UK market too. By 2008 it became clear that the technocrats had made a far bigger mess of monetary policy than all the politicians before them. Even worse they were not democratically accountable (a point discussed by Bill Mitchell here). Later, it was Gordon Brown and New Labour that took the hit rather than the monetary policy committee. The Brown/King boom was also different in that afterwards house prices did not return to their long-term affordability ratio. This was also the fault of the technocrats with the support of the next generation of politicians. Quantitative easing injected new money in search of a home, and the price of homes did not fall.

The trouble with rising high house prices is that it drives a further wedge between the haves and the have-nots. A better strategy for life becomes to marry into inherited wealth rather than work hard—something to ponder as we look at the new ten pound note. The solution is obvious of course – we the collective—the state—should build more homes and share the wealth.

*Averages are not a good representation of a skewed distribution like income – the average may rise even though median income (what the average person is experiencing) is falling.



  1. Sean Danaher -

    Interesting. Another factor I think must be interest rates which were much higher before the GFC. Indeed when I bought my current house in 2000 we looked at a worst case scenario of a 15% interest rate. Fortunately it was not to be and the highest interest rate since 2000 was around 6%. Lower interest rates should drive the house price higher

    There is also a supply problem with the estimated 300,000 homes per year target since the Brown years being constantly not met. Indeed I think the UK has a shortage of about 1,000,000 homes, but I suspect post Brexit the population growth will slow.

  2. Peter May -

    And yet the Oxford geographer Danny Dorling says we have more bedrooms per head of population than we have ever had before. So I feel the more likely problem is that houses we do have are either in the wrong place or too expensive. The fact that the government happily funds London’s infrastructure whilst nowhere else gets any cannot help either.
    And then there is the disastrous help to buy which seems to help a lot of people on quite good wages to spend more than they should on a house.

    1. Sean Danaher -

      Indeed I think family units are getting smaller and more single people than ever before own houses. We may have to get used to digs which used to be popular during and after the war.

      Infrastructure is a disgrace. I live near Newcastle upon Tyne. For some years for each £1000 spent in London 50p was spent in the NE of England; I think in a good year we get about £5. Much of the A1 is still single carriageway between Newcastle and Edinburgh! The UK regional policy which has inner London West at an average GDP of 580% of the EU average and West wales at 67% is obscene.

      Personally I would settle for a good broadband connection – I get 2MBaud on a good day

      1. Charles Adams -

        Yes, the UK looks very different if you live in the NE – Danny Dorling seemed to become more optimistic about inequality after he moved to Oxford.

        You can buy two-bedroom houses in Ferryhill for £15,000. If you know what you are looking for, you can just about spot the remains of the abandoned station as the East Coast mainline trains race past. With a station and TGV speeds, Ferryhill would be commuter land. Or better rebuild the station and upgrade the track, finish the A1 upgrade and may be the businesses will relocate. Afterall, the people are great, the countryside is great, and the coast is only 40 minutes away.

      2. Sean Danaher -

        Lets hope so. The NE also boasts two of the finest cities in England with Durham and Newcastle. I’m proud to be an honourary Geordie!

      3. Peter May -

        I agree about the cities – the Luftwaffe concentrated on the coast and Newcastle itself was spared and is very attractive.
        Mind you the Durham lot won’t thank you if you think they’re Geordie!!

      4. Charles Adams -

        I am a big fan of Dorling – great graphics!

  3. Graham -

    There may be other factors. Someone, can’t remember who, suggested there are plenty of houses, but some are empty, some are second homes, some are in the “wrong” place, some are “unattractive”, many are unaffordable etc.

    1. Charles Adams -

      I agree plenty of houses in the ‘wrong’ places but this could be solved by better infrastructure such that jobs become more uniformly distributed.

      1. Marco Fante -

        I don’t know about this “wrong place” suggestion:

        “Despite widespread anxiety about a shortage of housing supply, there are 610,123 empty homes in England”

        and a lot of those are in very central and well frequented locations. A real look into the financial incentives for leaving those homes unoccupied might be useful.


        The suggestion that houses are empty because they are “unaffordable” does not make sense in economic terms. For any given supply, demand determines a price, the supplier accepts that price or receives nothing. A real look into the financial and tax incentives for receiving nothing might also be quite useful.

  4. Marco Fante -

    I was thinking about your observations regarding BoE decisions in this context. Central banks in the neoliberal era don’t normally address specific markets with their interest rate decisions preferring to limit themselves to broad inflation target references etc.

    The Reserve bank of Australia has become something of an exception in recent years by openly putting that nation’s housing bubble as a priority in its interest rate decisions. They are the only G20 central bank that has done this as far as I am aware (?). Nonetheless it is still good to see that the precedent is there.

Comments are closed.