The Housing Market Conundrum: Why Falling House Prices Are Long Overdue

Introduction:

As the UK’s housing market faces increasing pressure from rising interest rates, the long-standing tensions surrounding high house prices are reaching a boiling point. While some fear a potential crash, others argue that falling house prices are a necessary market correction. In this blog post, we’ll delve into the underlying issues causing this conundrum and explore why a reduction in house prices is not only desirable but long overdue.

The Elite Club Mentality:

The housing market in the UK often resembles an exclusive private club, designed to limit membership and requiring support from current members to gain access. Over the past decade, the cost of purchasing a first home has surged by two-thirds, resulting in fewer young people being able to step onto the housing ladder. Research from the Centre for Policy Studies reveals that homeownership among 25-34 year olds dropped to 28% in 2019, compared to 51% in 1989. Additionally, one in four homebuyers now rely on financial assistance from friends and family, averaging £20,000, just to gain entry into the housing market.

Supply and Demand Imbalance:

The root cause of this crisis lies in the failure to meet housing targets and address the supply shortage adequately. Even when conservative targets were set, they were consistently missed, leading to a scarcity of available homes. Government schemes like Help to Buy, aimed at stimulating demand, have only exacerbated the situation by driving prices even higher. Consequently, a whole generation of young people is being denied the opportunity to progress in their personal and professional lives due to limited housing options. Furthermore, this scarcity has distorted people’s perception of savings and their future prospects.

The Homeownership Illusion:

For many British citizens, their home represents their primary source of wealth. They have invested every penny they had to purchase a property in a market with limited supply, ultimately turning them into millionaires in the process. Consequently, this has perpetuated a culture where perpetual renting is the norm, further fueling the Not in My Back Yard (NIMBY) phenomenon. This great standoff between homeowners and younger generations yearning for affordable homes is deeply rooted in the significant disparity between house price increases (almost 70% in the past decade) and wage growth (just over 30% in the same period).

Interest Rates Unmasking the Crisis:

The recent rise in interest rates is shedding light on the deep-seated problems within the housing market. Historically low rates created a false sense of security, leading many to believe they would remain low indefinitely. Now, the return to normal interest rates is causing distress for those who stretched their finances to afford a home, assuming repayments would never substantially change. Average fixed-term mortgage rates for two-year and five-year terms have surpassed 6%, resulting in heightened fear for over a million households set to renew their mortgages this year. Their payments could potentially double or even triple.

A Dip, Not a Plummet:

While headlines may suggest a significant plunge in house prices, the reality is more nuanced. According to Nationwide, house prices have decreased by 3.1% annually, which only takes them back to early 2022 levels, just off their record high. This modest decline is primarily a response to potential buyers hesitating to secure new mortgages at higher rates. However, it does not adequately address the underlying structural issue of inflated house prices due to supply constraints.

The Need for More Homes:

As interest rates normalize, it becomes increasingly evident that they are not solely responsible for market distortions. The housing market’s persistently high prices are a direct consequence of long-standing supply constraints. Decades of undersupply, with a 50% reduction in home construction compared to the 1960s, have turned the UK into an outlier among OECD countries. Average house prices increased four and a half times between 1970 and 2016, according to the Institute for Economic Affairs.

Conclusion:

The intensifying debate surrounding the housing market is a result of rising interest rates, but the solution remains clear: the UK needs to build more homes. Politicians can no longer ignore the harsh reality faced by Generation Rent. Even during economic downturns like the recent recession, house prices continued to rise rapidly. The fundamental law of supply and demand applies to housing, and it’s time for decisive action. Falling house prices are not only necessary but long overdue for a market correction that will enable more affordable homeownership opportunities for future generations.