Thursday, April 27, 1989

Residential property market in the United Kingdom

The British residential property market has experienced massive price expansions over the past few years (beginning around 2000/1) with house prices often expanding at a rate of 20 per cent per annum. Since early 2005 the market appears to have begun to cool (with prices remaining relatively static and dropping in some cases). Total residential housing stock represents over 22 million units as of 2005, with approximately 134,000 new houses built p.a. (based on 2002). The British Government has launched two reviews of the housing market, due to a perceived market failure (only 134,000 new builds for 179,000 household formations), the Barker Report (supply issues and what can be done to increase flexibility in the market) and the Miles Report (the UK mortgage industry and how it can be made more long-term). Issues of social exclusion have also arisen in recent years, especially for critical personnel (nurses, teachers, police, etc.) in most areas (both urban and rural). Widespread disillusionment with property prices has recently led to the formation of political campaigns such as Priced Out aiming to pressure the government into taking action on the affordability issues particularly for the under 40's.

There has also been uneven growth in house prices, both in regional terms (London has not seen much growth in the past few years[citation needed], whereas the North of England and Scotland have seen dramatic rises) as well as affordability issues for locals (such as in the Highlands, where second-home buyers have nearly priced out of the market the local population). In some cases buy-to-let investors and second-homes buyers are the cause of house-price inflation, but there remains the simple problem that insufficient housing stock is built as compared to household formation. Areas with low density (especially those desired for their natural beauty) are having a harder time dealing with the present housing/household ratio, as simply building more houses is often politically impossible or undesirable.

Some have questioned the Baker reports estimates of a housing shortage and there being little evidence of any shortage of property to rental (if not buy), particularly in the North of England. The figure of 134,000 built in 2002 is contradicted by the National House-Builder Council,28930,en.pdf which quotes there were 160,800 homes built in 2002. In 2006 they quote 185,000, which is above the Barker report estimate of household formations. There appears to be little statistical evidence to support the claims of the number of new homes built are the cause of the house prices rises, for example in 1990's an average number of houses built a year was 158,910 (NHBC figures)against 172,000 for the 5 years to 2006. Yet prices at the end of 1990;s when adjusted for inflation were less than at the start 1990, where as prices from Q4 2001 to Q4 2006 increased 60% when adjusted for inflation. Using the Nationwide's house price data . House price at the end of 2006 were 35% above the trend prices of the last 30 years.

Contents [hide]
1 Debate
2 Affordability Ratios
3 History
4 See also
5 External links

[edit] Debate
The health of the British residential property market is seen as an important factor in the British economy.

Residential property prices in Britain have risen dramatically between 1996 and 2005. Many commentators (property bears) believe that in part this is not due to economic reasons but to a bubble mentality among speculators.

Other commentators (property bulls) claim that the rise in prices is a rational reaction to the low housing supply, high employment, economic stability and low interest rates.

What cannot be debated is that unprecendented price levels have excluded record levels of first time buyers from buying and are preventing many more buyers from being able to trade up.

[edit] Affordability Ratios
A number of ratios have been developed to judge the sustainability of house prices.

Proportion of Average Income. The long term average ratio of average house prices to average annual incomes has been 3.5:1. In 2005 the ratio was around 6:1 - leading to some analysts claiming that house prices were overvalued by about 40%. A further report from in 2006, [1] comparing average asking prices with average incomes, has shown the UK average ratio to be as high as 10:1.
New Mortgage Cover. This is the ability of a person on an average wage to cover a mortgage for a "first time buyer" property (that is one that is somewhat below the average specification). Currently it is around 30% of post tax income, compared to 39% in 1989.
Comparable Large Purchases. House Prices are often compared to the cost of other large consumer purchases (often new cars). This is more inexact, because of qualitative changes in many of these other purchases, but indications are that a house is historically highly priced in comparison to other consumer goods.
Rental Yield. This is the market rent for a property divided by its price, or the average market rent divided by the average house price. Due to the popularity of buy to let this has become a popular measure. This is now around 4% (the equivalent to the post tax yield from a high interest savings account) which many commentators believe does not reflect the risk.
Rent to Mortgages. Historically it has been more expensive to rent than to pay a mortgage, as fewer people could get credit than could rent and repairs and maintenance would be covered in rental payments. In recent years, this has reversed in Wales and the South West (Source: Abbey) although for the UK as a whole, averaged over 25 years current prices imply a buying cost of £379341 over 25 years versus renting costs of £403,173.

[edit] History
British property prices were at an all time nominal high in the late 1980s due to the prosperous economy, the increasing quality of housing through an increase in newly-built housing stock and newly leased right-to-buy council housing.

Property prices fell by 30% in real terms (though nominal decreases were smaller) through the early nineties mainly due to higher interest rates. There was an increase in property repossessions by banks and building societies, and many people were left in negative equity for a number of years.

Prices started to recover in 1996, slowly at first and in some limited areas. By 2001 prices had in most places returned to their pre-collapse levels, and continued to rise, so much so that in 2004 many properties were "worth" double their market price only three years before. In many cases prices were increasing by 20% per year (1.5% per month).

Prices saw a cooling in 2005 that led some forecasters to predict a sharp correction in the market, that might have reduced house prices by as much as 40%. However, these fears proved unfounded, as a renewed strengthening in late 2005 continuing throughout 2006 and early 2007 has led most analysts to predict growth, albeit at a more modest pace, in the medium term.

however world markets especially in the American rental market has fallen which could lead to a reduction in property prices in the UK if the market continues to fall.