A look at why UK house prices have risen faster than inflation in the past few decades.
House Prices Since 1991
House Prices Since 1960
Despite two substantial house price crashes in 1991-95 and 2007-08, UK house prices have continued to rise.
Reasons for Rising House Prices
- Increase in the number of households. The population of the UK has risen relatively slowly. But the number of households has increased at a much faster rate. This is because :
- Increase in life expectancy meaning there are more old people living alone.
- Increase in divorce rates, leading to more single people
- Change in social trends causing young people to wish to move out of home earlier.
- Increase in population from net immigration.
- Lower long-term interest rates.In the 1980s and before the UK economy was more subject to fluctuations in the economic cycle and inflation. As inflation increased to 10 or 20% interest rates would rise leading to mortgage payments becoming more expensive and discouraging people from borrowing. Interest rates are not only lower now but also more stable. This has made paying a mortgage more attractive.
- Increase in relative cost of renting. Although house prices have risen the cost of renting has similarly increased, making the alternative to buying a house less attractive.
- Increased competition amongst mortgage lenders. With the financial sector deregulated in the 1980s there is much more competition, including online mortgages. Up to 2007, this increased the number and range of mortgages making it easier for people to get a mortgage. After the credit crunch, mortgage availability fell drastically; this has meant many first time buyers find it difficult to get mortgage finance and explains some of the fall in house prices.
- Parents using equity gains to help children. Many of the older generation are sitting on significant gains in the value of their house. This equity is often being used to provide a deposit for their children to get on the housing market. Therefore sustaining an increase in the ratio of house prices to earnings.
- Long period of economic growth and low unemployment during 1990s until 2007 encouraged many people to take on bigger mortgages. Since 2007, growth has fallen well below trend and this fear of unemployment has discouraged people from entering the housing market.
- Shortage of Supply.
One of the main factors in the UK housing market is the acute shortage of housing, especially in popular areas. This means that even a very small increase in demand is having a proportionally bigger increase in price. It also explains why the fall post 2008 credit crunch was less than expected and less than in other countries.
There are several other reasons for rising house prices such as increased immigration, people buying second homes and increased demand from foreigners. However perhaps the most significant reason is the low long-term interest rates combined with the increased choice of mortgages. Therefore, combined with the UK population’s strong attachment to owning a home, house prices have continued to rise well above inflation. The interesting question is for how long this remarkable growth in house prices can continue.