Finance Insights

Is the UK Housing Market About to Crash? Exploring the Housing Crisis

Is the UK Housing Market About to Crash? Exploring the Housing Crisis

The UK is currently facing a housing crisis, with prices skyrocketing and the average house costing nine times the average salary. This situation is even more alarming in London, where a house costs roughly 12 times the average salary. Sounds crazy, right?

Now, you might be wondering why this matters. Well, this crisis affects a lot of things, from intergenerational inequality to wealth distribution and the overall economy.

When housing prices rise faster than wages, younger generations struggle to afford homes, creating a divide between the haves and have-nots.

Plus, it’s just bad news for the economy, as people spend more on housing and less on other productive activities.

In this article, we’ll delve into the historical context of the UK’s housing crisis, discuss its current state, and ponder its future.

The UK’s Housing Crisis: Historical Context and Current State

Median house price to median income ratio

1. Historical norm (ratio of 4)

To understand the gravity of the situation, let’s take a look at the relationship between median house prices and median incomes.

Historically, the ratio between these two figures was around 4, meaning a house would cost about four times the median annual salary. Sounds reasonable, right?

2. Current state (9 times the average salary in the UK; 12 times in London)

Low wages frustrated man

Now, let’s fast forward to today. The average house in the UK costs a whopping nine times the average salary! And if you think that’s bad, London’s situation is even worse, with houses costing around 12 times the average salary. Ouch!

Impact on younger generations and wealth inequality

This housing crisis has some nasty side effects. For one, it exacerbates intergenerational inequality, as older homeowners benefit from rising prices while younger folks struggle to get a foot on the property ladder.

Additionally, it worsens wealth inequality, as the privilege of homeownership becomes reserved for those with wealthy parents.

In fact, more than half of first-time buyers under 35 rely on the “bank of mum and dad,” and this figure jumps to around 75% in London and the South East. Talk about an uphill battle for the younger generation!

Contributing Factors to the UK’s Housing Crisis

Let’s dig a little deeper and explore the factors that have contributed to this daunting housing crisis in the UK. There’s quite a bit to unpack, so bear with me!

Wage stagnation

First and foremost, wage stagnation has played a significant role in the crisis. When wages don’t keep up with rising house prices, it becomes increasingly difficult for people to afford homes, especially for those just starting their careers or those without financial assistance from family.

The Green Belt and planning system

The UK’s Green Belt policy and complex planning system have also contributed to the crisis. Green Belt regulations limit the amount of land available for development, which can drive up prices in areas where housing is in high demand.

Additionally, the case-by-case planning system adds time and expense to the development process, further pushing up house prices.

The big five volume builder oligopoly

The dominance of a few major builders – the “big five” – also contributes to the housing crisis. These large companies can control the supply of new homes, dictating prices and limiting the availability of affordable housing options.

Lack of social housing and right-to-buy schemes

The decline in social housing and the implementation of Thatcher’s right-to-buy schemes have also fueled the crisis.

With fewer social housing options, more people are forced into the private market, increasing demand and driving up prices.

Additionally, right-to-buy schemes have decreased the overall stock of affordable homes, further exacerbating the problem.

Low interest rates in the 2010s

Finally, let’s not forget the impact of low interest rates in the 2010s. These low rates made borrowing money for mortgages cheaper, leading to increased demand for housing and putting even more pressure on the market.

The Role of Inflation and Interest Rates in the Housing Market

Now that we’ve covered the main factors behind the housing crisis, let’s explore the role of inflation and interest rates in this complicated puzzle.

Central banks raising interest rates to control inflation

raising interest rates Housing crisis

As inflation has risen around the world, central banks have increased interest rates in an attempt to control it. Higher interest rates can help curb inflation by making borrowing more expensive, thus reducing consumer spending and demand for goods and services.

Effects on the housing market

1. Increased cost of borrowing and mortgages

Higher interest rates have a direct impact on the housing market. When borrowing becomes more expensive, people are less likely to take out mortgages, which reduces demand for housing. This decrease in demand can lead to a slowdown in price growth or even falling house prices.

You may find this helpful resource on Everything You Need to Know About Mortgages in the UK to learn more.

2. Increased cost of servicing pre-existing mortgages

But it’s not just new borrowers who feel the effects of higher interest rates. Existing homeowners with variable rate mortgages also face increased costs, as their mortgage payments rise in line with interest rates. This can put pressure on homeowners to sell their properties and downsize to more affordable homes, increasing the supply of houses on the market. As we know, when supply goes up and demand goes down, prices can fall.

The Decline in House Prices and Future Projections

Starting in September last year, UK house prices began to fall, and this trend has continued ever since. Between March and February, house prices experienced a further 0.8% drop and are now down about 6% from their peak in August.

Despite the ongoing decline, house prices still remain significantly above pre-pandemic averages. However, experts expect them to fall even further in the coming months. The OBR projects a 10% drop in house prices in 2024, while Lloyds and Halifax both predict an 8% decline in 2023.

These projections largely depend on the Bank of England’s efforts to control inflation by raising interest rates. As we’ve discussed, higher interest rates make borrowing more expensive, which can reduce demand for housing and push prices down.

If inflation continues to remain stubbornly high, the Bank of England may need to raise interest rates even further, potentially leading to steeper drops in house prices.

The Impact of OPEC+ and Energy Prices on the UK Housing Market

Recently, OPEC+ announced a reduction in their daily oil output by one million barrels per day, which is equivalent to 3% of total production.

As a result, oil prices surged to $86 a barrel, with suggestions from the Nigerian Minister of State for Petroleum Resources that OPEC+ aims to push prices as high as $90 a barrel.

So, what does this have to do with the UK housing market?

Well, higher energy prices are often linked to increased inflation. Elevated oil and gas prices, such as those caused by the Russian invasion of Ukraine and subsequent disruptions to energy supplies, have been the primary drivers behind Europe’s record inflation levels.

Higher energy prices lead to increased costs for households and various industries, ultimately contributing to inflation. If the Bank of England is forced to raise interest rates further to combat inflation, the UK housing market could face even steeper price declines.

While it’s impossible to predict the future with certainty, it’s crucial to remain aware of these potential risks to the housing market.

The future of the UK housing market remains uncertain, particularly with the ongoing decline in house prices and the potential impact of factors such as OPEC+ decisions and energy prices.

The market’s vulnerability to these influences underscores the importance of monitoring developments and understanding the risks involved.

For anyone making property decisions in the current climate, staying informed about the factors affecting the housing market is essential.

If you’re a first-time buyer, you might want to check out The Complete First-Time Buyer Guide: How to Buy Your First House for some valuable insights.

By understanding the complex interplay of economic, political, and social forces, you’ll be better equipped to make well-informed decisions and navigate the risks inherent in the UK’s housing market.