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UK property: why house prices are so high

New build homes in London. Photo: Paul Riddle/View Pictures/UIG via Getty

House prices across the UK have risen substantially over the past quarter-century. In some parts of the country it is now a real struggle for first-time buyers to step onto the property ladder.

UK house prices grew faster on average over the 40 years from 1971 to 2011 than any other OECD country. But prices really took off in the mid-1990s.

Land Registry data shows that the average UK house price in January 1995 was £55,437, a similar level to the beginning of the 1990s.

By March 2019, the average price was £223,610, a 303% increase over that period.

To give a sense of just how large that number is relative to the cost of living, if the average house price in 1995 had risen by the rate of inflation each year, it would only be around £105,000 today.

So why exactly have things gotten so out of control? Well, there are two parts to the housing market story: supply and demand.

Easy mortgages and booming demand

Let’s start with demand. Over the past few decades, demand for house purchases was supported by a booming economy and easy access to mortgages.

People had well-paying jobs and, up until the financial crash in 2008, banks were very keen to approve mortgages to both homebuyers and buy-to-let investors — too eager, in fact, which contributed to the economic crisis.

The number of mortgage approvals for house purchases peaked in December 2003 at 132,737. Some buyers were able to secure 100% mortgages at the time and borrowed debt that was a substantial multiple of their income, much higher than the four or five times available today.

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Irresponsible lending to both homebuyers and buy-to-let investors fuelled a demand boom in the housing market.

Even today, in the aftermath of the crisis, mortgage approvals still hit 64,337 in February 2019, despite affordability issues for young house hunters. While the number is well down from the peak, it’s still buoyant.

Demand is currently supported by ultra-low interest rates and schemes such as Help to Buy and shared ownership, though buy-to-let investor demand is curbed by a number of tax rises, including higher stamp duty on additional property purchases.

Severe housing supply shortage

But the bigger problem in the housing market is supply.

Set against hot demand for property over the past two decades is an ongoing and severe shortage of housing supply across the UK. This shortage is most acute in London and south-east England, but also affects other areas, particularly urban centres.

"Estimates have put the number of new homes needed in England at between 240,000 and 340,000 per year, accounting for new household formation and a backlog of existing need for suitable housing,” according to a House of Commons briefing paper.

“In 2017/18, the total housing stock in England increased by around 222,000 homes. This was 2% higher than the year before — and the amount of new homes supplied annually has been growing for several years — but is still lower than estimated need."

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The number of homes built has consistently fallen substantially short of demand for a while, a problem that deepens each passing year. So why can’t we build enough homes?

The most fundamental problem is the country’s strict planning laws, particularly in England, where a tangle of complex regulations hinder development. Planning laws have a bias against development and put a lot of power in the hands of local communities to block construction.

Local planners are at the mercy of the communities they serve. The politics of planning make it hard for them to approve developments without facing a substantial backlash. Councillors on planning committees are keen not to upset their voters.

Property market estate agent signs saying 'Sold' outside new housing in Rendlesham, Suffolk, England. Photo: Geography Photos/UIG via Getty Images

One example is the “green belt” protections. It is incredibly hard to build housing within green belt areas, even if some of the land within them is not considered “green,” such as fields used for environmentally-damaging intensive farming.

Planning restrictions limit the supply of land available for developers to build on and increase the building cost even on land where housing is permitted. This drives up the price of land for developers, so they build fewer homes.

House prices would be 35% lower on average if all regulatory constraints on housebuilding were removed, according to a 2013 academic study titled "The Impact of Supply Constraints on House Prices in England."

"Our findings point to the English planning system as an important causal factor behind this ‘affordability crisis,’" the study's authors Christian A. L. Hilber and Wouter Vermeulen wrote.

In short, a boom in housing demand fuelled by loose lenders and severe constraints on supply have pushed house prices higher and higher.