Million Dollar Baby

Note: This post had been in my ‘draft’ basket for a while, but Michael Skapinker’s remarkable column in yesterday’s Financial Times put it back at the top of my pile.

Housing has become a real issue for British inhabitants in general, and Londoners in particular. LSE Professor Paul Cheshire has made a new contribution in this debate through a widely echoed report which concludes that one of four London homes will cost more than £1m by 2020, with the Financial Times concluding in the same article that “‘not just having a mum and dad who bought a house, but a grandparent too’ would be needed to get on the [property] ladder in the future”. So far, the latest data seem to prove him right.

The fact that owner occupiers and renters are not in the same boat is not news. The latest English Housing Survey supports that assertion in many respects. The share of overcrowded dwellings is almost four times higher in rented places (5-6% compared with 1-2%) and the gap is increasing. Conversely, the share of owned dwellings which are under-occupied has been soaring over the last two decades and now concerns more than 50% of the properties – partly due to the fact that almost all houses larger than 110 sq. m. are owned – compared with 9% and 13% for socially and privately rented dwellings, respectively. The share of non-decent homes has been decreasing across all types of occupations, but more than one out of four privately rented dwellings is still affected by ‘decency’ issues, primarily damp. For all those reasons, owner occupiers understandably report a higher satisfaction level than all types of renters (both social & private).

Share of non-decent homes, by tenure. Source: English Housing Survey 2014-15.
Share of non-decent homes, by tenure.
Source: English Housing Survey 2014-15.

Although the benefit of home ownership in terms of life satisfaction is indisputable, and despite the low interest rates and the numerous government schemes aimed at favouring ‘prime ownership’, UK inhabitants remain negative about their chances to ever get on the property ladder. Only 60% of private renters expect to buy one day, although the age for first time buyers has been continuously rising. For the youngest (25 to 34 years old), the mirage of ownership is vanishing at fast pace.

Split of households with a HRP aged 25-34, by tenure. Source: English Housing Survey 2014-15.
Split of households with a HRP aged 25-34, by tenure.
Source: English Housing Survey 2014-15.

In his report, Prof. Cheshire adds to the pessimism. Analysing the historical evolution of house prices in the UK, Prof. Cheshire concludes that “the key variables we have found have influenced house prices are real incomes, changes in population and house construction and interest rates”, with the former being “by far the most influential”. That being said, the relationship is clearly not 1:1, since real incomes have gone up by a factor of more than 3 since the early 1950s and the price of houses in London has been multiplied by 10 in half the time according to the Halifax House Price Index.

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Quarterly evolution of house prices in London. Indexed at 100 for the average of 1983 prices. Source: Halifax House Price Index.

Government schemes or massive foreign capital inflows are not part of the list. In one hand, this is reassuring, as this means that house prices are directly linked to the income UK workers receive. On the other hand, this also means that an increase in inequalities between the richest and the poorest will leave more and more people on the side of the property ladder.

Source: http://thecrownblogspot.blogspot.co.uk/.
Source: http://thecrownblogspot.blogspot.co.uk/.

Prof. Cheshire’s quantitative forecast adds further colour. His econometric model, calibrated using historical data, forecasts an average house price increase of 23% by 2020 and 97% by 2030, with significant disparities between areas. London will be most heavily hit, with 25% of houses being priced at £1m or more by 2030 and the price of a house in the lowest quartile of all prices representing 17 times the income of a person earning the lowest quartile wage at that time, compared with 11.5 times today.

House Prices Observed and Predicted 1961 to 2030 – in logs. Source: Future Britain: Housing Millionaires and housing paupers.
House Prices Observed and Predicted 1961 to 2030 – in logs.
Source: Future Britain: Housing Millionaires and housing paupers.

Experts agree to say that the price surge we have been witnessing is also due to an imbalance between supply and demand. On that front, the Financial Times recently highlighted that new house building was still apathetic, leading the government’s ‘1m homes built by 2020’ target to be considered as increasingly unrealistic. The root causes of this supply shortage are subject to debate, but the UK regulatory and planning systems surrounding the building industry are often pointed out as major roadblocks – at least this is an area where the British and the French converge. There is however an urgent need for action: as rightly pointed out by Skapinker, at that pace, London will become unaffordable for the next wave of young talents it used to attract.

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