Three factors fostering continued growth
There are reasons for such optimism. First, previous sharp corrections in house prices have usually coincided with steep rises in unemployment, boosting ‘forced’ sales. Currently, the labour market remains strong, with the unemployment rate at its lowest for half a century.
Second, whilst higher interest rates should theoretically push prices down, this effect is likely to be far less pronounced than in the past. Recent shifts, such as a decline in the proportion of homeowners with a mortgage and the growing dominance of fixed-rate mortgages, will act to cushion the impact of rising rates on prices. Furthermore, since homeowners tend to be higher earners, many will have built a savings buffer during the pandemic.
Third, there are several longer-term structural issues at play in the UK housing market — primarily on the supply side. One is that the supply of new-build housing has long struggled to keep up with population growth. But perhaps more significantly, a combination of people living longer and older owners having little incentive to downsize means the average ownership tenure has lengthened, reducing the number of existing houses coming onto the market at the top end.
With older people less likely to sell their often-higher value properties than in the past and buy-to-let landlords — who tend to hold rather than sell — accounting for a growing share of homes at the bottom end, the market has become disorganized. The 1.49 million residential property transactions conducted in 2021 — the highest since the Global Financial Crisis (GFC) of 2008–09 — was still 4% down on the average for the decade leading up to the GFC.
Difficult political and policy challenges to address
All of this highlights the political and policy challenges now surrounding the UK housing market. A sharp fall in house prices would create significant economic damage, as so much household wealth is tied up in housing. However, the prospect of ever higher house prices also presents significant economic costs. It means buyers need to take on more debt to buy a home, leaving the economy more vulnerable to a financial crisis. Expensive housing directs investment into construction. If people are spending large sums on housing, they have less to spend in other sectors.
Furthermore, property’s attractiveness as an asset class diverts household savings into property, rather than more productive businesses. There are also obvious questions about equity and inequality — not least between older, wealthier homeowners and younger, lower-paid renters.
The result is a set of complex political choices. The solutions — building more homes, changing the tax system to disincentivise buy-to-let or second homes, or encouraging downsizing — are politically unpopular. But the status quo is becoming ever less sustainable and brings longer-term political costs that must also be considered.