Location, location, location: where we build is what counts

The financial crisis and slowing economy has brought the topic of housing back to the frontline of policy debates but the problems within this market started many decades before.

High house prices are not a new phenomenon, although the recent decade’s increase in credit availability had accentuated it. House prices have increased in the UK over a long period: by 273 percent in real terms since 1959.  The rate of increase has accelerated in recent years; since 1997 house prices have doubled while earnings have only increased by 28 percent, illustrating the increasing affordability problem.

The key shift happened in the 1970s. The oil crisis and associated inflation marked the start of a trend towards home ownership that continues today, as people chose to protect the value of their savings by investing in housing.  Increasing home ownership, combined with a rising number of households and a low number of housing completions has led to prices increasing at a faster rate since 1975 than in any other developed country.

Figure 1: House prices in the UK

Source: Arrested Development

Furthermore, since the mid-1970s, housing supply has slowed.  As Figure 2 shows, the number of completions has fallen from its late 1960s peak.  The long-term reduction in completions from over 400,000 new houses per annum in 1968 to 109,000 in 2011/12 has been predominantly caused by the withdrawal of local authorities from housebuilding at the end of the 1970s.   The contribution that local authorities used to make to housing numbers has not been replaced either by the private sector or by Registered Social Landlords (RSLs).

Figure 2: Housing completions by sector, 1949 to 2010

Source: Department for Communities and Local Government – Table 241 Permanent dwellings completed by tenure

The key issue here is that of location. If we look at the UK as a whole, the stock of houses broadly reflects that of the number of households. However, houses are not being built in the areas with highest levels of demand and this is reflected in high prices.  Over the last 40 years, economic and technological forces have shifted the UK’s centre of economic gravity southwards and, in particular, away from northern industrial and port towns.  Yet, new housing developments have often been built in the areas with low demand.

For example, Cambridge- a strong and growing economy – built fewer houses per head than Doncaster – an economy with high levels of unemployment – in spite of prices being twice as high in Cambridge.   And in Manchester under 25 percent of the new houses built between 2004 and 2008 were in the three local authority areas with the highest house prices, while 30 percent were built in the authorities with the lowest prices.  This is not an efficient use of funding, as well as widening the gap in house prices and contributing to an affordability crisis in the south.

Moreover, increases in house prices may place a greater emphasis on the rental market.  Historical trends within the rental market have shown little change in overall stock since the 1960s and more recently a shift away from local authority provision (see Figure 3).  There was a large increase in private rental properties from 2001 as a response to both rising demand for rental, as house prices were increasing, as well as an increase in credit availability.

However, the supply of rental properties available has not increased at the same rate as the demand and so prices, particularly over the last three years, have continued to rise.  A restricted private rental market and high house prices mean people continue to rent for longer as they save for a deposit.  This also prevents new workers from moving to an area.

Figure 3: Housing rental stock by sector

Source: Department for Communities and Local Government – Table 104 Dwelling stock

The financial crisis has simply accentuated these long term trends within the UK, with restricted mortgage availability slowing the housing market down.  Although housing starts were beginning to fall in 2005/6 before credit constraints arrived, the subsequent financial crisis deepened these existing trends and led to a sharp reduction of around 50 percent in housing starts (Figure 4).

Figure 4: House build starts and completions and real house prices in England (1998-2011)

Source: DCLG www.communities.gov.uk/publications/corporate/statistics/housebuildingq42011

Therefore, policy to tackle high house prices and increase housing starts cannot be spatially-blind. There are complex, interacting factors occurring at a local level and the housing market illustrates that we should not treat the UK as one homogenous group.

Follow Joe Sarling at @joesarling

For more information see the Centre for Cities’ housing policy tracker here.

Also published on Shifting Grounds


One thought on “Location, location, location: where we build is what counts

  1. Pingback: Social housing demand: how has it changed in the last decade? | Comment Today

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