The housing bulls say UK property is in a state of structural undersupply. Everyone seems to accept this as fact - but in fact, the UK could have too many houses within as little as five years from now...
One of the arguments constantly put forward by the housing bulls when they claim that UK prices can only rise is that there is a structural shortage of housing in the UK. But does this case really stand up?
Since 1900, the housing stock of the country has risen more than three-fold (there were about seven million permanent dwellings in 1900, but more than 22 million by 2000), yet over the same period of time the population of the country has risen by just over 50%. If these two relative rates of long-term growth continue, surely the housing market will inevitably tip over from a state of structural undersupply to one of structural oversupply. The question is simply when.
Subscribe to MoneyWeek
Subscribe to MoneyWeek today and get your first six magazine issues absolutely FREE
Not enough babies
The answer may be sooner than you think. The number of children born to each woman the so-called total fertility rate (or TFR) has now fallen to a point where the population is not sustaining itself. Compared with the post-War generation, when Britain's TFR was greater than two (peaking at almost three in 1964), since the mid-1970s it has been consistently below two.
At first glance, this may not seem important. After all, the TFR has been less than two for 30 years, so why should we start to worry about it now? But consider the population pyramid of the UK as collated in the census of 2001 and you can see why it is important. Since the bulge' of the 30-40 age group (relating to the late-Sixties baby boom), there has been a clear downward trend in population numbers. The result is that the prime child-bearing age group is much smaller than it was.
According to the Office for National Statistics (ONS), the TFR in the UK in 2004 was still just 1.77 children per woman. This is an increase since 2003, when the figure was 1.71, and a further increase from the record low figure of 1.63 recorded in 2001. Nevertheless, it remains very far from the rate required to maintain the population at current levels.
The consequences of this should not be underestimated. Simply extrapolating forward from the population of the UK according to the 2001 census, and assuming that each woman has, on average, 1.77 children between 25 and 35 and that the death rate follows a historically consistent pattern, and ignoring immigration, suggests that, after peaking at just over 58 million in 2006, the population will fall to around 50.5 million in the year 2046. That's a decline of 7.5 million, or 14.2%. On the face of it, that suggests that the UK property market is in danger of going into fundamental oversupply.
Still, there are mitigating factors here. One of the most important factors in driving the upward momentum of the housing market over the last three decades has been not only the size of the population, but also how many people choose to live in each household. According to the ONS's General Household Survey (GHS) of 2002, "between 1971 and 1991 there was a decline in the average size of household in Great Britain, from 2.91 persons to 2.48". Much of that decline has been driven by the increase in one-person and lone-parent households, which almost doubled from 17% to 31% between 1971 and 1998.
According to the GHS, there were 24,479,439 households in the UK in 2002. Simply modelling forward the UK population, as already described, and comparing that with the number of houses in the country assuming that new homes are being built at the recent net rate of around 155,000 a year suggests that the UK housing market will be soon be in oversupply, unless the average household size continues to fall.
Will it? It seems unlikely. According to Nationmaster.com, at 2.4 persons per household the UK is already below the developed nation average of 2.55 (Sweden is the lowest, at 2.1). And the ONS itself points out that, in the past seven years, "there have been no statistically significant changes in the overall proportion of adults living in one-person households, and among people aged 65 and over the proportion living alone has remained relatively stable since the mid-1980s". This alone suggests that one of the primary drivers of the UK housing market for the last 30 years has run its course.
But even if the average household size in the UK does continue to decline from its current level, assuming that there is an absolute lower limit of two on household density (human beings are, after all, social animals), my model so far still projects an incontrovertible oversupply in the UK housing market in 18 years, in 2023.
This still leaves one big factor unaccounted for, however: migration. Every year for the past few years the UK has received a net inflow of around 151,000 migrants (the difference between around 513,000 immigrants and 362,000 emigrants a year).
At first glance, this might not sound unduly significant at around 0.25% of the population. But it is more relevant than it appears. For, whereas the UK is a net exporter of people in the 45-plus range, immigration occurs primarily within the child-rearing demographic of 15 to 35.
Assuming the same breeding pattern as current UK residents (ie, 1.77 children per woman between the ages of 25 and 35) and this all means that the UK population could well continue to grow by my calculations, to just over 61 million in 2046.
Nevertheless, while this has the effect of keeping the population higher for longer, it is not enough to off-set the growth in UK housing stock. Overall, the market will be in oversupply by 2010 if there is no further increase in social factors, such as one-person households, and even if the size of the average household falls below two (which is extremely unlikely), it will be in incontrovertible oversupply by 2041.
Living longer and longer
The final factor to take into account is longevity. Most recent population projections assume that in future Britons will live longer. By how much is a matter of debate. But according to Sustainable-development.gov.uk, "life expectancy in the UK is projected to increase by 4.8 years between 2000-2005 and 2045-2050".
Assuming this factor occurs sooner rather than later means that, according to our projection, the population of the UK will continue to decline, albeit by a lesser amount, to just under 54 million by 2046, while the total population (ie, including immigration) grows to just under 65 million.
But even if this happens and everything from longevity to immigration is a matter of debate the average household size will still have to decline to Swedish levels to avoid the housing market going into fundamental oversupply.
In the Government's hands
So what are we to conclude? Basically, that the only factor that will cause the population of the UK to grow is immigration. Even then, it will still require a continuing decline in household sizes to avoid the housing market going into oversupply in 2021, and this isn't very likely (particularly given the stabilising rate of divorce in the UK).
Either way, the housing market looks to be entering (almost) uncharted territory. In fact, perhaps the only precedent we have for the effects of a declining population in the UK are the years following the outbreak of the Black Death in 1348.
While it is difficult to draw too many conclusions from this, one particular parallel does stand out. From a purely economic perspective, the plague was a huge benefit to surviving landless labourers and a catastrophe for the landed squirearchy as demand for food collapsed (depressing land values) at the same time as the supply of labour collapsed (increasing costs).
What's different this time, of course, is that the principal factor behind whether the population of the UK goes up or down (ie, immigration) is largely in the hands of politicians. From an economically rational perspective, therefore, it is entirely possible that the future political landscape of the country will divide along property-owning lines.
In this case, the property owners (currently around 17 million) will favour high levels of immigration, coupled with increasing rates of demolition of the UK's existing housing stock and curbs on new building in order to protect the value of their investment. The property-less classes will favour curbing immigration and increasing the rate of new home-building in order to get on the housing ladder in the first place.
Obviously, the main political parties in the UK do not, at the moment, divide along these lines. But who wins this confrontation, and by how much, could ultimately determine whether houses in London continue to fetch £500,000 each, or, as in the industrial terraces of the north, closer to £5,000.
The unavoidable truth remains, however, that, over the longer term and as the housing market approaches saturation, house prices will be more in the hands of the politicians than those of the free markets. For those considering relying on property to fund their retirement, this could be an important consideration.
Charles has previously written for the MoneyWeek, giving readers his share tips regularly and covering other topics on the side such as stock markets and the economy. He has also written for The Business, Shares, Investors Chronicle and The Evening Standard, and Charles has presented on LBC and been a guest on BBC One and BBC World. Aside from his journalist background, Charles graduated as a chemist from the University of Oxford specialising in ligand gated ion channels.
Savers will benefit from Plum’s 4.94% money market account
Savers will benefit from Plum's 4.94% product that relies on money market funds that closely track the Bank of England’s base rate. We explain why this could be good news for savers.
By Rupert Hargreaves Published
Revealed: Best funds for DIY investors
Wondering where to put your money? With thousands of investment options, which funds, ETFs, trusts are the best? Bestinvest has just released it’s best funds list - we have all the details to help you strengthen your portfolio
By Kalpana Fitzpatrick Last updated