How to solve the UK’s housing crisis

Houses to let © Getty Images
Rents in the UK rose by just 1.6% last year

If you are in the midst of a housing supply crisis what is it that you would most expect to happen? The obvious answer is a fast rise in rents.

So, given that almost everyone is convinced there is a chronic shortage of supply in the UK, here’s a surprising number for you: 1.6%. That’s the rate at which rents rose across Great Britain in 2016 according to the Countrywide Monthly Letting Index for December. That’s the lowest annual increase for seven years and half the rate of the rise in rents in 2015.

Even more of a surprise for most will be the fact that rents in London aren’t rising but falling: they ended the year down 2.9% (to an average of £1,246 a month).

So what’s it all about? Supply and demand (as usual). The number of homes coming on to the rental market rose by 12% in 2016 (with the greatest growing – 22% – coming in London). But the number of would be tenants rose by only 6%.

The result? As Countrywide points out, “faced with greater choice, tenants have been able to negotiate on price.” In 2015 37% of those renewing contracts accepted a rent increase. In 2016 only 33% did. In Scotland and London renewing tenants even managed to negotiate average cuts in their rent (0.2% and 2.8% respectively).

All this information should be of more than passing interest to those in the UK government tasked with dealing with our “housing crisis.” We are told over and over again that our problem is a massive shortage of housing; one we must address by frantically building houses everywhere. Goodbye green belt. Goodbye back gardens. And goodbye low rise. But the rent numbers tell us very clearly that this is complete nonsense.

If there is a shortage of housing in the UK, rents would be rising fast (that supply and demand thing again). They aren’t. As the miseries pointed out at a Societe Generale conference last week, UK house prices are still very, very expensive – and growth has outpaced inflation by many multiples (in London and the Southeast in particular). Yet look at a graph of rents and you will see that average rents have only just kept pace with CPI inflation.

The result is that UK house prices are bizarrely high relative to rents (50% above the long-term average). Houses are expensive to buy. Houses are not so expensive to rent.

This tells us that the problem in the UK housing market is not a shortage of housing (something also proved, by the way, by the fact that the average size of a household in the UK has not risen for years) but a surplus of speculation called by very low interest rates. Solve that problem and you solve the “housing crisis”.

  • Dan C

    Good article Merryn, however you assume that policymakers actually WANT to solve the housing crisis. Everything they have done to date would indicate the contrary – they wish to inflate property values in order to support bank balance sheets, and they will do this by worsening living conditions for ordinary people.

    • Sunil Kapur

      Sad but true.

  • M Somerset-webb

    More on this. A release from Knight Frank shows rents falling in the home counties last year (by 0.8% on average in 2016 and by 1.6% in the last quarter)

    • Paul

      Its looking like the London ripple effect is rippling out to the rest of the country..Just wonder what will be the variable that finally bursts the UK house price credit bubble, or even variables. Could it be small interest rate rises in response to the US Fed and to stave off import inflation breaching the BoE target inflation level. Or could it be a combination of rising BTL tax’s, falling allowances, cuts to housing benefit, increased housing supply coming on tap all combining and finally gaining momentum making investors, especially overseas ones, realise that investing in UK property for a capital gain has now evaporated and we have a run on the market as investors exist, triggering a crash, not just a UK one but a global property crash. This is increasingly seeming the most likely outcome..I figure 2017 will be the tipping point, throw in BREXIT and its a very high probability and despite what all the estate agents, builders and lenders are trying to conceal. Too much disposable incomes are being used to service debt and with flat wage inflation I think we are really on the precipice on what buyers who are the decision makers and not sellers think a home is actually worth in economic terms as this is dependant on what they earn and the Govn has literally run out of ways of inflating an over inflated market with yet more tax payer funded schemes or simply using funny money i.e. QE to manipulate the money markets and long term interest rates.

  • Momoko Miyamoto

    I disagree with MSW’s analysis on this one. I believe that rents may have peaked because tenants simply can’t pay more. Wage growth has been flat especially amongst the younger people more likely to rent. House prices have contnued to rise with more mortgage lending but tenants cannot pay their rent on credit for very long. With rising transport costs, utility bills and now weak sterling imported inflation, tenants just don’t have the money.
    There has been significant population growth in London and SE UK which is why roads, schools, trains, hospitals, GPs are all noticeable busier.

    • Paul, Planet Earth

      Agree it looks like the UK has finally gone past the optimum point on the economies of scale chart gained from large immigration driving down costs making businesses more competitive to a situation of increasing diseconomies of scale where by mass immigration is now actually pushing costs over the edge most noticeable rents and house prices and equally the impact on the NHS, schools, trains, infrastructure etc and thereby making businesses far less competitive in economic terms as it costs more to employ people who then need to spend more merely to stand still paying rising rents or larger mortgage debt coupled with rising inflation pushing up food and fuel prices.

  • Sargv

    But is there a problem, Merryn? House prices keep growing – check. House owners are happy. Rent are – well, not cheap, but affordable – check. Tenants are content. What this crisis is about then? Why should the rate be increased?

    But rate increase – well, that WILL start a crisis. Overstretched first-time buyers will go default, which starts a drop in over-inflated prices, putting more people into negative equity, causing more defaults, creating massive problems for banks and the rest of the economy.

    And if you keep the rates where they are – well, savers are screwed. They pension pots will underperform and they fail to meet their retirement targets.

    So, we are not in a crisis, and when we would be – it wouldn’t be a HOUSING crisis.

  • Kevin Hoque
  • The_UK_is_a_corporatocracy

    Merryn, It’s not just low interest rates.

    Some of the problems and possible fixes:

    1. Interest rates too low. Below inflation should be illegal.

    2. Lending multiples 15% can be greater than 4.5x household income. Give some buyers ammunition to overpay and it pushes prices up for everyone else as they have to compete. Go back to 3x Main + 1x second income and the JAMS would have more disposable income again.

    3. The MMR should have a maximum length mortgage term of 25 years. Banks lobbied to have it taken out at the last minute. This means banks are extending the length of the term until the computer says ‘Yes’ to the mortgage application. All the MMR has done is enable banks to extend terms and so make more mortgage interest.

    4. Help To Buy has pushed price up with builders adding the 20% part buyers can ignore onto the price. Scrap it now. The rise in new build prices as builders cash in, has made non new build houses look cheaper by comparison, so people in effect overpay. The strange thing is that most people don’t seem to realise that HTB is just a banker’s bailout. If re-sales are sold at a loss, taxpayer’s money is handed over to bankers. £1m so far, in a rising market, though it’s £22m in profit since inception. Though those figures are before London went 40% banker’s bailout.

    5. Foreign buyers should have to pay a much higher SDLT tied to the value of sterling. So houses don’t look “cheap” when sterling is low.

    6. BTL, increase CGT to 75% in 5 years time, staggered over the next 4 years to encourage sales, e.g. 10% year 1, 20% year 2, 40% year 3, 50% year 4. Wipe out this people farming and go back to people investing in businesses that create jobs.

    7. Discourage buying to flip for a quick profit like Germany does. More CGT tax the quicker a house is sold extending to less if it’s held longer.

    8. Second homes should be taxed a lot more e.g. quadruple council tax on both (or all) houses owned.

    9. Reverse the council tax discount for single occupancy. Instead of a 25% discount it should be an extra 25% to pay. Why should people living in overcrowded conditions, subsidise people to live with empty rooms?

    10. Reverse the 1998 Bank Act cancelling the Bank of England’s independence. Why should unelected ex-bankers have more power than our elected politicians? They do not do anything for the economy just enable banks to make more money and protect their assets at our expense. Think “Let me issue and control a nation’s money and I care not who writes the laws.” Mayer Amschel Rothschild

    I missed one earlier

    11. Housing wealth should be taken into account when for applying benefits. Why should a 16 hour a week nail technician living in a mortgage free £1m house, receive tax credits? Benefits should be a temporary repayable loan against the sale of the house.

    • Stefan Karakolev

      This actually makes a lot of sense!