House prices are rising - should we celebrate?

As yet more data show that house prices are rising (to record highs) there will be talk of ‘housing market recovery’. But just how fair is it to say that rising house prices are a good thing for most of us and the sign of a healthy market?

Certainly there are advantages for some. The profits and share prices of the major house builders have soared since house prices started rising in the spring. This is because investors know that house builders’ business models rely primarily on high sales prices, not building lots of homes. The government’s ‘Help to Buy’ is certainly a major contributor too, accused by the OBR of pushing up prices and not getting enough homes built.

However I think that there are at least six reasons why rapidly rising house prices are worrying for most of us (including many home owners).

1.       More and more young families are priced out…

The first and obvious down-side to rising prices is that young families are locked out. As prices have soared, a whole generation has moved into private rented housing rather than ownership. This means dead money, high rents, poor conditions and high letting agent fees. For most, renting is not what they want but there isn’t a choice.

2.       …However parents are feeling the squeeze too

But it’s not just young adults feeling the pinch. The boom in the cost of a first flat means a massive reliance on the Bank of Mum and Dad to get on the ladder. The proportion of young adults (age 25 – 29) who can afford to buy without any help has fallen dramatically since 2005. This erodes older people’s savings for retirement, with 1 in 5 parents who help children with a deposit using retirement savings.

3.       If parents can’t afford to help out, their adult children may live at home

While the Bank of Mum and Dad is bursting at the seams for those lucky enough to still have access, there are also many whose parents can’t afford to provide financial help for deposits or rent. For those parents, a very real possibility is that their adult children will not be able to gain independence deep into their 20s or 30s. Three million parents over age 50 have their adult children living at home with them. We know that this has knock on impacts on parents’ finances, with 4 in 10 parents with adult children still at home saying that they still have to do a big family food shop.

 4.       Rising house prices put the whole economy at risk

The UK has one of the most volatile housing markets in the world, with four boom and bust cycles since the 1970s. For international comparisons, just look at the last boom bust housing cycle in Britain, Spain and Ireland compared to stable Germany.

International House Prices: Britain, Spain, Ireland and Germany (Source: Economist)

Of course, rising prices don’t just risk collapse – they also hurt economic growth and investment. As mortgage consumers, we pump capital and debt into house prices which could be allocated to business growth or spending in the real economy.

5.      Rising house prices do not mean more homes get built.

A common misconception is that rising prices mean more homes will be built. This simply isn’t the case with housing. In the jargon, supply of housing is ‘inelastic’ to rising demand. From 1995 to 2007 house prices rose 200% but the number of homes built rose just 12%. There are many reasons for this, but fundamentally we can’t expect house price rises to solve the housing shortage.

6.       Rising house prices choke off the mid-market

House prices have become utterly detached from incomes. What this means in practical terms is that the housing market isn’t functioning for families on normal incomes. Increasingly, it’s becoming a millionaire’s market. Data from the land registry shows that in just the last year there has been rapid growth in sales at the top end (£1m plus), moderate growth at the upper end (£300k –  £800k) and stagnation and decline in transactions in the mid market (under £300k). As most home buyers would expect to buy and sell between £100k and £300k it is clear that, for most, the market is not healthy.


So, does this mean I think that house prices should crash? No, clearly not. A price crash would be economically disastrous and trap millions in negative equity.

I think we should move towards what I would call the ‘Grant Shapps’ policy on house prices. The Conservative former housing minister argued that we need price stability (a gradual fall in real terms) so that houses are seen as places to live, not speculative investments. He advocates building homes to hold down prices – we agree. The big question we’ll be seeking to answer over the coming months is just how you close that gap between the homes we need and the low number we are currently building.

  1. “how you close that gap between the homes we need and the low number we are currently building.”

    One question related to this: Is the Kate Barker report still vaild?

    Is it simply numbers of house built or location and type houses important as well?

    1. Good questions. I think the answer has got to be that all those factors are important.

      The housing shortage needs to be closed, but it will be hard to get public buy-in without ensuring that the homes built are high quality and affordable to families on normal incomes. We’re doing work on all those aspects to the housing crisis – I’d recommend our recent report ‘Little Boxes, Fewer Homes’

      1. Do you then feel national house builders are part of the problem rather than solution?

        Shall we encourage more small house builders and self builds?

  2. Thanks for your excellent and clear post for those like me who don’t really get the housing jargon.

    One question, though. You say crashing prices would be really bad because it would “trap millions in negative equity”. Could you explain that? Do you have any article or reference about this?

      1. Thanks Perry! Yes, the reason it’s a trap is because it makes it much harder – if not impossible – to move on for those in negative equity.

        Of course, there are other downsides to a major house price crash too – banks balance sheets would be hit, which as we know can have massive impacts on the wider economy. That’s why a steady re-balancing of the gap between incomes and house prices is better.

      2. Thank you.

        This is exactly what is happening currently in Spain, with houses valued 40% less than in 2007.

        I thought here it was different with banks assuming the risk of falling prices after repossession, but I see it is not the case.

        1. Banks assuming *any* risks? Dream on… They seem to be able to put all the risks back on us!

  3. To Pete Jefferys,
    I have read your paper “Solutions for the housing shortage” and agree with the theses. In the 1970’s I worked for Ontario Housing Corporation in Canada where we found solutions to many of the problems we face in the UK. I have attempted in the past to introduce one in particular to the UK which is targeted at helping first time buyers. If you would lie to receive the paper I should be pleased to e mail to you.

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