Talking about bubbles misses the point

Not a day goes by without someone, somewhere, making their case for why we are in a new house price bubble – and someone else insisting that we’re not.

The argument about what actually constitutes a bubble is both pointless and annoying, as it is completely detached from people’s lives and experiences. But even worse is the constant comparison of today’s house prices to ‘the peak’. The ‘bubble-believers’ point to house price indices to show that house prices today are as high as the 2007 peak. The ‘bubble-deniers’ assert that affordability isn’t as bad as it was then.

Let’s look at affordability ratios – that is how much larger are average house prices compared to average salaries – since 2005.

We can see that since the peak, the situation has indeed become ‘better’ for people: where the average house price was over eight times the average salary, it is now ‘only’ around 6.5 times salary – a real affordability boon!

But in the interests of balance, we need to zoom out from this blinkered focus on the last few years to show the historical picture. We should be focussing on whether today’s recent trends follow the long run patterns and not obsess over short-run fluctuations.

The chart below shows how stark the picture is. Zooming out to go back as far as 1953, it shows that in the five decades before 2000, the average house was around 4.5 times the average salary – not particularly far away for a mortgage. Then, as a result of a range of reasons – such as financial liberalisation, decreasing local authority completions, houses increasingly treated as investment assets rather than homes and globalisation, to name a few – in the 2000s the affordability ratio jumped up to an average of nearly seven times the average salary. Put in this context, the small improvement since 2007 doesn’t look so rosy any more.

We feel looking at earnings and house prices together is more beneficial than searching for bubbles. In our latest report – The House Price Gap – we have shown that the average earner in England would have an extra £29,000 on top of their salary if wages had kept pace with crazy house price growth since 1997 (the furthest back we could go on earnings data). This isn’t just a national issue either – houses are more unaffordable in every local authority since 1997. An average earner in Westminster would have an extra £105,000 if local wages had increased at the same rate as local house prices, while average earners in Watford, Manchester and Bristol would have an extra £47,000, £34,000 and £32,000, respectively.

The reasons for this increase in house prices (and the subsequent decrease in affordability) are large and structural. As a result, we need to think of policies at this scale – we need to build far more houses to keep pace with demand; we need sensible checks and balances on mortgage and lending provision; we need to find a way to ensure larger, long-term investment into house building; we need a greater number of house builders to bring competition, diversity and resilience to the sector; and we need to ensure the land market works more efficiently.

Thinking about short-run bubbles leads you to create short-term solutions. The problem is much larger than that, and requires bolder change.


(1) The analysis in this blog uses the earnings data from the ONS Average Weekly Earnings dataset (taken from the Measuring Worth website) in order to go back to the early 1950s. The earnings data in the report ‘The House Price Gap’ uses ONS Annual Survey of Hours and Earnings data in order to use district analysis – but the data only goes as far back as 1997. These datasets are measured differently and so aren’t directly comparable.

  1. Great post.

    The only point I would make is that I do think bubble talk matters to people and relates to their lives when they are thinking of selling, buying or remortgaging. Eg if there is a bubble which is about to burst then FTBs might be advised to hold off for a while.

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