BLOG: A question of supply and demand
Since the peak of the financial crisis in 2008/9, house prices in the UK have fallen, leaving many homeowners in precarious financial situations and some with negative equity on their properties. Mixed with stunted real-terms wage growth and rising inflation, it has produced a cocktail that has infected the British economy over the past five years.
Yet in 2013 house prices in the UK have at last risen above the pre-crisis peak of 2008, with an average rise nationwide of £10,000 over the last year. On the face of it, this strong house price growth suggests that the market is flourishing and returning to good health.
However, the growth in house prices and with it the explosion in demand for mortgages (recent figures from the Council of Mortgage Lenders show that gross lending is at its highest since October 2008) are undoubtedly linked to Government schemes designed provide a stimulus.
Schemes like Help to Buy and Funding for Lending are doing exactly what they were intended to, i.e. boosting a flagging housing market by enabling first time buyers to get that all-important first step onto the property ladder.
Demand has soared, dragging asking prices with it. Crucially, at present the scheme only provides loans to the buyers of new build properties.
With prices now at an all-time high, many families in the UK have simply been priced out of the market. The reality is now that for many, being able to purchase a home is no longer a viable option.
A report out from Shelter last week found, unsurprisingly, that families on low to middle incomes, the ‘squeezed middle’ can no longer afford a family-sized three bedroom home in 75 per cent of the UK market, even if they managed to raise the deposit required.
It’s been well documented that UK house prices have at least more than doubled over the last 15-20 years while wages have nowhere near matched this. Many commentators are clamouring for the market to correct itself with prices dropping and returning to ‘normality’.
What is ‘normal’ for the housing market nowadays? That’s now very difficult to calculate and I doubt that anybody could give a definitive answer. Waiting for the market to correct itself could be a long, drawn-out process too.
For me, the way to solve this problem is simply to look at one of the fundamental economic principles: supply and demand.
Demand for houses has risen, yet there is a shortage of suitable, affordable houses on the market. The Government needs to address this by building more homes. According to National Housing Federation statistics, last year almost a quarter of a million households were generated in Britain. In comparison just 110,000 new homes were built. The figures are only expected to grow marginally in 2013.
Perhaps once there is an ample supply of good quality homes that are financially within the reach of the ‘squeezed middle’, the Government may no longer need to rely on schemes like Help to Buy to boost the housing market.
Charles Haresnape is managing director of residential mortgages at Aldermore Bank