House prices in the United Kingdom

The affordability of housing in the United Kingdom deteriorated significantly from the late 1990s onwards, [1]with house prices rising faster than earnings and the average age of first-time homebuyers increasing. The issue of housing supply and affordability was recognised as a social, economic and political problem and generated a number of Government responses.

Growth of house prices

As recently as the mid 1970s, the average house price in the United Kingdom was just over £10,000. A steady increase followed over the next decade, and by 1986 that figure was in the region of £40,000. However, the economic upturn of the late 1980s saw that figure rise to around £70,000 in 1989, dropping slightly in the early 1990s due to the recession.
However, between 1998 and 2007 house prices in the United Kingdom rose dramatically, generating large increases in home equity for many homeowners but also making housing unaffordable for other people. Most developed countries experienced sharp increases in house prices in the early years of the new millennium. The UK situation was different in two regards. First, the house price boom started earlier and saw more sustained increases. Second, the regional pattern was fairly uniform.[4] Between 2002 and 2007, house prices in the UK rose by 90%, faster than any Eurozone nation except Spain.
The average (mix-adjusted) house price in the first quarter of 1998 was £81,722, but at the peak of the market in the third quarter of 2007 the average price was £219,256 – over two and a half times higher or a total increase of 168%.[4] Between the first quarter of 2001 and the fourth quarter of 2006 prices increased 60%, again when adjusted for inflation (figures from the Nationwide Building Society's house price data). House prices at the end of 2006 were 35% higher than they would have been if the long-term trend rate of growth - 2.6% per annum in real terms since 1976 - had been maintained. In 2008, house prices started to fall but they have stabilised as of August 2009. This may reflect the housing market's normal seasonality or it may indicate a genuine recovery. Some analysts now expect UK house prices to contract by 50% in real terms. Adam Slater, senior economist at Oxford Economics has forecast that "it will take quite a few years, possibly a decade, before real house prices get back to their peak levels”.
The increase in the house prices has made the housing market increasingly difficult to enter. The ratio of lower-quartile house prices to lower-quartile earnings, a measure of affordability used in the Barker Review of Housing Supply, rose from 4 in 2000 to 5.2 in 2003 and 7.1 in 2006. At a regional level, the problem of unaffordable housing is no longer confined to London and the South East, but now affects almost the whole of England. In July 2009 the ratio of house prices to first-time buyers' incomes remained higher than the historical average.

Mortgage lending
During the period 2001-2007, many lenders began offering loans of increasing multiples of income sometimes to people with poor credit ratings; products that did not require a deposit became more common- 125% mortgage products appeared. The high rate of lending may have been exacerbated by the buy-to-let phenomenon. In the 1990s the Buy-to-Let market accounted for about 1% of loans taken out for the purposes of buying a house. In 2006, the 330,000 buy-to-let mortgages that were taken out accounted for 9% of outstanding home loans.
Although mortgages were more widely available, the rise in house prices meant that there was less affordable housing available to people on low incomes. The Joseph Rowntree Foundation reported what it called "alarming trends in housing supply, availability and affordability". In 2003, the British Government commissioned a report on the lack of supply in the housing market. The Barker Report on housing supply concluded that it was necessary to build an additional 70,000 houses per year to reduce the real price rise to 1.8% per annum. An additional 120,000 houses per annum was required to reduce long term house price inflation to the EU average of 1.1%. The government commissioned a further report by Professor David Miles of Imperial College on the mortgage market. Among its recommendations was that Building Societies should obtain more mortgage funds from the money market in order to increase the availability of mortgages.
The Barker report had also concluded that an additional 39,000 houses per annum were required for UK house building to match household formation. Barker was quoted as saying there were only a net 134,000 new houses for more than 179,000 household formations per year. The figure of 134,000 built in 2002 was contradicted by the National House-Builder Council which reported that there were 160,800 houses built in 2002. In 2006 they report 185,000 new builds, which is above the original Barker report estimate of 179,000 household formations a year. In the 1990s, an average of 158,910 houses were built each year (NHBC figures) against 172,000 for each of the five years to 2006.
Increased divorce rate is another often quoted reason for increasing house prices, but this metric peaked in 1993  - a year of static or falling prices.
The reduced availability of inter-bank lending had a severe effect on companies such as Northern Rock which had financed an aggressive expansion of mortgage lending by short term borrowing in the money market.

Barker Report

In Budget 2003, the Government asked Kate Barker, a member of the Monetary Policy Committee, to undertake a review of housing supply in the UK. Barker’s interim report was published on 10 December 2003. She found that the number of houses being built in the UK was not keeping pace with demand. In 2001, around 175,000 dwellings were built in the UK – the lowest level since the Second World War. Over the prior 30 years, UK house prices went up by 2.4% a year in real terms compared to the European average of 1.1%. As a result of these price rises first-time buyers in 2001 paid on average £32,000 more for their homes. In 2002, only 37% of new households in England could afford to buy a house, compared to 46% in the late 1980s.
Barker considered a range of factors that might be constraining the supply of housing in the UK. She identified the main constraint as land supply and the housebuilding industry's response to risk, which leads to reluctance to build out large sites quickly. The regulatory relationship and control over the use of land also influences the way in which land is made available for development.
The Barker Review’s final report set out a range of policy recommendations for improving the functioning of the housing market:
Government should set out a goal for improved market affordability;
additional investment to deliver additional social housing;
a Planning-gain Supplement to ensure that local communities share in the value of development;
a Regional Planning Executive to provide advice on the scale and distribution of housing required;
allocation of additional land in Local Development Frameworks;
a Community Infrastructure Fund to help to unlock barriers to development; and
Local authorities should be allowed to “keep” the council tax receipts from new housing developments for a period of time.
In response to the issue of housing affordability highlighted in the Barker Report the Department for Communities and Local Government created a non-departmental public body, the National Housing and Planning Advice Unit, to provide advice to the Government, Regional Assemblies and other stakeholders. The Unit's initial report, Affordability Matters (published in June 2007) argued that there are strong reasons to promote affordability - deteriorating affordability is associated with house price volatility, the diversion of investment from more productive areas of the economy, reduced labour market flexibility, and a poorer standard of living for young people.