Banking on Property - what is driving the housing affordability crisis and how to solve it

What you need to know:

  • This new report from Positive Money examines why despite the economy still being in recovery from one of the worst economic contractions in 300 years, house prices have continued to soar. The dominant narrative of the problem being rooted in a shortage of supply fails to explain the rapid house price growth of recent decades.
  • Instead, rising house prices are rooted in a series of policy changes, introduced over many decades, that have sought to increase home ownership and transform houses into profitable financial assets.
  • At the same time, weakened regulation of the financial sector and declining interest rates have increased the availability and attractiveness of mortgage credit, leading to a significant increase in the amount of purchasing power available for buying a house.
  • Although the stated aim of many of these changes was to increase home ownership, in practice they have created a significant structural bias towards housing in the UK economy.

The widening gap between the housing market and the rest of the economy is a symptom of the UK’s longstanding housing crisis. This new report from Positive Money, funded by Trust for London, exposes the root causes of why genuinely affordable homes are out of reach for a growing majority of people, the uneven impact of this broken system across different demographics, and start to explore positive proposals for change.

The issue

In 2021 house prices in the UK grew at their fastest pace in over a decade, despite the economy still recovering from one of the worst economic contractions in 300 years. The growing disconnect between the housing market and the rest of the economy is a symptom of the UK’s longstanding housing crisis. Other symptoms include falling homeownership rates from a peak in the early 2000s, worsening housing conditions, increasing homelessness and declining affordability in the private rental sector. There is now a broad consensus that the UK faces a serious housing crisis. The most striking aspect is the growing gap between house prices and incomes.

The median house price in England is now 9 times median earnings, having more than doubled since 1997. In London the picture is even more stark, with house prices 13 times median earnings in 2021. This report identifies the systemic drivers of rising house prices, and how this has produced a severe housing affordability crisis. This is particularly stark in London, where house prices have grown by a dramatic 326% between 1980 and 2021.

Positive Money finds that the dominant narrative of the problem being rooted in a shortage of supply fails to explain the rapid house price growth of recent decades. Instead:

  • Rising house prices are rooted in a series of policy changes, introduced over many decades, that have sought to promote home ownership as the dominant form of tenure and transform housing into vehicles for accumulating wealth.
  • At the same time, the liberalisation of the financial sector and the downward trajectory of interest rates have increased the availability and attractiveness of mortgage credit, which in turn has led to a significant increase in the amount of purchasing power available for buying a house.
  • Although the stated aim of many of these changes was to increase home ownership, in practice they have created a significant structural bias towards housing in the UK economy, transforming housing from a basic need into a financial asset for accumulating wealth.
  • The result has been the emergence of a powerful feedback loop between government policy, mortgage lending and house prices. Government policies intended to increase home ownership inevitably interact with this structural bias, increasing inflows of money into the property market and pushing up house prices further. While successive governments have tried to help more people onto the ‘housing ladder’, instead they have ended up pulling the ladder even further out of reach.
Key recommendations:
Area Policy proposal
(I) Macroeconomic policy reforms Require the Bank of England’s main policy making
committees, the Financial Policy Committee (FPC) and
Monetary Policy Committee (MPC), to support the UK
government’s goal of stabilising house prices as part of
their secondary objectives.
Macroprudential tools and credit guidance
Strengthening existing macroprudential tools to help
achieve sustainable house prices by dampening
expectations of house price inflation and regulating the
supply and direction of bank credit.
Improved framework for monetary-fiscal coordination
Requiring the MPC to communicate whether it is able
to meet its primary objectives without increasing the
unaffordability of housing with its current toolkit, and
whether fiscal policy or alternative policy tools would
be more effective. As part of this, the Treasury should
also publish an updated review of the monetary policy framework.
(II) Market shaping reforms Promoting a diverse banking system
The government and the Bank of England should support
the development of different models of banking which
would focus on lending to more productive and socially
useful activities, such as national and regional development
banks and stakeholder banks, rather than mortgage
lending.
Reforming the property and land tax system
Reforming property and land taxation to make it more
progressive, thereby dampening investor demand for
housing as a speculative financial asset, and increasing
public funds available for investment in more social and
affordable housing.
(III) Alternatives to home owndership The following policies address declining affordability in the
Private Rental Sector (PRS) and aim to provide decent and
secure alternatives to homeownership. They also directly
discourage the treatment of homes as financial assets.
Implementing rent controls and strengthening tenants
rights in London will require national legislation to devolve
powers locally.
Rent controls to limit increases in rents and make private
renting more affordable.
Security of tenure for private sector tenants, including
open-ended tenancies.
Scaling up non-market alternatives to offer secure and
affordable alternatives to home ownership.

31 March 2022