Is Housing Really Unaffordable?

Most UK households do not face affordability difficulties; those most affected are typically low-income renters and aspiring first-time buyers. However, popularly-used affordability indicators look at the average household position across the country, rather than the distribution across households. Therefore, Chapter 2 discusses the strengths and weaknesses of different affordability measures, including the popular price to earnings or income ratios, the share of expenditure taken by housing and residual income methods. The chapter is critical of these measures and, therefore, proposes two new indicators that provide more information: the first examines the relationship between housing stress and expenditure shares for low-income renters; the second constructs a version of the Lorenz curve for aspiring first-time buyers and shows the proportion of houses that could be afforded by households with different levels of income around the country.

Crisis, What Crisis?

The opening chapter provides an overview of the topics covered in the book, set in the context of the key policy debates that have taken place in recent years, not just in the UK but across countries facing similar issues. The chapter introduces the analytical approaches to be used. The methods are primarily those of economists – including modern as well as traditional techniques - but recognise the insights of other disciplines and the political constraints under which housing operates. The chapter stresses that housing cannot be divorced from the macroeconomy and monetary and fiscal policies are often more important to housing outcomes than policies directly aimed at housing. But housing also influences the economy which, particularly since the Global Financial Crisis, has added further constraints on housing policy.

Where Do We Go from Here?

Chapter 14 highlights the key themes of the book and their implications for policy. Although there is considerable agreement among economists with regard to the range of required policy reforms - including changes to land use planning, taxation, social housing provision, rents and subsidies, and to financial markets - there are external constraints, both political and economic, that impose limitations on even the most positive reforming governments. But the absence of positive policy change in the UK would imply that the worsening affordability and volatility that have often typified housing markets are likely to continue. The book shows the need to extend housing policy beyond a concentration on expanding supply and points to the need for a more balanced approach that incorporates policies addressing demand as well as the supply sides of housing. Given the policy constraints, the chapter also points to possible new directions.

What Factors Determine Changes in House Prices and Rents?

Whatever measure of affordability is used house prices and rents play a central role and Chapter 3 is concerned with what causes these two variables to change over time and vary across different parts of the country. Although increases in house prices have been particularly strong in the UK by international standards, other countries are also discussed. In fact, house price trends and volatility can be explained by a fairly small number of variables – and their influence has been remarkably consistent over the last fifty years. The problem has been rather that house prices are very sensitive to changes in incomes, interest rates and credit conditions and these vary greatly over time. Therefore, modest changes in macroeconomic conditions have disproportionate effects on housing. UK empirical work on market rents is less well-developed than for house prices, but the chapter considers the reasons why rents appear to have risen at a slower rate than house prices.

Subsidizing the Housing Costs of Lower-Income Tenants

Chapter 12 turns to tenant subsidies. Since the introduction of income-related housing subsidies to tenants in the early 1970s there has been continuing debate about the relative weight to be given to demand side and supply side subsidies. The numbers helped by the second is limited by available supply while in the UK the first provides an as of right benefit to all eligible households in both the social and private rented sectors. Other issues relate to the efficiency and capacity to target assistance, the relative public expenditure costs to achieve government objectives, and their impact on the allocation of affordable housing and on work incentives. One of the most important and unpredicted changes in housing has been the growth of private renting which now accommodates around 20 per cent of households in the UK. The chapter discusses these tenure shifts and examines how austerity, regulation and changes to welfare policy have impacted on households and affordability.

Housing Demand, Financial Markets and Taxation

In Chapter 7, fiscal and monetary policies are considered and particular attention is paid to structural changes in mortgage finance markets. From the early 1980s the UK experienced two periods of strong mortgage growth: the first lasted until the recession of the early 1990s and the second started in the mid-1990s and ended with the Global Financial Crisis (GFC). However, a distinguishing feature of the GFC period was the fall in mortgage advances, which has never been fully reversed. Credit tightening causes particular problems for first-time buyers as compared to the majority of current owners; the latter typically have sufficient equity in their existing properties, which they can use to finance further purchases. Therefore, the decline in credit availability has had important distributional effects. Accumulated equity also provides an advantage for existing owners entering the expanded Buy to Let market. Similarly, the stress tests that borrowers now have to undertake fall primarily on aspiring first-time buyers and those with volatile incomes. The chapter also considers non-neutralities in the property tax system which can discriminate against first-time buyers.

Influences on Household Formation and Tenure

Chapter 4 concentrates on new household formation and the tenure choices of younger age groups. Not only have the young experienced lower rates of home ownership than previous generations, but they are more likely to remain with parents for longer or share with those in a similar position. The UK is not alone and many other countries have experienced similar trends. Since younger households are now more likely to rent privately for longer, the chapter discusses whether this represents a change in preferences – renting is more flexible – or whether young households are constrained from entering home ownership by high housing costs, credit constraints, job insecurity, competition from the Buy to Let market, demand from older households and from those wanting second homes.

Rental Affordability

Chapter 5 discusses housing for low-income groups. Households face a wide dispersion of housing costs and data for the UK and many other countries show that those on low incomes are more likely to spend a high percentage of their incomes on housing in the absence of support. Low-income households are also more heavily concentrated in the rental housing sectors. The chapter, therefore, concentrates on the measures that have been implemented to support housing and the extent to which the problem of high rents is offset by income related subsidies. The chapter also stresses that low-income affordability cannot be considered in isolation from other parts of the housing market and the economy more widely, notably fiscal and monetary policies and changes in the income distribution, and policy has generally taken insufficient account of the interlinkages.

Subsidizing the Supply of Rental Housing

Chapter 11 discusses subsidies to the supply of rental housing. The traditional approach has been to subsidise first local authorities and then housing associations to produce additional social housing. Later the emphasis shifted to introducing private finance and recycling past subsidy to provide a range of affordable housing products. Additionally, the planning system was modified to make it possible to require the provision of affordable housing on residential development sites. Allocation principles have also changed, moving away from accommodating lower-income working households to emphasising provision for vulnerable households of all types. Here we examine the impact of changing financing mechanisms on the capacity to add to the housing stock; the types of provision; and the rents that are charged across the country. We also consider the impact of Right to Buy and other approaches to transferring accommodation between tenures. Finally, we look to comparable international experience.

Housing, Affordability and the Macroeconomy

Chapter 8 marks the beginning of the book’s policy discussion. Not only is housing strongly affected by the macroeconomy, but housing also affects the economy as a whole. Although housebuilding is a modest part of economic activity, the indirect effects of housing are powerful. Chapter 8 considers these interlinkages. Early research, which concentrated on the relationship between housing and consumer expenditure, generated considerable controversy. The Global Financial Crisis stimulated further analysis, emphasising the role of housing wealth particularly in providing collateral for loans. Recent international studies have considered the impact of liberalisation of international capital markets; the importance of housing and housing finance for macroeconomic stabilisation; and in reverse the importance of macro policy for default, particularly in the light of the US sub-prime crisis. The chapter also discusses the extent to which housing becomes more sensitive to changes in monetary policy instruments in a liberalised environment.