Why are house prices rising? The answer is more complex than high-interest rates and price-gouging. Those factors play a role but are only a tiny part of the truth; they don't paint the whole picture. To give this question its proper due, we have to look at
- how our housing market got into the shape it's in
- the factors involved in setting house prices
- how those factors dictate consumers' spending decisions
- how government action impacts the housing Market
Around the world, people have a strange habit of compartmentalising everything. The assertion that people aren't buying houses because prices are high is an excellent example of such. Fast fashion and food choices are more widespread instances.
Media has been torn about sustainable fashion lately; even our beloved Love Island has jumped on the bandwagon. Everyone's urging everyone to consider where their clothes come from and how environmentally damaging their fashion choices are. The uproar over food sourcing is more muted but there, nevertheless.
Buying clothes and food is no longer a matter of "I want this. Here's my money". Neither is buying a house or renting a flat. The housing market and all the factors that shape it have profound effects on our society, economy and environment. So let's skirt the easy and often incomplete answers to get a complete picture of what house prices are doing.
Exploring the Relationship Between Housing and Economic Growth
Let's say a chunk of money just landed in your hands. If you're a wage earner, payday might be such an event. If you're a student, you might receive a bursary from your university, or maybe your family paid you for a bit of work around the house. No matter how you came into that stash of cash, you feel expansive, like you could walk into a shop with your head held high and buy anything you want.
That feeling has a name: the wealth effect. Even if your allotment amounts to just enough to get by for another month, you feel relieved knowing you'll be fine for that while. For homeowners, that feeling is magnified.
A home is a tangible asset that allows homeowners to build wealth. It's the most assured path to wealth building. People who own their homes feel assured of their future financial security. They know that they can tap into their home's equity if anything happens to get the cash they need.
Being confident in their financial security, homeowners are less opposed to spending. They might buy things to decorate their home or expand their wardrobes. They could tap into their home's equity to afford big-ticket items like renovations or a new car.
But it's not only homeowners who enjoy that feeling. Renters whose monthly lease takes up at most the recommended 1/3 of their take-home pay also enjoy this sense of confidence. They can pay a little each month to afford future homeownership. And if they manage their money wisely, they too can afford a bit of extra shopping.
All of this spending stimulates the economy and provokes economic growth. This growth is how nations measure their wealth. So it would seem governments would do everything they could to ensure that as many people as possible enjoy the wealth effect, right? The answer is a bit more complicated than that.
The Effects of Housing Market Fluctuations on Homeowners and Renters
The wealth effect brings people confidence and assurance in their financial stability. What happens when that confidence is shaken? Anyone wondering, "What are house prices doing?" knows those consequences. House prices are beginning to dip, which is an ominous economic indicator.
Many economists point out that the property market is like any other. These self-regulating markets are presumably stuffed with buyers and sellers striking their bargains. Such a simplistic vision doesn't account for variables that might impact either buyers, sellers or the market. Inflation and rate adjustments are two such factors.
Even before the coronavirus pandemic, our housing market was a mess. And then, post-pandemic, we saw inflation surge out of control. To rein it back in, the Central Bank has been raising interest rates on lending. These rate increases make downstream entities like commercial banks and housing developers (building societies) more reluctant to write mortgages.
For renters, this means their chance at homeownership is receding ever further. For homeowners, the wealth effect starts waning. They feel less confident in their financial security and hang onto more of their money. That, in turn, stalls economic growth.
With all that said, housing markets' fluctuations aren't necessarily bad. For instance, if the difference between rental and ownership prices is too significant, it might mean that the houses in that area are overvalued. The market will then self-correct, adjusting prices accordingly. It doesn't sound straightforward, but only if you can't see how such adjustments could be made.
The Role of Government Policies in Shaping the Housing Market
Any participant in the housing market last year knows how disastrous the mini-budget was. Anyone with a mortgage felt the total weight of that misery. All the renters suddenly found themselves assailed with extra fees. You might think that event is all you need to know about the effect of government policies on the housing market.
But there's more. For instance, consider the number of properties turned into holiday lets. They represent housing stock that could accommodate a range of housing needs. University students near graduation need a place to live, as do seniors who've opted to downsize.
What about foreign investors? They tend to jump on the highest house prices in the UK. A recent report revealed that thousands of properties in London sit vacant; they're investments in overseas buyers' portfolios. But these investors don't just buy the most expensive properties; apartment blocks and estates are up for grabs.
Governments around the world condone and authorise these initiatives. On the surface, they sound like just the thing to stimulate economic growth - and that's what they do, to an extent. But holiday lets also take needed housing stock out of the market. And courting investor money places what housing is available out of buyers' and renters' price ranges.
These are one aspect of government policy impacting house prices rising. Others include raising interest rates to tame inflation and keeping themselves out of the property development business. The cost of living in the 1967 UK was much lower, partly because the government of that day abided by the Housing Act.
For a long time, the British government planned, financed and built council housing. But the mid-80s saw a change of policy. Government housing became privatised. One might say that the 40-year-old government policy still shapes the British housing market.
Affordable Housing Crisis: Challenges and Potential Solutions
It's not like our government can tell investors to find different shores to park their money on. But they could shape the investment landscape so that there might be housing for all. And they might revise our landscape so that building societies may plan communities closer to where people's jobs are.
But a depleted housing stock is only a part of the story. What housing is available is priced out of reach. So our government should plan to build or make available housing people can afford. Such might involve everything from compact homes within city limits to building senior communities outside Green Belts.
Our government could do a lot to alleviate this affordable housing crisis. But they have to have the political will and consensus to get anything done. It's instead telling that even comedian Russell Howard points out how little of both - will and agreement there is. But opposition parties are, again, only part of the story.
Solving housing challenges can't and won't happen by decree. Many factors go into determining countries' economic conditions, including international laws, treaties and agreements. Going back on them or trying to renegotiate them would take time and political capital, two assets our government cannot afford to waste. Besides, we know how well Brexit worked out.
Establishing price controls would be an efficient start towards affordable housing. The government has just taken that step by passing the Rental Reform Bill. It states that landlords cannot raise tenants' rents more than once yearly. It also covers landlords' current penchant for evicting their tenants when a better prospect arises.
Some believe this bill is written to mask how much agency investment groups will gain over the housing market. That may turn out to be the case. As the bill is not yet finalised, we don't know. But we can say that few are feeling the wealth effect right now, and our economy will suffer. Our government must meet Britain's housing challenges head-on if they hope to solve our crisis.
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