UK Housing Market Slowdown Due to Affordability, Not EU Vote

UK Housing Market Slowdown Due to Affordability, Not EU Vote

The UK’s housing market is showing signs of slowing down; price growth is lower, fewer buyers are active and forecasts have been cut. Many headlines and commentary scream that it’s ‘all because of Brexit!’ But the truth is that the vote simply served as a stark reminder that prices are too high for many hard working Britons to afford and that’s because there is a drastic undersupply of homes in the UK and has been for many years.

Back in 2004, then Bank of England member Kate Barker presented the findings of her ‘Review into Housing Supply’. The report remains as relevant today as it was then. Her in-depth study found that the UK needed to dramatically increase its home building output in order to home the growing population and also keep it affordable. Ms. Barker concluded that 240,000 new homes per year were required in order achieve this, a figure that is still quoted as a target today. In 2004, 190,590 new homes were built across the UK, making a good starting point to achieve the new target.

Building rates did rise over the next three years with 219, 080 new homes completed between April 2006 and May 2007. Then the global credit crunch hit and construction plummeted as investors were spooked and lending ground to a halt.

Fast forward a few years and building completions remain pretty low. In the 12 months to the end of May 2015, 152,380 new homes were built across the UK and preliminary figures suggest a number close to 165,000-170,000 were ready for people to buy and rent by the end of May 2016.

What does all this have to do with affordability? Well, if something is in high demand but there isn’t a huge supply of it, then the price of that item is driven higher and this is what has been happening in the UK’s housing market; there aren’t enough homes in the right areas available to buy or rent so their value has increased.

In the meantime, earnings growth has remained low, hovering between 1.9% and 2.8% over the past year or so, well short of the 3.5%-4.7% seen between 2001-2007. This means that while the price of property has risen sharply – in the region of 10% per year – earnings growth has slowed. At the same time, mortgage lending rules have become stricter. This combination has made property less affordable for everyday, working Britons.

When you read your next headline proclaiming that Brexit has done for the housing market, just take a minute to think about what it actually means. The EU referendum result hasn’t immediately made the price of property lower. What is has done is make people think carefully about value and risk. And it is this mindset which is causing investors, home-buyers, builders and lenders to re-think their plans. In this scenario, property is less in-demand so the price of it has adjusted accordingly.

If there had been enough homes in the first place they wouldn’t have been so expensive which questions how much of an impact any big economic decision might have on the housing market.

1 Comment. Leave new

Thanks for the post! Is there any specific reason for the fall in the UK housing market?

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