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Why the UK housing market is so broken

And what to do about it

It’s common knowledge that something has gone wrong with the UK housing market. In 1950, the average house cost roughly £40,000 (adjusted for inflation to 2012 values); nowadays it’s around four times that, with the result that rents are sky-high and first time buyers are often in their forties.

Of course the reasons for this are complex: interest rates, availability of mortgages, changing social patterns, and internal migration, to name but a few. However, underlying this, some simple things have had the most important influence.

What was the major driver for house market inflation? Prices really took off in the 1970s, when public sector building programs fell off a cliff. The private sector was very slow to take up the slack (and has never fully replaced the rate of building of pre-1970s councils). Partly this was lack of capital, but the more significant reason was because the political and planning system did not react to the changing development landscape, and planning applications from private developers were not granted at a significantly increased rate.

One of the most striking statistics is that a house now costs around £70,000 to construct; roughly double what it cost in 1950. Over the same period, the adjusted cost of a low-end family car has remained at around £9,000. And this despite the fact that cars have become much greener, safer and much more comfortable. True, houses have more electrical sockets, and better insulation; but they also have smaller rooms and probably smaller gardens too.

So, why is this? The simple answer is that the construction industry has had absolutely no incentive to innovate. Because house prices have risen so dramatically in real terms, the increasing cost of the fabric has been easily absorbed into the sales price of new houses. Any decrease in construction costs would simply have resulted in an increase in land prices. And innovation carries risks: mortgage companies may look unfavourably on “unknown” aspects, consumers may not accept non-traditional offerings, or there could be claims against the builder if the house has problems in the first few years.

These are all sensible short-term considerations, and continuing with the old ways makes immediate good sense; but in the longer term, it has been very bad for the country. For example, for a given investment, the public sector can now construct only half the number of dwellings that it could sixty years ago. Innovators in construction have had an uphill struggle to gain traction in the marketplace; consequently with such a small home market, opportunities for export have been lost.

So how do we fix things? To rebalance the real cost of housing will take decades; realistically we can only erode the real cost with inflation. If the actual value of houses falls, negative equity will cause significant problems and is politically a non-starter. Restarting public sector building programs will relieve the upward pressure on prices, as will reducing the bottleneck that is the planning process. But if in the twenty-first century we want to have better, greener homes that are cheaper to build, the only real answer is to encourage R&D with political action. We can either directly invest through organisations like the BRE, and programmes like the Technology Strategy Board, or apply political pressure in other ways such as tax breaks or regulating mortgages.

The cheaper the construction costs, the more we can tax the housing developers through mechanisms like Section 106 or Community Infrastructure Levies. Outcome: more finance for public sector housing, and more export opportunities. What’s not to like?

Edit 2012-10-04: Another undesirable side-effect of this situation is that it creates an opportunity for foreign companies to enter the UK construction market. I’m told that the finish quality of Swedish-built houses in the new development in Trumpington (near Cambridge) is significantly better than those built by UK firms. Lower costs and better design will allow foreign companies to out-bid UK developers for land, sell faster and make more profit too.

Maybe this will finally provide the impetus for our construction industry to invest in R&D? If it’s not too late.
 

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  1. Community facilities in Cambridge | A dragon's best friend linked to this post on 2012/10/05

    […] hard-pressed house-buyers. Local Lib Dem activist Kim Spence-Jones takes a different view in that there is widespread market failure in the housing market. I’m with Kim on this one, taking the view that taxation is the price we pay for living in a […]

  2. Why the UK housing market is so broken | weeklyblogclub linked to this post on 2012/10/20

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