Affordability of Housing in The United Kingdom - Growth of House Prices

Growth of House Prices

As recently as the mid 1970s, the average house price in the United Kingdom was just over £10,000. A steady increase followed over the next decade, and by 1986 that figure was in the region of £40,000. However, the economic upturn of the late 1980s saw that figure rise to around £70,000 in 1989, dropping slightly in the early 1990s due to the recession.

However, between 1998 and 2007 house prices in the United Kingdom rose dramatically, generating large increases in home equity for many homeowners but also making housing unaffordable for other people. Most developed countries experienced sharp increases in house prices in the early years of the new millennium. The UK situation was different in two regards. First, the house price boom started earlier and saw more sustained increases. Second, the regional pattern was fairly uniform. Between 2002 and 2007, house prices in the UK rose by 90%, faster than any Eurozone nation except Spain.

The average (mix-adjusted) house price in the first quarter of 1998 was £81,722, but at the peak of the market in the third quarter of 2007 the average price was £219,256 – over two and a half times higher or a total increase of 168%. Between the first quarter of 2001 and the fourth quarter of 2006 prices increased 60%, again when adjusted for inflation (figures from the Nationwide Building Society's house price data). House prices at the end of 2006 were 35% higher than they would have been if the long-term trend rate of growth - 2.6% per annum in real terms since 1976 - had been maintained. In 2008, house prices started to fall but they have stabilised as of August 2009. This may reflect the housing market's normal seasonality or it may indicate a genuine recovery. Some analysts now expect UK house prices to contract by 50% in real terms. Adam Slater, senior economist at Oxford Economics has forecast that "it will take quite a few years, possibly a decade, before real house prices get back to their peak levels”.

The increase in the house prices has made the housing market increasingly difficult to enter. The ratio of lower-quartile house prices to lower-quartile earnings, a measure of affordability used in the Barker Review of Housing Supply, rose from 4 in 2000 to 5.2 in 2003 and 7.1 in 2006. At a regional level, the problem of unaffordable housing is no longer confined to London and the South East, but now affects almost the whole of England. In July 2009 the ratio of house prices to first-time buyers' incomes remained higher than the historical average.