Blogs | September 29, 2016

Is debt the main driver of the UK housing market?

Chris asks: Do you accept it is debt that is primarily driving the housing market in the UK, not a shortage of housing?


Ian answers: No, I don’t think debt is the primary driver of the housing market in the UK and elsewhere – although it is certainly a big contributor. The most obvious culprit is the chronic under-supply of housing, with debt secondary.

A market in need of repair
The UK has not been building enough homes for a long time; it has the lowest rate of house construction in Europe. Meanwhile, population and demand for housing continue to grow – resulting in a persistent mismatch between supply and demand. 

Way back in 2004, the Barker Review of Housing Supply advised that 250,000 homes a year should be built in England alone to bring house price inflation under control. This rate of construction was last achieved in 1979! According to the Barker Review, a mixture of dysfunctional planning laws and short-term policies have been major contributors to this housing crisis. A decade later, in 2014, the same author wrote a short book Housing: Where’s the Plan? indicating not much had changed. 

The situation is particularly acute in London. According to data from UK building society Nationwide, housing in the capital is two or three times as expensive as elsewhere in the UK. 

We don’t need behavioural economics to explain what is happening; the UK housing market is simply a prime example of general market failure.

Answering another question
However, Chris, I suspect that hidden behind your question is the idea that if people did not borrow so much house prices wouldn’t be so high. If so, you may really be asking whether people are being overly affected by peer pressure and the politics of envy. Is the urge to buy a house and “get on the property ladder” so strong that people are taking risks with their financial situation? In many cases, you are undoubtedly correct.

Yet Bank of England analysis for its July 2016 Financial Stability Report shows UK household debt declined in the eight years following the 2008 financial crisis. The report, however, also notes that buy-to-let has driven mortgage lending in recent years. If debt is a driver of the UK housing market, investors – rather than those looking to buy a home –may be playing a big role. Perhaps they believe house prices in the UK are a one-way bet. 

Responsibility in a dysfunctional market
The trouble is the UK housing market is dysfunctional. If you don’t buy, you may be priced out of the market – but if you do, you end up owning an asset that might fall in value. Meanwhile, houses are the ultimate status symbol: size, location and quality signal prestige – and the “keeping up with the Joneses” effect kicks in to cause lifestyle pressure that translates into rising housing costs. And it’s easy to fall for thinking traps such as herding, peer pressure and recency bias. 

Yet we don’t need behavioural economics to explain what is happening; the UK housing market is simply a prime example of general market failure.

Lessons for buyers outside the UK
It also appears that high house prices affect many countries besides the UK. The IMF’s global housing watch finds that housing is more expensive than the UK in New Zealand, Australia, Sweden and Germany, when house prices are compared with incomes. ING’s annual research on homes and mortgages discovered that people in 11 of 15 countries surveyed consider housing expensive. As a result, one in three said their lives are on hold due to housing issues.

Nevertheless, 69% across Europe indicated they are happy with their housing situation, even if they had to compromise on their choice of house. Perhaps one lesson from this is that, even if you can’t buy the house of your dreams, you may be able to adapt to the compromises you are forced to make.

However, fewer compromises would be needed if housing markets worked better.

Ian Bright
Ian Bright

Senior economist at ING
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