Market Insight - April 2015
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How Times Have Changed

Focus Economy Sales Lettings RDI


Framing the debate.
Who’s paying for forty years of growing house prices?

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The housing market has experienced large tenure shifts in recent years. According to the English Housing Survey the private rented sector grew by 421,000 households over the last year alone. At the other end of the spectrum the number of households owning a home without any debt overtook those with a mortgage.

These shifts in tenure are a focus of the intergenerational fairness debate. Where the lifestyles and wealth the baby boomers born between 1945 and 1960 enjoyed are compared and contrasted against the experience of generation Y, born between 1980 and 2000. The boomers seem to win out as they benefitted from huge real increases in house prices, creating the kind of wealth which generation Y can only dream of.

A simple comparison of house prices over the last 40 years shows prices have increased 17 fold since 1975. But taking inflation into account changes this substantially. A property in 1975 cost about £10,500, but in today’s money that’s £86,000. So after inflation, the value of a property today is on   2.2 times higher than 40 years ago. A fraction of the 17 times simple prices have increased, but more than enough to have serious ramifications for affordability and access to home ownership.

To illustrate the effect of rising house prices on affordability and purchasing power, we’ve calculated how much space a typical buyer could afford today versus what they could have bought in 1975. A first time buyer today with a household income of £40,000 and a 20 per cent deposit could purchase about 650 square feet of space at average prices, roughly the size of a small two bedroom flat, where as in 1975 they could have stretched to a 3 bedroom terrace at 1,060 square feet.

Click to enlarge.

In practice the difference in purchasing power manifests itself in more ways than simply how much space purchasers are able to buy. For generation Y many would- be buyers simply can’t afford to buy due to high house prices, instead they’re either renting or living at home with parents. Others at the start of their ownership journey, who can affo   to buy, may be balancing compromises on location, space and quality of property.

On the other hand many of those that have owned homes since the 70s have benefited from prices growing above inflation. Their purchasing power has increased, with their wealth often reinvested into the housing market through buy to lets, second homes or assistance for young family members trying to buy their first home.

There’s no quick fix available for the political parties currently campaigning in the run up to the general election. Managing the interests of the older generations, more likely to be property owners against the younger, less likely to own, generations is something no mainstream party has yet to get right. What does seem to be clear is that delivering new homes into the markets that need them most is likely the best long term solution.

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