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Today’s young adults are much less likely to own a home than their parents’ generation, but those owning a home well before the crisis have gained from house price increases and a sharp fall in housing costs.
The UK has witnessed a substantial and sustained increase in house prices since the 1990s. This long-term rise in house prices, and the financial crisis which led to falls in real incomes and reduced availability of high loan-to-value mortgages, are perhaps the main causes of widespread concern about the ‘affordability’ of housing. In a new election briefing note funded by the Nuffield Foundation and published today, IFS researchers set out a range of evidence on how the affordability of housing, and – related to that – the kinds of housing that people access, have been evolving.
The real price of purchasing a typical house, as measured by the Nationwide house price index, nearly trebled between 1995–96 and 2007–08, taking it 77% higher than its previous peak in 1989. When thinking about affordability, we of course want to account for changes in incomes too. At their peak in 2007–08, average house prices were 7.6 times average net household incomes – significantly higher than the ratio of 6.4 at the end of the previous house price boom in 1989. But real house prices then fell by nearly a quarter between 2007–08 and 2012–13. This left the price to net household income ratio at 6.2 – back to around its early 2000s level and close to its level at the end of the 1980s boom. Significant real growth in house prices resumed from 2013–14.
When considered in combination with the lesser availability of mortgage credit since the crisis, it is not surprising that there is concern over the ease of access to homeownership. And in London, house price to income ratios have bounced back substantially more quickly since the financial crisis. Indeed, if we use pre-tax average earnings (for which, unlike net household income, we have data beyond 2012–13), we see that in 2013–14 the price to earnings ratio in London had already surpassed its pre-crisis peak.