Do we really have a housing shortage?
Capital Economics have produced a new report that plunges me into fresh doubts about the UK housing market.
I used to regard the UK housing market as a massive bubble. But I’ve been moving to the view in recent years that the UK has a chronic supply problem, which is the reason average British house prices have fallen, yet not collapsed. If house prices were going to plummet, wouldn’t they would have done so by now?
However, Capital Economics does not buy the supply constraint argument for high prices.
It points out that, if there were too few houses, rents would have shot up at the same rate as house prices.
That hasn’t happened:
While house prices have taken off over the past 15 years, rents have only climbed gradually.
But haven’t rents been rising in recent years? Yes, but only up to long-run averages:
In other words, during the boom, rents were cheap by historical standards. What we’ve seen is a correction.
I’m not entirely convinced by Capital’s case. I still suspect a shortage of supply will add support to prices. Capital, by contrast, expects them to fall by 5% this year and a further 5% in 2013.
But, regardless of the supply/demand debate, there’s no question that houses are very expensive relative to average earnings.
This chart shows what proportion of the average wage a 20% deposit would consume:
So a prospective first-time buyer on average earnings asked for a 20% deposit would have to save 80% of their annual income to buy an average house. As recently as 1995 it was less than 15%.Tagged in: bubble, Capital Economics, house prices
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