Only a few months ago Britain was making headlines because of Rishi Sunak’s plan to stand by the decision to expand oil drilling in the North Sea, now it is making headlines because the housing crisis in Britain is going from bad to worse to disastrous. Citizens of Britain may disagree on a lot of things, but one thing which has them all on the same page is that Britain’s housing system is in a deep crisis and it has been so for a while.
‘The’ housing crisis
The first half of 2023 gave no space for the UK’s housing market to fulfil at least 1/4th of its New Year resolutions. Right off the bat, factors such as the cost of living crisis, weaker real incomes, and the tightening of monetary policy via higher interest rates made a dent in the housing market during the first two quarters of 2023. And it has been stumbling downhill ever since.
The housing market experienced a slowdown in its growth, with house prices showing a 1% decrease compared to the same time last year, according to the latest Halifax House Price Index for May 2023. This 1% drop had the average house price at £286,532. This marked the first annual decline in house prices since 2012. However, it’s important to consider that this drop can partially be attributed to the fact that house prices were rising rapidly during the same period the previous year, creating a high base effect.
Despite this dip in prices, certain factors have helped prevent a more significant decline. One key factor is the presence of planning restrictions and a decrease in the number of residential building projects within the construction sector. These factors have limited the supply of new homes in the market, which, in turn, has kept house prices from falling further and helped to maintain relatively high price levels.
However, the rising interest rates were and are a cause of concern. Especially for homeowners. In June 2023, the Bank of England raised its policy interest rate (known as the Bank rate) to 5.0%. Making it the highest rate since the global financial crisis in 2007-09. This decision was made because inflation, specifically general price inflation (measured by the Consumer Price Index, CPI), had been consistently high, with double-digit annual increases in March. Additionally, core inflation, which excludes the more volatile prices of food and energy, remained elevated.
The purpose behind raising interest rates was to combat this persistent inflation and ensure that people, businesses, and financial markets don’t start expecting even higher inflation in the future. It’s crucial for central banks like the Bank of England to keep inflation expectations in check, ideally around their target of 2% per year. When people expect high inflation, it can lead to businesses raising prices and wages more aggressively, which can worsen inflation.
The looming rental crisis is adding fuel to the fire
It may be true that the rising interest rates have halted the activity on the runaway market for UK home sales, but on the contrary, the rental market is palpably intense. Joshua Oliver, writing for the Financial Times, mentions how newly let properties in the UK have become more expensive by 25% in comparison to before the Covid-19 pandemic in 2020. This data is released by estate agents Hamptons, suggesting that the real estate market has witnessed noteworthy price increases post-pandemic.
Furthermore, the Office for National Statistics data reveals that annual rent increases in the UK have set a new record for 12 consecutive months up to April of the current year (2023). This suggests a sustained period of rising rental prices over a year. They also reveal that annual UK rents rose by 5.3% in July. While the pace of annual rental growth may be slowing down, rents remain unaffordable for many tenants and continue to rise. This could pose challenges for individuals and families trying to find affordable housing in the UK. As if things were not bad enough the demand for rental properties has skyrocketed. Therefore owing to the scarcity and the persistent increase in the demand, the chances of all the individuals seeking for places to live in, finding one that would actually satisfy them, are pretty slim.
If we track the year-on-year change of the UK’s and London’s private rental costs from 2016 to 2023, side by side, their trajectories show only slight differences. While in 2016 private rental costs in the U.K. changed by 4%, London recorded a number close to 3%. Despite there being a gradual decrease from 2016 to 2019, there was a sudden spike in the years 2020 and 2021. However, there is a massive gap between the percentages that were recorded in 2022 and 2023, with 2023 reaching an all-time high of 5% in both the U.K. and London.
According to Zoopla’s (a property portal website and app) research, an average tenant in the UK is now expected to pay 28.3% of their pre-tax income toward rent. The affordability of renting homes in the UK is currently at its lowest point in a decade in seven out of the 12 regions and countries within the UK. In London, the situation is even more challenging, as renters are spending 40% of their gross earnings on rent. However, this is a slight improvement compared to the peak in September 2015, when renters in London were spending 43% of their earnings on rent. Even though that is barely something to rejoice over, there is some comfort in knowing that it has not hit rock bottom, yet.
Over the past year, rental prices have been increasing at a rate of more than 10% annually, with rents rising by 10.4% in the last 12 months alone. This means that rents have been growing more rapidly than the average earnings of individuals for nearly two years, making it increasingly difficult for people to afford to rent a home in many parts of the UK.
It is evident that these outrageous rental prices are pushing people to the brink of their financial capabilities, however, it is also true that it is a bidding war out there where there are dozens of tenants who are competing for every listing. The situation is extremely dire that Frome Town Council has officially declared a housing crisis owing to the soaring rental prices that outdo the financial capabilities of locals in the town. According to an article written by Dave Harvey: Business and Environment correspondent, BBC West, in Frome, the average monthly rent has increased to £1,499, which now constitutes 50 percent of the average salary in the area, making it impossible for individuals to afford housing anymore.
Councillor Polly Lamb, who introduced the proposal, expressed her concerns about the increasing rents, which are pricing out long-term residents. As a response to this growing problem, Frome has become the third town in the country to formally declare a housing crisis, following suit of South Hams in Devon and Leicester.
While this situation in the UK has everyone running around like headless chickens, experts are of the opinion that aggressive suppression of rental prices is not the way out. While it is a common belief that rent control would solve at least half of the issue some scholars have even argued that a meticulously crafted rent control system has the potential to address the affordability problem, many economists outright reject the proposition.
The primary objection to rent control is that it can limit the financial incentives for landlords, potentially leading them to exit the rental market and discouraging new landlords from participating. This outcome, in turn, can result in a decrease in the overall supply of rental properties, exacerbating the challenge of accessing affordable housing. In essence, critics argue that rent control can have unintended negative consequences on the rental housing market.
Therefore it is important to realise that the housing crisis as a whole, in which housing affordability is a component, is an intricate problem that requires a suitable combination of policies and not just a single drastic measure that could add to the stress rather than resolve it.
(Sandunlekha Ekanayake)