The Crisis in Housing Affordability
And it's only getting worse
The newly elected Labour government has put housing front and centre of its policy commitments. It plans to build 1.5 million homes over the next five years to tackle the housing shortage. The lack of housing supply is a contributory factor to the rise in house prices and rents over the last few years.
So what does the housing affordability problem look like in Great Britain and how does it differ between buying and renting a home and by region?
The current situation
Housing affordability is usually expressed in relation to owning or renting a home privately. Currently 64% of households are owner occupiers either because they own their home outright (35%) or because they are buying with a mortgage (29%). Private renters make up 19% of households.
Over the last 10 years both house prices and private rents have increased rapidly and both have outstripped income. In 2013, the average price of a house in Great Britain was £251,000. Ten years later it was £334,000. It's a similar story with private rents. An average monthly rent of £900 in 2013 is now over £1,200.
In the chart below we have converted annual house prices and the annual private rent into an index with 2013 value set to 100. We have done this so that house prices, rents and income can be shown on the same scale.
The chart clearly shows a growing housing affordability problem. House prices increased consistently from 2013 to 2022, peaking at about 144% of their 2013 level. There was a slight decline in 2023 putting the average cost of a house in 2023 at £334,000.
Private rents also rose over the period, with a more gradual increase compared to house prices. However, the rise in rents accelerated sharply in 2022 and 2023, reaching £14,600 a year or 136% of their 2013 level.
Annual median income (before housing costs) increased much more slowly compared to both house prices and private rents. By 2023, income had only risen to about 110% of its 2013 level.
Affordability of housing costs
The widening gap between income and house prices and rents has led to housing costs becoming less affordable. To demonstrate this we use two measures of affordability:
- House Price to Income Ratio: This tells us how expensive houses are to buy in relation to people's annual income.
- Rent as a Percentage of Income: This indicates how much of their net household income (income after tax) people would have to spend on an average rent in their region.
The ratio between house prices and average income is now well over 10:1 whereas just 10 years ago it was 8.5:1. In 2013, rent as a proportion of net income was 36%. Now it is 45%.
The current affordability issues shows significant regional variations as the charts show.
The ratio between house prices and income are much higher in London, the South East, and the East of England and have grown larger over the last 10 years. But the causes are different. For London and the South East, the growth in the ratio is caused by high house price inflation. For the East region, house prices are much lower but average annual income is also much lower. With income multipliers increasing over the long term, there has to be a question mark raised over how feasible home ownership is for a significant proportion of local people.
And the situation with private rents is no different. Rents have taken up an increasing proportion of income over the last 10 years and in London the average rent is now over 60% of average net income. But even traditionally more affordable regions such as Wales, Scotland and the North East, have seen increases recently. For most regions, 2020 represents the inflection point of increased affordability issues. Rents have increased significantly post covid in line with house prices.
Conclusion
The rise in housing affordability pressures across the country underscores the urgent need for targeted interventions. As house prices and rents relative to incomes continue to increase in traditional hotspots like London but also in traditionally more affordable areas, it's clear that a one-size-fits-all approach to housing policy may not be effective.
Each region faces unique challenges driven by varying local economic conditions, housing supply issues, and income levels. To address these disparities, policies must be tailored to the specific needs of each region, ensuring that solutions are both effective and equitable.
A nuanced, region-specific approach will be crucial in tackling the growing housing affordability crisis, helping to secure stable and affordable housing for all GB residents.
