The Housing Question No 3: Jubilee generations

This week: Real house prices, late home ownership, tenure changes, mortgage insurance, flats

Welcome to the third issue of The Housing Question, my newsletter covering everything to do with, well, housing. It’s still a work in progress but let me know what you think and please consider subscribing and sharing on social media if you like what you read.

Happy and glorious

Ahead of the Jubilee weekend, the Institute for Fiscal Studies has published some brief analysis of the fortunes of the generation of people born at the time of the Coronation in 1952. As they point out, this was the generation that rode the first wave of the property boom. Around 85 per cent of these 70-year-olds are home owners and one in seven of them own a second home.

When there’s no future, how can there be sin?

John Lydon marked the Silver Jubilee with one of his more profound lyrics. As we prepare to mark the Platinum equivalent, many people born since 1977 might wholeheartedly agree.

The reason? Unaffordable housing, of course. Savills marked the occasion with a press release pointing out that an average house worth £2,000 at the time of the Coronation in 1952 would be worth £56,000 in today’s money, a rise of 28 times. If house prices really were worth that now, imagine the opportunities it would open up for today’s young buyers saddled with huge and lengthening mortgages or for renters stuck paying someone else’s mortgage.

If only. All that was just England’s dreaming. The average house is instead worth more like £260,000, 130 times more than in 1952, and 365 per cent higher taking inflation into account. Savills does not give the source of its data but its figures roughly agree with Nationwide figures dating from 1952, when the average price of a house was £1,891, to the first quarter of 2022, when it was £260,771. A large slice of that increase has happened in two periods since the Sex Pistols took that trip on a boat, 1982 to 1989 and (after pausing for the early 1990s crash) 1995 to 2007. That is clearly illustrated in this graph from the Nationwide mapping real house prices adjusted for retail prices against the trend of 2.5 per cent per year real terms growth:

There are of course all sorts of caveats to be made here about the data and the measure of inflation but the comparison with prices in general does not tell the whole story. The prices of homes rise in line with the ability of buyers to pay for them, not prices in general. Taking data from measuringworth.com, average annual earnings in 1952 were £375 a year. In 2021, they were £30,160 a year. On that basis you would expect an increase of just over 80 times, making a house worth £152,000 today. Allowing for more caveats about how you measure household incomes, a true comparison would also have to take account of the rise in dual-earner families since the 1950s, increasing the household earnings of mortgage borrowers.

Moreover, the ability to pay for a house is not just down to household earnings but is also crucially dependent on how much you can borrow to fund a mortgage. Until the late 1980s this was controlled by a cartel of building societies that lent at three times a single income or two and a half times a joint income at relatively high rates. Since then, lending multiples have risen and mortgage rates have fallen with the advent of competition from the banks after the Big Bang, lower interest rates after Bank of England independence and record low rates after the financial crisis.

Long to reign over us

And that’s not the end of the story. The last 70 years have seen a transition from what Ray Forrest and Yosuke Hirayamacalled ‘early’ to ‘mature’ to ‘late’ home ownership. An era in which society was becoming less stratified, thanks in part to the growth of individual home ownership, has given way to one in which there is increasing social restratification between ‘real estate accumulators’, ‘housing wealth dissipators’ and propertyless ‘perpetual renter families’.

Under late home ownership, house prices are driven not just by earnings and credit but also by inheritance and family money and real estate investment strategies. Home ownership and owner-occupation have diverged thanks to the rise of multiple property ownership and a housing market that once allowed a broader distribution of wealth has instead become a source of wealth inequality. It’s an appropriate note on which to celebrate the Diamond Jubilee of the one of the biggest landowners in the country.

God save us all

All this interacted with what was happening in other tenures. For the first 25 years of the Queen’s reign, local authorities were building large amounts of affordable council housing. Cuts in public spending and borrowing, plus the introduction of the Right to Buy three years after the Silver Jubilee began the long years of decline. The Right to Buy contributed to a seven percentage point rise in owner-occupation between 1981 to 1991 but a single generation benefitted.  

For most of the first half of the Queen’s reign, the private rented sector was subject to various forms of rent control and regulation and tenancies were secure. The removal of those protections after 1988 created the conditions for the rise of Buy to Let – and of multiple property ownership.

The Silver Jubilee year also marked a high point for homelessness legislation as the Housing (Homeless Persons) Act 1977 filled gaps in the post-war welfare state for families. For all the progress made since, especially in legislation in Scotland and Wales, it remains the high point.

Frustrate their politics

Owner-occupation in the UK increased from 32 per cent at the Coronation in 1952 to 54 per cent at the Silver Jubilee in 1977 and peaked at 70 per cent just after the Golden Jubilee in 2002. Since then it’s slipped back to 64 per cent.

Could that trend be reversed? Yes, says a new paper by Iain Mulheirn, James Browne and Christos Tsoukalis for the Tony Blair Institute for Global Change. Contrary to conventional arguments about increasing the supply of new homes being the way to increasing home ownership, they argue instead for reform of the mortgage market to make it more accessible to buyers who cannot afford a large deposit and lack access to family wealth. As things stand, they face higher interest payments than normal buyers if they can get a mortgage and even higher rents if they can’t.

Key to this will be mitigating against the risks that lenders associate with higher loan-to-value mortgages and limits on lending multiples introduced for understandable reasons after the financial crisis. In theory, there is already a mortgage guarantee scheme in operation but this only lasts until the end of 2022, remains peripheral to the market and only covers about 5 per cent of first-time buyer mortgages. They blame risk aversion among lenders and a cautious regulatory environment for the decline in high LTV lending.   

Their solution is to double down on the scheme by making it compulsory for all mortgages over 80 per cent LTV, arguing that in other countries (Canada, The Netherlands) with state-backed schemes insured mortgages are cheaper and more available because they are accepted as less risky. This could be accompanied by more long-term fixed rate loans and further financial reforms. This graph from the report shows the premium charged for high LTV mortgages in different countries:

But wouldn’t that just increase credit and therefore house prices? Not, they say, if mortgage insurance premiums help to calm the market and not if the effect is to redistribute credit rather than increase it. For this reason, there may be a need for offsetting fiscal or regulatory measures on buy to let and second homes as well as reform of other tenures. They conclude that:

‘It should be possible to return safely to the pre-crisis home-ownership levels of close to 70 per cent without jeopardising financial stability. But doing so will require careful and conscious reform of how our mortgage market functions so that home-ownership aspirations are no longer exposed to volatile risk appetites in the financial sector. More broadly, helping families to realise their ownership aspirations need not come at the expense of much-needed and complementary reforms to the social and private rented sectors, so that everyone is freer to choose the right tenure for their needs.’

It's an agenda that chimes with the new emphasis put by Michael Gove on the mortgage market (while down-playing the 300,000 new homes target) and with ideas put forward by other think-tanks. It will also revive institutional memories of the debacle over mortgage indemnity guarantees after the early 1990s housing market crash, although they argue this need not be an insurmountable problem.

It is also a reformulation of tests that the mortgage and housing markets and housing policy have failed many times before thanks to the political imperative of appealing to existing home owners. Those are how to liberalise lending without also triggering a fresh round of house price inflation that only benefits those who already own and how to focus across the housing system and tenures rather than obsessing over home ownership alone. Those failures are a big part of the housing story of the 45 years between the Silver and Diamond Jubilees.

The flowers in the dustbin

An additional problem is the dysfunctionality of a key part of that market. As Neal Hudson argues in a piece for the Financial Times, problems in the market for flats undermine the whole notion of a housing ladder that allows young buyers to trade up from cheaper to more expensive homes as their incomes and equity grow. For the first 20 of the last 25 years, flats saw the fastest price growth of any type of property; since 2017 they have seen the slowest growth, just 2 per cent a year, compared to 6 per cent for detached houses.

Three factors are to blame, he suggests: a decline in the investor market following increased stamp duty in 2016; the escalating building safety crisis following the Grenfell Tower fire in 2017; and the litany of problems with the leasehold system that the crisis has helped to expose.

And this in turns highlights an inter- and intra-generational housing problem. Buyers with access to family wealth may be able to skip a few rungs of that malfunctioning ladder and move straight to buying a house while those who have scrimped and saved to buy a flat may find themselves stuck on the first rung with no way to climb.

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