Modest shocks to the economy could cause house price crash, University of Reading report warns.
What’s the latest?
The UK is unlikely to ever build enough homes to make property affordable, but first-time buyers could benefit from a house price crash.
Housing policy to improve affordability tends to focus on increasing the supply of properties, according to a research report by the University of Reading.
But buyers remain frozen out of the market because supply cannot hope to keep pace with growth in the economy.
Instead, first-time buyers’ best hope of getting on to the property ladder lies in a house price crash, which is made increasingly likely by the high level of house prices to earnings.
Why is this happening?
The research, which was presented to the Royal Economic Society’s annual conference, said in order for housing affordability to stabilise, housing stock must grow at the same rate as real household income, but in practice this is probably impossible to achieve.
The UK has known since the Barker Review in 2004 that it needs to build at least 250,000 new homes a year to keep pace with demand, but the rate at which properties are built remains well below this level.
The report said: “The increases in housing supply required to improve affordability have to be very large and long-lasting; the step change would need to be much larger than has ever been experienced before on a permanent basis.”
But it added that as affordability becomes increasingly stretched, even modest shocks to the economy could cause a house price crash.
Who does it affect?
The prediction that affordability may only improve with a house price crash is dispiriting news for those trying to get on to the housing ladder.
While a fall in prices may help them to purchase their first home, the research suggests the UK will continue to experience boom and bust cycles unless it builds enough homes.
As a result, while a crash may help them buy their first property, they are likely to suffer a fall in the value of their home when the next house price downturn happens.
The report concludes: “Market crashes are hardly an optimal policy response to improving affordability, given the wider effects on the economy.”
Sounds interesting. What’s the background?
The Government’s recent housing White Paper emphasised the importance of boosting housing supply, with measures set out to speed up the home building process and create high-density developments in towns and cities.
The Government has also offered assistance to people saving for a deposit through the Help to Buy ISA, under which it will boost the savings of people buying their first home by 25% up to a maximum of £3,000.
Top 3 takeaways
- The UK is unlikely to ever build enough homes to make property affordable
- But first-time buyers could benefit from a house price crash
- The chances of a crash are increased by the high level of house prices to earnings