Is this as unaffordable as housing can get?
This chart (based on the Regulated Mortgage Survey) charts the ratio of median income to house prices from 1969 to 2013 for the UK as a whole – so in areas of peak demand, such as London and the South East, the levels are much higher, but the pattern is the same.
Here, let’s not get ensnared in discussions about whether what we’re seeing with property in London and the South East is a bubble, and likely to burst soon; there are reasonable long-term economic reasons why people are buying, so a crash is unlikely. But it still leaves property unaffordable for those needing to move, in particular the economically active and flexible young, as they consider where to live and work, or start bringing up families.
They should also be the people of most interest to politicians. They are the young and aspirational, with whom Ed Miliband failed to connect, whose votes could be won by a new Labour leader who had something to offer them. In contrast, the Conservatives, while already “aspirational” enough, struggle to reach this generation, for whom getting on the housing ladder seems more and more remote a dream. Targeting the grey vote, e.g. with Pensioner Bonds and the pension triple lock, is expensive, and short-termist; win the loyalty of someone in their 20s, and a party has many more votes in the long run.
Time to adjust to peak unaffordability?
If getting on the property ladder becomes an option only for those whose parents are happy to invest, on their behalf, in already expensive property, what are the alternatives for the less fortunate, or merely better advised? For many, keeping on renting is all there is, but others will move. These will be the higher earners, whose greater skills and qualifications allow them find jobs elsewhere, whether abroad, or in other parts of the UK. Their leaving will take pressure out of the rental market, and bring forward, in London at least, the point of peak unaffordability. This point will also come closer as expectations of further property price rises fade.
This part of the process is similar to what happens as bubbles reach their peak. Even if prices do not fall, not expecting further rises will change the psychology profoundly; the idea of “help to buy” itself could, for a generation, become toxic.
The most likely trigger for the change will be the interest rates returning to long-run averages – e.g. 3% after inflation. The disappearance of returns on cash has driven many would-be cautious investors – such as baby boomers moving into retirement – into becoming buy-to-let (BTL) landlords. The process is already anticipated in the US, where returns are becoming more attractive for longer-term investors in the bond markets. Although not yet happening to the same extent here, in a world of globalised markets it will, real alternatives for savers will increase, and demand from BTL landlords will ease.
It will not be easy to unlearn the received wisdom – from generations of effective, if not intentional, restriction in housing supply – that buying property was the way to invest for the long run. But we have already had a decade of peak unaffordability, and behaviour will start to change.
It may be even harder for politicians to fashion an alternative aspirational message for this generation, who no longer listen to them, without alarming those who have bought into their promises. But it is the centre ground which they know they should occupy.