The graphic below explains the tension between the median household income and the average housing prices over the last 30 years better than 1000 words could.
In the following blog post, we’ll try to show why the prices of housing increased disproportionately in comparison with the household income and why this situation will get even worse if we don’t fundamentally change the way we build houses.
Reasons for high real estate prices in the UK
Historic low interest rates
Interest rates have fallen from about 15% in the 1990s to only around 0.5% in 2020. Low interest rates make buying a house more attractive compared with other assets. Buying a house is viewed as a low risk investment due to lower fluctuations in value than shares or investment funds as well as its physical existence and value characters. Due to the low interest rates, the difference between paying a mortgage and rent payments disappears and more people decide to buy real estate rather than renting it. Furthermore, it’s very easy to get a mortgage for houses because the banks see real estate as a safe asset and in the case of asset liquidation the burdens as well as the needed time to sell a house are low.
Constraints on housing supply
The UK housing market is characterised by a notorious undersupply and this has been the case for decades. Since the 1970s the UK had a housing deficit of more than 100,000 houses every single year. This hasn’t changed in recent years. From the more than 300,000 houses needed in order to meet demand only about 170,000 are being produced. The reasons for this deficit are numerous.
While the efficiencies in most industries have seen significant increases over the last decades, the efficiency of the construction industry in the UK has decreased!
Current building methods are expensive, slow and often come with plenty of quality issues which sprawl into legal disputes.
A massive shortage of well-trained construction labour is another factor which tightens the housing supply in the UK. Tens of thousands of construction workers are expected to drop out of the work market and into retirement over the next few years, which will further tighten the supply of housing if we don’t make remarkable progression in MMC (Modern Methods of Construction) like our Vector Homes housing solution.
The demand for new housing is not only the result of the decades long deficits, the demand also continues to rise. While there have been 27.3 million UK households in 2017, it’s projected that this number will increase to 31.6 million households by 2039. This is based on forecasted population growth; the UK is expected to be home to 71 million people by 2033.
The demand is mainly driven by young people, the so called “first time buyers” for which owning a property remains very attractive.
Speculations in the real estate market are not only driven by local or national investors and large organisations, billions of FDI (Foreign Direct Investment) flow into UK real estate every year. This not only decreases the supply available on the market, it increases the prices further and makes it close to impossible to buy real estate for young people.
Part of the solution – Vector Homes
While we won’t be able to interfere in some of the issues like speculations and low interest rates, we can help by solving others.
With our novel use of recycled materials and components designed for high throughput manufacturing, we can provide our houses fast, sustainably, efficiently, and flexibly with high quality. The simplified fashion and low cost materials enables the homes to be built on budget, lowering the entry burden, especially for the first-time buyers.
You have interest in or questions about Vector Homes? Don’t hesitate to reach out to us!