Current Housing Crisis In The Uk

"Given the current and worsening housing crisis in the UK, explain the underlying patterns in terms of supply and demand economics."

Currently, the United Kingdom is facing severe housing shortages. Even during the period of the boom, the government was unable to build houses at the predetermined rate. There is a continuous increase in population growth due to factors such as immigration, improvement in life expectancy and higher birth rates. Additionally, an increasing number of people in the UK now have second properties and there are also more one-person households. Such immediate changes have resulted in a drastically increased demand for housing which has become a fundamental problem. It is clearly evident that housing supply in the UK, averaged throughout the country, is not currently at par with the persisting demand. Enough houses are not being built in order to satisfy the persisting demand of the population.

As proposed by parliament.co.uk (2013), in 2007, the Government set a target of increasing the supply of housing to 240,000 additional homes per year by 2016. Within this overall target was a commitment to deliver at least 70,000 affordable homes per year by 2010-11, of which 45,000 were to be new social rented homes. Nevertheless, due to the credit crunch of 2008, this target has been left unattained and has severely fallen behind as housing construction has slumped. There are almost 1.8 million households on English local authority housing registers and significant levels of overcrowding in the private and social housing stock.

Since the credit crunch took place in 2007, the achievement of even these targets was placed under serious pressure. Despite the ever-rising demand, the collapse in mortgage advances implied that private builders reduced the supply of new housing. As a result, house-builders will not aim at building houses which they are unable to sell. Furthermore, the reduction in house prices during the recession have not solved the problem of housing prices affordability as they have been characterized by tighter lending criteria.

The figure below shows how demand for housing stock in the UK has been growing faster than net additions to housing stock, pushing up house prices. The shortage of housing is more likely to worsen as the population keeps rising and the supply of housing remains sluggish (Shelter, July 2012).

Source: CLG data from Figure 9, IPPR (March 2011).

Housing construction in the UK has been at a low level since almost a decade now. It has become difficult to improve the situation whilst the government maintains the national denial of Freehold development rights which outlines the housing planning system in the UK. In this way, the government uses a range of policies to withhold from landowners the right to carry out construction on any land they own; consequently, working against increasing levels of housing production. Additionally, green belts and farming restricts supplies of land in cities and in urban development areas. The government does not focus upon making changes to anachronistic and inadequate planning laws although parliamentarians are aware of housing shortages. Moreover, there is a local scarcity of developable land and uneven topography (steep slopes) in many parts of England. This further restricts the long-term supply of housing options and choices, especially in the most rugged areas (John Muellbauer, 2010).

Since the economy worsened during the recession, there was a decline in demand for housing which reduced prices, therefore resulting in an excess supply of housing. This situation may hold in periods of uncertainty, however, in the long term demand can be expected to increase when the economy advances. Once the economy began to gradually recover, investment demand began improving and house prices began to rise. At this current stage, supply is unable to respond more effectively than it did in the past (Williams, 24 Oct 2011).

Guardian.co.uk (2013) highlights how the lack of supply is not the sole cause underlying the housing crisis faced by Britain. It is true that just 146,000 dwellings were added to housing stock in 2011, 43% down on the figure for 2008. Nevertheless, overall, housebuilding in the last year was "considerably higher than reported in official returns". When the figures factor in conversions of shops or churches, changes to the use of existing properties and other causes, the number of new homes is slowly on the rise, with 13,700 more homes created in 2011-12 than the previous year. The co-author of the review outlines how other factors also contribute towards housing shortages. Firstly, the unnecessary caps which are placed on local authority borrowing restrict councils from investing in the local housing market and from responding to the inadequacy in places where there is a need to tackle the issue. The second issue proposed by the author is that of intergenerational inequality. The UK government follows a tax regime which is in favour of the owners, who are generally relatively older, and a regulatory bias that rewards buy-to-let landlords with interest-only mortgages. Therefore, it is predominantly the young people who are still unable to access mortgage finance without large deposits.

According to estimates put forward by The Economist (June, 2005), the total value of residential property in developed economies increased by more than $30 trillion over the past five years, to over $70 trillion, an increase equivalent to 100% of those countries` combined GDPs. Since those people without capital are failing to access the housing market, the cost of housing rents and housing properties are continually driving up to unaffordable levels, causing a strain on housing benefit and worsening the housing shortage crisis.

"It`s still a challenging climate," said Steve Turner, a spokesman for the Home Builders Federation. "The main constraints are a lack of mortgage availability, having enough developable land coming through the planning system; and regulation" (Spillane, May 2012). Nevertheless, it is hoped that improved mortgage availability can lead to an increase in private sector construction. However, this does not certainly resolve other problems, such as planning legislations and local opposition on constructing houses on a larger scale. This implies that it is unlikely that the UK will ever be able to effectively overcome the continually worsening housing crisis.

References

Economist (2005) The global housing boom, The Economist, 16 June

Fearn, H., March 2013. Editor`s blog: lack of supply is not the sole cause of Britain`s housing crisis. 8 March 2013 [Online]. Available at: http://www.guardian.co.uk/housing-network/editors-blog/2013/mar/08/lack-of-supply-british-housing-crisis [Accessed:24 July 2013].

Muellbauer, J. (2010) UK house price models and prospects. Paper presented at CCHPR Conference, September

Parliament.co.uk (2010). The failure of housing supply to keep up with rising demand has wide social and economic implications. Available at: http://www.parliament.uk/business/publications/research/key-issues-for-the-new-parliament/social-reform/housing-supply-and-demand/ [Accessed:24 July 2013].

Shelter, July 2012. Understanding supply constraints in the UK Housing Market. FTI Consulting.

Spillane, C. (May 2012). U.K. Residential Property Shortage to Persist: Shapps. 22 May, 2012 [Online]. Available at: http://www.bloomberg.com/news/2012-05-22/britain-may-never-fix-residential-property-shortage-shapps-says.html [Accessed: 23 July 2013].

Williams, C. W. &. P., 24 Oct 2011. Causes and Consequences? Exploring the Shape and Direction of the Housing System in the UK Post the Financial Crisis. Housing Studies.