Only solution to Britain’s housing crisis may be economic crash

Staggeringly high prices may only be corrected by market collapse, economists warn

The solution to the UK’s housing woes may not be pretty. Staggeringly high prices, which are preventing many Britons from buying a home, may only be corrected by a market crash, according to economists from the University of Reading.

While many say boosting the supply of property for sale would help with affordability, the academics say the effect would be very limited, because the amount of building needed just isn’t feasible.

“Permanent increases in construction would be required that have never been achieved in history,” Geoffrey Meen, Alexander Mihailov and Yehui Wang said in a research paper to be presented at the Royal Economic Society’s annual conference this week.

According to their model, “price-to-income ratios are likely to stabilise even without major increases in supply, although adjustment could take the form of an undesirable market collapse”.

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House prices vs wages

Average home values are about 7.6 times annual earnings, up from a ratio of 3.6 times 20 years ago, according to data from the statistics office. Over that period, house prices have more than tripled, far outpacing growth in incomes. The UK’s response has concentrated largely on increasing supply. Prime minister Theresa May’s government said in February that it would force local councils in England to set out how they’ll build more houses in an effort to push down prices.

Noting that market crashes are “hardly an optimal policy”, the academics suggest more “integrated housing policies, where housing issues play a wider role”.

A separate paper by Alisa Yusupova and others at Lancaster University showed that a series of “’house-price exuberance’ bubbles rippling out from London” provide a better explanation for the sustained gains since the 1980s, rather than issues of supply or even demand-side factors such as income, mortgage rates and credit availability. – (Bloomberg)