Morgan's Site

Written December 2019

The Housing Market is in a Bubble

HM Land Registry provides data on house prices as far back as April 1968 in its UK House Price Index. It shows that in the 51 years and 5 months from April 1968 to September 2019 (the most recent available date), the average house price has risen from £3595 to £234370,[1] an average of 8.46% per year, far outpacing an average 5.74% annual inflation as measured by the Consumer Price Index over the same period of time.[2] If we extrapolate observed inflation of 5.74% per annum with April 1968's average house price of £3595, we would expect an average house price of £63396 by September 2019 (not £234370!).

Over the past 51 years and 5 months, house prices have outgrown inflation by a factor of 3.70. I propose that the reason for this appreciation in house prices is that the increase in the amount of money banks are willing to lend home-buyers has increased the supply of money in the property market thus artificially inflating prices by simple supply and demand.

In 2019, average after-tax household income in the United Kingdom was £29400.[3] If we assume that pay will keep up with inflation over the long term, and that a person works an average of 47 years from age 21 to 68, we can calculate a lifetime household take home pay of £1381800 (in today's prices). If we extrapolate the increase in house prices over the past 51 years (and 5 months) to the future, we can predict that within 70 years the cost of a house will exceed total lifetime earnings for a household.

The measures we can take to slowly deflate this housing bubble are either to increase people's take home pay to keep pace with increasing house prices or to reduce the rate at which house prices are increasing relative to take home pay. If we fail to put these measures in place, the bubble will burst and we will experience a recession of impact comparable to the great depression of the 1930s.

I believe that the best course of action is to reduce the rate at which house prices are increasing by reducing the supply of money in the housing market. We can achieve this by slowly reducing the amount of money we let banks lend for mortgages on houses. We can offset this reduction in money creation either by encouraging bank lending to businesses, which would also help increase real income, or by quantitative easing outside of the housing market. This strategy would have the negative effect of making it harder for families to get mortgages on houses in the short-term, but will increase home ownership in the long-term by reducing house prices relative to income. It is also in the interest of property owners for house price growth to slow as this will help avert a crash in property prices.