UHY Hacker Young | Chartered Accountants

Why can’t young people afford to buy houses?

24 January 2019

Home ownership has for several generations been one of society’s fundamental aspirations. It is now out of reach for more than two million households. But the causes of the problem are disputed.


The twentieth century was the era of home-ownership. In 1918 only 23% of households owned the house that they occupied; by 2003 this had risen to 69.3%. Now the trend has reversed. By 2014 owner-occupying households had dwindled to 63.1%. This is mostly affecting the younger end of the market. For example, in the last ten years, the rates of home-ownership among mid-income people in the 25-34 age bracket fell from 65% to 27%.

And rise

There is no doubt that the rise in house prices relative to general inflation is the main cause. Lower interest rates mean that mortgage repayments have not grown at the same pace as house prices – as shown by the illustration below – but obtaining a sizeable deposit remains a challenge.

A comparison of house prices, mortgage repayments and earnings over the last 20 years

November 1998 September 2018 Movement
Average house price £47,122 162,009
Bank of England base rate 6.75% 0.75%
Monthly mortgage repayment £320 £600 88%
Deposit £4,712 £16,200 244%
Average UK earnings £19,916 £29,588 49%

Assuming a 10% deposit and a mortgage at 1% over base rates with a 25-year term. Average UK earnings from median full-time weekly earnings: (2018 £569 per week / 1998 £383)

The debate is about the underlying causes of house-price inflation and the finger of blame is most often pointed at under-supply. The argument goes that this is a simple question of market forces. Demand exceeds supply and therefore prices go up. The market attracts speculators in the form of buy-to-let landlords and developers who invest for gain, and the ordinary family loses out. This is certainly the main conclusion of a report prepared by Onward, a Conservative think-tank, in June this year. To be fair, this is not the only reason identified by the report. Other factors include building in the wrong places, failure of long-term planning by local authorities, the dominance of a few major developers who assemble large land banks, and taxation policies that favour landlords.

The Onward paper also refers to the Barker Review of Housing (2004) which postulated that a doubling of the rate of supply of new houses would more than halve the rate of price increases, reducing it to the European norm.

Not so simple

If Government concentrates only on the shortage of supply it will fail to solve the problem. This is the implied verdict of a report prepared by Oxford Economics, a consultancy firm. It points out that there are 28 million dwellings in the UK, and that in 2014 (a typical year) there were 270,000 new households and 159,000 new homes. The shortfall represented only 0.4% of housing stock, so it would take a very long time for this factor to put significant upward pressure on prices. Conversely, an increase in housebuilding would take a long time to slow the rate of price rises. In fact, it calculates that a 1% increase in new builds or a 1% decrease in new households would reduce prices by only 1.8%.

My house is my bond

So although short supply is a factor it may not be the primary one. The argument is that a house is a financial asset that behaves in a similar way to a bond or a share. For the owner-occupier, it represents the value of the rent that he doesn’t have to pay. For the residential landlord, it is the capitalised value of the rental income. Naturally, the investment decision is also influenced by such factors as maintenance and running costs and the anticipation of future capital gain. Theoretically though, in an open market, the costs of ownership and renting should be the same. The price of a house for sale should be bid up until it reaches the capitalised value of the rent saved by the prospective owner.

But in fact, the housing market is also linked to global financial markets and other investment opportunities. All income streams can be valued using an interest rate and the lower the rate of return expected the higher the value of the investment. Another way to express this is that if you require a return of say £10,000 and the interest rate is 5% you need to buy bonds to the value of £200,000. But if the rate is only 2% to get the same return you have to invest £500,000. During the last ten years, the yield on bonds and dividends on equities have roughly halved, thus doubling their value. The housing market has inevitably followed this trend.

Other factors

The report states that house prices are highly sensitive to household earnings and rising employment and claims that a 1% increase in real average earnings per household leads to a 2.2% rise in house prices. However, the overall wage-rise statistics mask a more important trend: whereas in 2002 the earnings of younger people (28 to 40 years) were roughly on a par with older people, by 2016 they had fallen to about 10% lower than those of the older group.

Falling mortgage interest rates (11% in 1992; 2.5% in 2014) also push up prices, and so does the relative ease in obtaining a mortgage compared to in the 90s.

Of course, more creative policies are needed to help our youngsters onto the housing ladder, but perhaps the problem will only be alleviated when interest rates get back to what used to be regarded as normal.

What this means for business

The unaffordability of housing can damage the economy because it restricts labour mobility, making it difficult for employers to bring skilled workers from other regions. High house prices can constrain economic growth, increase pressure on local infrastructure, exacerbate skill shortages, and consequently raise business costs. There is also evidence that for these reasons, business start-ups are less common in high-cost areas. Businesses need to recognise these changes – particularly taking the long term view as to where they invest and locate.


Since the publication of the Oxford Economics Report, the rate of house-price inflation has fallen back. The Royal Institution of Chartered Surveyors is blaming Brexit uncertainty and lack of stock for a slower-than-usual housing market in the third quarter of 2018. Confirmation, if it were needed, of the sensitivity of house prices to economic forces.

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