The Housing Crisis Will Persist Even If Housing Prices Fall

In the UK, housing prices are thankfully forecast to drop this year. But without a serious investment in social housing from the government, the housing crisis isn’t going to end.

Tower blocks in St. Johns Wood, London. (mattbuck / Wikimedia Commons)

While 2023 is bringing a lot of bad news for a lot of people around the world, it’s possible to imagine some potential upsides. We should, for example, begin to see house prices plateau as interest rates rise and bank lending contracts.

In fact, most observers agree that house prices are going to fall throughout 2023, perhaps by as much as 25 percent when accounting for inflation. Some are warning that rising interest rates could lead to a 1980s-style housing crash.

While a housing crash would make the coming recession much worse, it’s still a fairly unlikely scenario. But a steady leveling off of house prices alongside rising incomes could help many young people to get on the housing ladder.

There’s just one thing getting in the way of this outcome: the parlous state of the UK private rented sector.

As Michael Walker has been documenting recently for Novara Media, the crisis for UK renters has reached new highs over the past few years. If young people are paying 50–60 percent of their monthly income in rent, there is no way that they’ll be able to save enough for a deposit, especially with interest rates so high.

And even if they do manage to save up enough for a deposit, they’ll be competing against buy-to-let landlords — many of whom can purchase properties without expensive mortgages.

It’s easy — and often fair — to blame greedy, lazy landlords for the housing crisis, but the problems run far deeper than a few individuals.

When it comes to demand, the first issue is inequality — which in the housing market manifests itself most clearly as intergenerational inequality. Older people who were able to ride the wave of the housing boom used the wealth they accumulated in their homes to purchase second and third homes as “investments.”

The second and related demand-side issue is the alarming condition of the UK pensions system. The state pension is too low to live on, and buy-to-let housing is often seen as the most reliable form of income for retirees. Previous governments made the problem far worse by allowing pensioners to draw down their entire pension in one go.

Real estate in London is also highly financialized. Wealthy individuals from all over the world — including plenty of Russian oligarchs — have their money parked in London property. They can also invest indirectly though financial “innovations” like Real Estate Investment Trusts.

As long as young people — squeezed by multiple recessions, stagnant incomes, high interest rates, high taxes, and significant debts — are forced to compete with international investors and wealthy, older cash buyers and seeking out buy-to-let properties, they’ll struggle to get on the housing ladder. Only when older people pass on their wealth to those lucky enough to be born to rich parents will the intergenerational inequality revert to bog-standard wealth inequality.

Another demand-side issue is the extreme regional inequality seen in the UK. London is by far the largest and wealthiest region in the UK — it’s where most of the jobs are, so people need to live there. It also receives disproportionate levels of public infrastructure investment, which pushes up property prices.

As long as economic activity is concentrated in London, which will continue for as long as the government fails to invest in the rest of the country, demand for housing will continue to outstrip supply. And landlords will be able to exploit the fact that people need to live within commuting distance of where they work to keep rents high.

Then there are the supply-side issues. First, the astonishing dearth of social housing. If those at the bottom end of the income spectrum have nowhere to go, they can be trapped into paying higher rents. Those who can’t simply end up in “temporary accommodation,” being shunted from one hostel to the next.

The final supply issue is, of course, planning and house building. A few massive private developers currently dominate house building in the UK. Their primary aim is not to provide enough housing to meet demand — quite the contrary, it’s to maximize value for their shareholders.

They do this using a number of tactics that have a perverse impact on the housing market as a whole. They buy up chunks of undeveloped land hoping to realize a significant capital gain when planning permission is granted. The untransparent — often verging on corrupt — system of planning permission in the UK doesn’t help.

They also have zero incentive to build lots of housing quickly on a single plot of land, as a significant increase in the housing supply in one place could lead to a leveling off in prices in that area. Instead, homes are built and sold in such a way as to maximize the developers’ returns.

One thing that would solve many of these problems all at once would be a massive program of social house building.

If the government committed to working with local authorities to build new social housing across the country, combining this with sufficient infrastructure investment to make the homes desirable, it could relieve the housing crisis, bring down rents in the private-rented sector, reduce income inequality, and reduce regional inequality all at once.

In a recession, such a program would create jobs and boost demand while also creating a long-term source of revenue for the public sector. And if the houses were built to high environmental standards, it could help the decarbonization process.

There’s just one problem. The Conservative Party is comprised mostly of landlords, and is in the pockets of the big developers.

At least a quarter of Tory MPs are private landlords. And in the decade to 2021, a full fifth of the entire income of the Conservative Party came from property tycoons.

Given the age profile of Conservative voters, not to mention the significant portion who are buy-to-let landlords, the party doesn’t even have much of an electoral incentive to fix the housing crisis.

Clearly, the government isn’t going to fix the problem for us. Tenants have to organize.