United Kingdom’s housing market woes persist

UK’s housing market continues to struggle, amidst falling property demand and residential construction activity. The average house price in the UK increased slightly by 1% to £260,791 (US$ 326,555) year-on-year in Q1 2024, based on figures released by Nationwide – an improvement from the 1% fall a year earlier but still far lower than the robust growth of 12.6% recorded two years ago. When adjusted for inflation, house prices declined by 2.1% in Q1 2024 from a year earlier.

Quarter-on-quarter, nationwide house prices rose slightly by 0.6% (0.9% inflation-adjusted) in Q1 2024.

United Kingdom’s house price annual change

Eight of the thirteen major regions saw house price rises during the year to Q1 2024, with Northern Ireland registering the biggest growth of 4.6% to an average price of £181,303 (US$227,022). It was followed by the North, with a house price increase of 4.1%, Scotland (3.7%), North West (2.9%), Yorks & The Humber (2.4%), London (1.6%), Wales (1.2%), and East Midlands (0.5%).

On the other hand, house price falls were registered in South West (-1.7%), East Anglia (-1.3%), Outer South East (-1%), Outer Metropolitan Area (-0.6%), and West Midlands (-0.2%).

London’s average house price stood at £519,505 (US$650,509) in Q1 2024. London’s house prices are now about 72% above the 2007 peak levels.

Demand continues to fall. During 2023, the total number of residential property transactions in the UK fell by 19% to 1,019,220 as compared to a year earlier, following a 14.8% decline in 2022, according to HM Revenue & Customs. Then in Q1 2024, transactions dropped further by 7.8% y-o-y to 227,040 units. Quarter-on-quarter, transactions were down by 13.8% during the latest quarter.

UK’s residential construction activity is slowing again. In 2023, dwelling starts fell by 15.6% to 148,930 units as compared to a year earlier, following a slight decline of 0.9% in 2022, according to the Ministry of Housing, Communities and Local Government. Likewise, dwelling completions fell by 11.1% to 158,190 units in 2023 from a year earlier, following a meager increase of 1.7% in the prior year.

The UK housing market is expected to remain muted this year.

“It’s likely to be another muted year for the market, however, the better-than-anticipated activity this year has shown that many buyers are still getting on with satisfying their housing needs. We predict a modest average 1% fall in new seller asking prices in 2024. The underlying level of good demand at the right price makes it unlikely that we will see a more significant drop in prices next year,” said Rightmove property expert Tim Bannister.

The overall economic outlook remains gloomy. During 2023, the UK economy was estimated to have increased by a meager 0.1%, a sharp slowdown from growth of 4.3% in 2022, and 7.6% in 2021, according to the Office for National Statistics. The National Institute of Economic and Social Research (NIESR) expects the UK economy to remain subdued this year, with a projected real GDP growth rate of 0.9%. The International Monetary Fund (IMF) is even more pessimistic, forecasting a growth of just 0.5%.

The housing boom and bust in the UK

UK property prices saw huge rises from 1996 to 2007:

  • Prices in London rose 289.1% (228.1% in real terms).
  • Prices in Northern Ireland rose by 393.2% from Q3 1996 to Q3 2007 (315.9% in real terms), the highest rise among UK regions.
  • Price increases in other regions ranged from 187.9% (142.8% in real terms) for Scotland, to 245.5% (191.3% real) for the Outer Metropolitan Area.
  • The national index rose 240.9% (187.5% in real terms) over the same period (all figures from Nationwide).

In early 2007 interest rates were raised, and lending conditions tightened. House price falls accelerated in H2 2008, due to the global financial meltdown. The biggest falls occurred in Northern Ireland where house prices fell by 39.2% (-41.9% in real terms). London house prices fell by 19.8% (-23.3% in real terms).

The housing market started to recover in 2013, with nationwide house prices rising by 45.1% (32% in real terms) from 2013 to 2021. London had one of the biggest price growths, up 46.9% (32.6% in real terms) over the past eight years.

The UK’s and particularly London’s house price rises have, over the past decade, been fuelled by four factors:

  • Strong immigration and population growth, especially in London.
  • Interest rates are at record lows, with a large expansion of the money supply through “quantitative easing”.
  • Strong growth of the City of London.
  • Construction activity remains weak (though this is less true of London).

However, the UK housing market started to cool last year, as increasing interest rates and stubbornly high inflation had adversely affected consumer’s purchasing power. Nationwide house prices were down by 2.3% (-6.4% in real terms) in 2023, after increasing by 4.8% in 2022 (but fell by 4.2% in real terms).

United Kingdom Average House Price graph

Huge price gap between London and the rest of the UK

The gap between London and the rest of the UK remains huge, as house prices in the capital city gradually return to pre-pandemic levels. In Q1 2024, the average London home is worth more than double the average home elsewhere in the UK – a huge gap but still a far lower difference as compared to record highs recorded seven years ago. The average difference in price is £277,295 (US$ 347,220) in Q1 2024.

The gap between London prices and the rest of the UK peaked in Q1 2017, when home prices in the capital were 154% higher than the rest of the country, with an average price difference of £290,140 (US$363,305).

Despite the generally falling gap since Q2 2017, the average house price in London remains about 72% higher than at its peak in 2007. All other regions, except Northern Ireland, have higher property values in Q1 2024 than their 2007 peak prices:

  • Outer Metropolitan London is 60.3% up from the 2007 peak.
  • Outer South East is 52.5% up on 2007.
  • East Anglia is up by 46.2%.
  • East Midlands is up by 46.2%.
  • South West is up by 45.4%.
  • West Midlands is up by 43%.
  • Wales is up by 31.8%.
  • North West is up by 31.7%.
  • Yorkshire and Humberside is up by 28.5%.
  • North is up by 17.8%.
  • Scotland is up by 17.5%.

Northern Ireland had the weakest performance, with prices still more than 20% lower than at the 2007 peak.

United Kingdom Cost of London Home Compared to Rest of UK graph

Demand continues to fall

During 2023, the total number of residential property transactions in the UK fell by 19% to 1,019,220 as compared to a year earlier, following a 14.8% decline in 2022, according to HM Revenue & Customs.

Over the same period:

  • In England, residential property transactions dropped 19.8% y-o-y to 857,780, after declining by 15.4% in the prior year.
  • In Scotland, transactions were down by 11.1% to 93,080 in 2023, following an 8.3% fall in 2022.
  • In Wales, transactions plunged by 20.1% to 44,760 units, following an annual fall of 12.8% in the prior year.
  • In Northern Ireland, transactions were down by 17.3% y-o-y to 23,600 units, after dropping by 16.5% decline in 2022.

Demand remains weak this year. In Q1 2024, residential property transactions in the UK fell further by 7.8% y-o-y to 227,040 units, based on HM Revenue & Customs figures. Quarter-on-quarter, transactions were down by 13.8% during the latest quarter.

United Kingdom Residential Property Transactions graph

Residential construction activity falling again, and chronic housing shortage persists

UK’s residential construction activity is slowing again, amidst the increase in materials costs and high interest rates.

During 2023, dwelling starts fell by 15.6% to 148,930 units as compared to a year earlier, following a slight decline of 0.9% in 2022 and a growth of 36.9% in 2021, according to the Ministry of Housing, Communities and Local Government. Over the same period:

  • Private enterprise starts dropped 18.9% y-o-y to 115,740 units, after increasing slightly by 0.9% in 2022.
  • Housing association starts were down by 6.2% y-o-y to 30,170 units, following an annual fall of 5.3% in the prior year.
  • Local authority starts plummeted by 38.8% to 3,020 units, in contrast to a huge increase of 91.1% in 2022.

Likewise, dwelling completions fell by 11.1% to 158,190 units in 2023 from a year earlier, following increases of 1.7% in 2022 and 19.3% in 2021.

  • Private enterprise completions dropped sharply by 17.1% y-o-y to 119,890 units in 2023, after increasing slightly by 1.7% in the prior year.
  • Housing association completions rose by 13% y-o-y to 35,950 units, following a slight growth of 1.9% in 2022.
  • Local authority completions surged by 45.7% to 2,360 units, after rising slightly by 1.9% in 2022.

United Kingdom Dwelling Construction in England graph

With weak construction activity, chronic housing shortage persists. Accordingly, the completion level remains far below the government’s target of 300,000 new homes every year. Moreover, the UK’s per capita housebuilding rate remains low by international standards and failed to respond sufficiently to rising house prices during the boom, due to planning constraints.

For instance, in 2019, there were about 178,800 home completions in the UK. However at least 250,000 new homes must be built annually to match population growth, to replace the aging housing stock and the accumulated backlog, says the Town and Country Planning Association (TCPA).

Homebuilding in the UK stagnated at an average of 186,000 new units annually between 1991 and 2003, and from 2004 onwards barely exceeded 200,000 annually (222,940 in 2007).

“Every government arrives in office pledging to boost the number of new homes being built but the facts speak for themselves: in the 30 years from 1958 to 1988 around 7.5 million homes were built in England. In the subsequent three decades the number more than halved to around 3.1 million,” said Larry Elliot of The Guardian. “The supply of homes is affected by tough green belt regulations, local planning rules, and by the lack of a land value tax to deter hoarding.”

According to Rightmove, the chronic housing shortage in the UK is the primary driver of record house price rises in recent years.

Raising housing supply and other reforms

The Covid-19 pandemic brought about some immediate changes to the country’s planning policy, including enabling pubs to offer hot food takeaway services and changes related to permitted development rights (PDRs). But even before the pandemic, a reform of the planning system was already the subject of consultation to speed the system up and expand the housing supply. A housing white paper published in August 2020, including a concurrent consultation, details the government’s plans for upcoming changes to the planning system, including automatic approval for designated areas, priority for high-quality developments, replacing Section 106 by infrastructure levy, and discounts for developers building affordable homes.

“The whole thing is beginning to crumble and the time has come to do what too many have for too long lacked the courage to do – tear it down and start again,” said Prime Minister Boris Johnson. “That is what this paper proposes. Radical reform, unlike anything we have seen since the Second World War.”

“Not more fiddling around the edges, not simply painting over the damp patches, but leveling the foundations and building, from the ground up, a whole new planning system for England,” PM Johnson added.

The government published its response on local housing needs in December 2020, alongside a written ministerial statement. In February 2021, the Levelling Up white paper was released outlining various proposals related to planning. Then in March 2021, the consultation outcome on revised PDRs, housing delivery, and public infrastructure was published. In a statement to the House of Commons in February 2022, the Secretary of State for Levelling Up Michael Gove outlined its planning and regeneration measures.

In January 2024, the Department for Levelling Up, Housing, and Communities (DLUHC) launched another consultation on reforms to social housing allocations in the country.

Then in March 2024, the government unveiled a Levelling Up budget worth £400 million spread among 20 towns across England, Scotland, Wales, and Northern Ireland. Each of the said towns will receive up to £20 million (US$25.1 million) of funding and support over 10 years to invest in communities and regeneration.

Before the proposed reform to the planning system, the government had already undertaken several measures in the past to address supply shortages. By end-2020, £7.1 billion (US$8.9 billion) was allocated over 4 years to a National Home Building Fund to build more affordable, and sustainable homes across England. In addition, the Tenant Fees Act 2019 has banned letting agents’ fees to tenants.

In 2014 a Starter Homes policy was announced to address the affordable housing crisis. The Starter Homes policy is aimed at households with combined incomes below £80,000 (US$100,323), or £90,000 (US$112,863) in London. Starter homes must cost a minimum of 20% less than the market value, and the maximum price after the discount will be £450,000 (US$564,315) in London and £250,000 (US$313,509) elsewhere. Buyers of starter homes will need a mortgage. If the property is resold within 15 years, some or all of the discount must be repaid.

However, a review conducted by the National Audit Office in November 2019 showed that building had not yet commenced, despite £173 million being spent to buy land for affordable properties, partly because enabling legislation was never passed. As such, the policy was formally scrapped in 2020 and was replaced by a new scheme aimed to deliver only 6,600 homes – and only about 36% of these homes will meet the current definition of affordable housing, according to Homes England. This left about 85,000 young people waiting in vain for an affordable home to live.