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Last Updated: Friday, 24 November 2006, 08:27 GMT
Why is it so expensive to buy a house?
By Ian Pollock
Personal finance reporter, BBC News

People in the UK seem to be obsessed with property - buying it, doing it up and selling it.

Daily Mail front page headline, 12/09/2006
The national obsession with rising house prices generates big headlines

Look at our fascination with house prices, now measured by at least ten different house price surveys every month.

Gawp at the never ending stream of TV programmes about DIY, interior decoration, buying a home abroad or making money through outright property speculation.

Browse the regular exhibitions aimed at promoting the virtues of buying a house in the latest foreign hotspot, whether it be Croatia or Romania.

Or you can grit your teeth as you hear people just a few years older than yourself reveal how little they paid for their house just five or ten years ago.

There is no doubt about it. The UK is a nation of homeowners, rather than Napoleon's fabled shop keepers.

More households

Our national obsession is unlikely to fade.

We are going to see a big increase in the number of smaller, older, households over the next 10 to 20 years
Prof Michael Ball

Even more people will want a home in the coming years.

The population of the UK is predicted to rise from 60 million in 2005, to 62 million in 2011, and nearly 65 million by 2021.

More importantly, the number of households, which is the key determinant of how many homes will be needed, is also going to rise sharply as well.

There are currently 22.8 million households in Great Britain.

The Department for Communities & Local Government (DCLG) predicts that another million or so will be added in the next five years alone.

And by 2016 there will be 25.1 million households in Britain - an increase of 2.3 million in just ten years.

A lot of attention has been given to the fact that the country has seen a surge in immigration recently, principally from Eastern Europe.

But Professor Michael Ball, of the University of Reading business school, said the rise in household numbers will be driven by a large increase in the number of us who are living alone.

"The big driver at the moment is actually the ageing society.

Graph of average English household size, 1961 to 2026

"At the same time general household size is getting smaller, so we are going to see a big increase in the number of smaller, older, households over the next 10 to 20 years," said Professor Ball.

The size of the average English household has already fallen steadily from 3.1 in 1961 to 2.29 today.

The DCLG predicts that in the next 15 years that will fall even further, to just 2.21.

Not enough houses

One of the main reasons why house prices have been so buoyant for the last ten years is that the country has simply not been building enough to meet the demand for houses to buy or rent.

Estate agent Gordon Blausten showing the former storage cupboard,  May 2005
The smallest flat in the UK - a former storage cupboard in Notting Hill

"We estimate that the number of households has been growing at 200,000 or even more each year in recent years," said Milan Katri, chief economist of the Royal Institution of Chartered Surveyors.

"Yet new building has been running at between 140,000 and 160,000 a year," he added.

Thanks to successive government policies, hardly any new council houses have been built for the last 20 years.

Some people who might once have rented have been more or less forced to buy instead.

Tony Key, Professor of real estate economics at the Cass Business school in London, said this under supply of housing has led to a huge distortion in the UK property market.

"Somewhere around the mid 1980s we stopped building council houses and we didn't fill in the gap.

"There's been a group of people who might logically be renters who have been forced into being owner occupiers," said Professor Key.

Meanwhile millions of former council homes have also been sold by local authorities.

The conventional wisdom

The combined effects of rampant house price inflation, a lack of good quality, cheap, rented property, and windfalls gains for home owners have left a deep psychological imprint on the UK public.

A really strong component of demand is speculative, taking advantage of what you think is happening in the market, and the fear factor
Saxon Brettell, Cambridge Econometrics

Saxon Brettell, of the consultancy Cambridge Econometrics, said a fear of being left behind and a desire to cash in on windfall gains, are big forces driving demand.

"The long run forces are the need for shelter and accommodation, and allowing people to live in the location where they want to.

"But if you didn't believe that you had to get onto the housing ladder as quickly as possible as a young person, we wouldn't have this stressful activity with the search for early ownership, early on in their careers, especially in the South of England," he pointed out.

Despite the house price crash of the early 1990s, many people continue to believe the conventional wisdom that you cannot lose by getting into property.

So they buy flats and houses, bid up prices and it all becomes a self-fulfilling prophesy.

"A really strong component of demand is speculative, taking advantage of what you think is happening in the market, and the fear factor, that if you don't get into this market you will be left behind," said Mr Brettell.

"These are really very important forces for young people, and this is quite distinctly different, especially in the South of England, from the rest of Europe from the US."

Building more

The obvious solution would be to build many more houses.

Graph of UK residential and commercial property prices since 1980

Currently we complete just 3.1 new houses or flats per year, for every thousand of our population.

That meant that in 2002 the UK built fewer of them than in 1921.

The rest of the European Union, before its enlargement, built at a much faster rate, of 5.1 houses a year per thousand population.

As a result those 14 other EU countries have 448 dwellings per thousand population, compared to 431 in the UK.

In 2004 the economist Kate Barker published a report for the government recommending that the country's local authority planning system be changed to make it easier for house builders to get planning permission in areas where people want to live.

Would that make any difference?

According to an analysis by Professor Key, the answer must be yes.

Land for house building is very restricted by planning laws.

That for shops and offices much less so, and there is, in reality, almost no hindrance to the supply of land for industrial purposes, as this creates jobs.

So, since 1980, UK house prices have risen by an astonishing 676%.

But the value of shops, offices and industrial estates has gone up by just 261%.

What that suggests is that a house that cost 30,000 in 1980, and which is now valued at 203,000, would cost just 78,000 - roughly 60% less - if all the demand since then for house building land had been satisfied.

Here and abroad

We think we are obsessed. And funnily enough so do people in the rest of Europe.

In almost every country you go to they think they are specially obsessed by owning their own home
Prof Christine Whitehead

Christine Whitehead, Professor in housing at the LSE, says there is nothing special about our interest in houses and their value.

"I go to every country in Europe and in almost every country you go to, they think they are specially obsessed by owning their own home."

Comparing our own systems for buying and owning property with those in the rest of Europe is very instructive.

Despite our perennial complaints about the roguishness of estate agents, dilatoriness of lawyers and the cost of stamp duty, buying and selling here is relatively easy to do.

Professor Whitehead said our transaction costs are lower then in most of rest of Europe, where taxation and the administrative costs of moving can take more than 10% of a property's value.

"We have a much more fluid market, in the main, buying and selling does not take very long," she said.

If you add in the fact that we have lots of houses -which offer more privacy and control than flats, a legal system geared to the home owner and the fact that mortgage repayments are usually cheaper than rent, then you have some pretty good reasons to buy a house.

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