09. Affordable Housing

As with any commodity, it is the combination of the price demanded and the financial means of the prospective buyer, that renders it affordable or not.  Housing is no different. House prices have been rising inexorably at least since the 1960s and continue to do so, especially in the most sought after areas, such as London and the South East.                      

However these increases have not been matched by any commensurate increase of wages and salaries above the general level of inflation since the crash of 2008; even in the less sought after areas of the country, where the increases have been less severe, people have still struggled to find the down payment for a mortgage.  This situation is nothing new, but it has become far more acute in recent years. The consequence is that, since 2000, home ownership has been in decline and private renting has been increasing (see Fig.1, item 3.08).

The problem of housing affordability has been around at least since the end of the First World War, when the ‘Homes for Heroes’ programme was established leading later to subsidised council housing which, although a form of welfare, was an effective solution to the problem of affordability for many years. The council housing stock thereafter was added to with greater or lesser enthusiasm by all governments until being set into reverse by the ‘sell off’ policy of the Thatcher government in the 1980s. This policy of course added to the number of homeowners who then had a vested interest in continually rising house prices, not to mention a new group of grateful Tory voters. But council housing, rightly or wrongly, has always carried a stigma; given the choice and the financial means, the majority of people would choose to live in the leafy suburbs rather than the council estate, and the crucial phrase here is ‘financial means’; without the financial means, many things become unaffordable, including housing.  At the present time, amongst economists, and commentators on housing, various reasons are suggested for high house prices:

  1. Low housing supply.
  2. Low interest rates, and therefore cheap mortgages.
  3. The attraction, to investors, for an appreciating asset.
  4. Government policies encouraging home ownership.

No doubt all of these factors, either singly or in combination, have an effect on causing house prices to rise, but the one thing that is rarely mentioned, with some notable exceptions (1), is the powerful effect of the demand for the acquisition of houses in the right location, which, in the UK, usually means in London or the South East., and it is in these higher value locations that the problem of affordability is most acute.

Taking the above factors in turn:

  1.  Low housing supply.

The solution to the problem of housing supply offered by politicians, (and many economic advisors) is simply to build more houses, hoping that by the law of supply and demand, the increase of supply will bring prices down. But they do not recognise that the price of a house is related not only to the value of the building but also the value of the site upon which it stands. In high value areas the site value may be as much as 4 times that of the building value, so any increase of house building can only affect 20% of the total price, the 80% due to site value will continue to rise regardless. Land does not obey the law of supply and demand because the supply of land is fixed. (2)  (This statement has to be qualified in the sense that although no more land can be created, nevertheless sites can always be supplied for particular purposes through a change of use, or simply through demolition and re-use. but these changes of use are rare and in any case controlled through the planning system.  Since the 1980s a substantial amount of public land has been sold to the private sector for commercial development, including housing (3), so there is a supply, but the competition is intense for such sites and, once acquired, the release for development is strictly controlled to the best advantage of the landholder). (see item 3.10, Land Banking). 

  1. Low interest rates.

Low interest rates mean cheaper borrowing, which includes mortgages.  Certainly greater access to mortgages results in many more prospective buyers looking for something where the best locations are limited, which inevitably raises prices.  There is general agreement that the economic collapse of 2007-8 originated in the US, and was brought on by the irresponsible granting of mortgage credit, to so-called sub-prime borrowers. But the same practises were being carried out in the UK, and world-wide. In an interesting recent article Josh Ryan-Collins suggests that this situation was more the result of de-regulation and entry of the banks into the mortgage industry, rather than low interest rates. He notes that ‘interest rates were not particularly low in the 1980s’(4).  So although low interest rates are always an encouragement to borrowing, there is some doubt that they are always the prime cause of high house prices. (See below for a brief history of UK interest rates).

  1. Attraction to investors of an appreciating asset.

This is a more likely cause. As noted in the previous item, the attraction of housing as a financial asset became more evident in the 1980s and 90s not only to professional investors, but also to ordinary homeowners, who saw it as an excellent way of increasing their wealth, if they were able to buy into an area with good growth prospects. Of course, in the most sought after areas, the homeowners were competing, not only with professional investors but also wealthy foreign buyers who bid prices up to extraordinary levels, especially in the capital.

  1. Government policies.

From the 1980s onwards governments have pursued policies towards encouragements to home ownership, which could be seen as subsidies for prospective homeowners. The ‘Right to Buy’ policy is well known, but there were also MIRAS (mortgage interest relief at source), which lasted from 1983     to 2000.  The latest scheme is ‘Help to Buy’ for first time buyers. The relief of capital gains tax on first homes could also be seen as an encouragement to homeownership.   All of these schemes in different ways help prospective buyers to enter the market, which inevitably have the effect of raising prices.

 Interest rates

Interest rates are determined by The Bank of England, which was established in 1694. The history of the rate shows distinct periods of stability and other periods of volatility.  For over a hundred years from 1719 to 1822 the economy enjoyed a rate that was stable at 5%. For the next 18 years the rate fluctuated between 4% and 6% and then in 1840 entered a period of volatility that lasted till 1932. During this time the rate varied between 2% and 10%.

A second period of stability, for 19 years, from 1932 to 1951, maintained a rate of 2%, except for a brief blip to 4% in 1939.  From 1951 a second period of volatility began, and lasted until 2008, in which the rate varied between 2% and 17%.  Between 2008 and 2009 the rate dropped to the unprecedented level of 0.5% and has been at or near this level ever since. (5)

Source: Guardian Datablog.


Ireland suffers the same problem with housing as England. Conall Boyle, former lecturer in economics and statistics at Birmingham City University, provides an interesting article showing that an increase of house building in Ireland between 1975 and 2015 did not help to bring prices down (6).  It is the site value factor that has the greatest affect on house prices in high value urban areas and these ever-rising prices are exacerbated through land hoarding and land speculation, creating an artificial shortage and the consequent increase in prices – simply to the benefit of the landholder, whose ranks are now increased by the new homeowners.

The best solution to this problem is to impose a land value tax which would arrest the rise of the land value factor, keep prices under control and make land banking and speculation unprofitable. Depending on the degree to which a land value tax is imposed, extreme house prices would be reduced. Only then will housing become affordable.


(1)  See Josh Ryan-Collins on housing and interest rates:


(2) This rule still holds true despite the fact of land reclamation, of which the Dutch have a vast experience over centuries; but the reclaimed land in Holland is generally of only rural value.  The culverting of rivers, such as the Wallbrook and Fleet in London was an early form of ‘making’ land but has long since been absorbed into the overall pattern and does not alter the general rule of fixed supply.

Refer to:  https://www.thoughtco.com/polders-and-dikes-of-the-netherlands-1435535

(3)  Christophers, The New Enclosure. pp.102-3

(4)  Ryan-Collins on housing and interest rates, p.5.

(5)  Source, Guardian datablog:  https://www.theguardian.com/news/datablog/2011/jan/13/interest-rates-uk-since-1694

(6)  Refer to:  http://housescheaperbettermore.blogspot.fr/2017/07/building-more-houses-wont-bring-down.html