1. Demographia, 5th Annual Demographia International Housing Affordability Survey: 2009 Ratings for Metropolitan Markets, 26 January 2009

2. United Nations, 'House price to income ratio', Chapter 7: Promoting sustainable human settlement development, in Commission on Sustainable Development Working List of Indicators of Sustainable Development, September 1996, posted on www.un.org

3. European Commission's Joint Research Centre, Indicators of SD UN CSD Methodology Sheets: UN_ME050-House price to income ratio, posted on http://esl.jrc.it

4. World Bank, Urban Development Indicators, posted on www.worldbank.org

5. Francis Jones, National Statistics, Increase in income inequality - The effects of taxes and benefits on household income 2006/07, Newport, ONS, 25 June 2008, posted on www.statistics.gov.uk

6. Halifax, House Price Index, 3 April 2009

7. Chris Giles, 'UK given £75bn new money', Financial Times, 6 March 2009, p 1

8. Ian Abley, 'Development Rights for the Hydrogen-Fuelled Future', chapter 18 in Ian Abley and James Heartfield, editors, Sustaining Architecture in the Anti-machine Age, Chichester, Wiley Academy, 2001, p 210 to 227

9. Communities and Local Government, Household Projections to 2031, England: Housing Statistical Release, 11 March 2009

10. General Register Office for Scotland, Household Projections for Scotland 2006-based, 9 October 2008

11. http://wales.gov.uk

12. James Heartfield, Let's Build! - Why we need five million new homes in the next 10 years, London, audacity, 2006, p 20

13. Alan Holmans and Christine Whitehead, 'New and Higher Projections of Future Population in England - A first look at their implications for households and housing', in Town and Country Planning, London, Town and Country Planning Association, September 2008, Volume 77, Number 9, Tomorrow Series Paper 10, p 1 to 20

14. Ian Abley, We are witnessing a British built "housing crisis" that Government is powerless to resolve, 23 July 2008, posted on this website here

Britain doesn't add up

I am not surprised that Hugh Pavletich and Wendell Cox of Demographia struggled to make sense of the British housing market in their excellent Annual Demographia International Housing Affordability Survey. This is their fifth survey, published in 2009 on data available to the third quarter of 2008. (1) Britain doesn't add up. Even after the housing bubble has burst British housing remains unaffordable.

Their measure of housing "affordability" is when the median-priced house on the market costs no more than three times the median gross household income. They cite the House Price to Income Ratio indicator of the United Nations as a measure of "sustainable development". (2) The UN methods for working out the "median-priced house" and the "median gross household income" are established. (3) The World Bank describe this "median multiple" measure as '... possibly the most important summary measure of housing market performance, indicating not only the degree to which housing is affordable by the population, but also the presence of market distortions. When abnormally high, it often indicates severe supply-side restrictions; when low, lack of effective demand attributable to limited or unsecure property rights.' (4)

On average househods in Britain have a gross, pre-tax income of £30,000. If as Demographia say the "median multiple" should be 3 for housing to be "affordable" British houses and flats should be costing less than an average of £90,000. Less than £85,000 if the redistributive tax and benefit system is recognised. This is to take the average. There are few habitable houses or flats for sale for less than £100,000 in even the remote parts of the country. The 90,000 house might be statistically defined as "affordable", but is unavailable on the market.

The £90,000 home would still be "unaffordable" by the Demographia measure for at least 60% of British households. Looking at each income quintile, (5) the Demographia measure of affordability would suggest house prices should be far lower for most poorly paid British households living in an industrial economy. With a gross income of £5,000 a year the bottom 20% would need to buy a finished home for £15,000. An impossibility for any size of dwelling, but the next three quintiles cannot find affordable housing either:

• £12,000 x 3 = £36,000 for the Second
• £23,000 x 3 = £69,000 for the Third
• £38,000 x 3 = £114,000 for the Fourth

With gross incomes of £38,000, the fourth quintile of households would need to find housing for £114,000, but will be disappointed. In any case their net income is a reduced figure of £31,000. After the redistribution of tax is accounted for, net incomes suggest that 80% of British households face unaffordable housing markets:

• £15,000 x 3 = £45,000 for the Bottom
• £19,500 x 3 = £58,500 for the Second
• £24,000 x 3 = £72,000 for the Third
• £31,000 x 3 = £93,000 for the Fourth

Households have to be among the top 20% of earners to bring home an average of £53,000 after tax, which at three times would mean housing of over £159,000 was unaffordable. The top 20% of earners would mostly not want to live in areas where housing cost £159,000. No-one else can find anywhere to live to achieve the Demographia measure of affordability. The Halifax House Price Index for March 2009 calculated the average house price in Britain to be £157,326, which is where it was in May 2004. They also noted that the rate of price falls seemed to be slowing, and house buyers are re-entering the market. (6) Britain will not see an average house price of 90,000 as 3 times gross average income.

Even after the housing bubble has burst, British housing is "severely unaffordable" with a "median multiple" of £157,326/30,000 = 5.24. The average house price may fall to below £150,000, to make British housing only "seriously unaffordable", but it is highly unlikely to fall anywhere near to a figure of £120,000, and "moderately unaffordable".

Meanwhile, Gordon Brown's government is doing everything in its power on a world stage to reinflate the unaffordable housing market, reducing base interest rates to 0.5%, and increasing the money supply with innovations in "quantitative easing". (7) House price inflation is set to return soon. That should become evident this year.

Everyone in Britain knows that new homes will not be built for sale at prices they can comfortably afford. But they have to be paid for because people need somewhere to live. Everyone in Britain knows that the only housing market is the trade in the 26 million houses and flats that exist, as house prices inflate to provide "equity" over any mortgage borrowing.

Everyone knows that British population growth is outstripping new housing supply. The shortfall in housing production heightens the largely ineffective demand, while environmentalists argue Britain is overpopulated. At audacity we have long welcomed population growth, criticised the British failure to build homes for everyone, and opposed a planning system that prevents people building freely on ample land to obtain housing nearer the cost of production. (8) Household growth is not accommodated. The housing stock is ageing badly, whilst remaining unaffordable. Facing no opposition government can manage that.

The number of households in England is projected to grow to 27.8 million in 2031, and that means 252,000 new households per year. That is in England alone. Population growth is the main driver of household growth, accounting for nearly three-quarters of the increase in households between 2006 and 2031. (9) In Scotland in that period the number of households is projected to increase to 2.7 million, which is an average of 17,600 additional households per year. (10) Figures for Wales seem out of date and research is underway. There were 1.21 million households in Wales by 2003. (11) By 2031 the household figure will not be much higher in Wales. That might suggest that by 2031 Britain may have 31.75 million households. If the projections are right, and there are about 26 million households in Britain in 2009, there will be roughly an average of 260,000 households trying to form every year. That makes the figure suggested by James Heartfield in 2006 in Let's Build! of 234,000 new households every year an underestimate. (12) A small underestimate.

Government can philosophise about whether 240,000 or over 300,000 eco-homes a year will meet household growth. (13) The long term output of naturally ventilated and thickly built eco-homes, in which occupants must accept greater scope for seasonal discomfort, may be closer to 100,000. (14) That will replace no existing housing, which if it were to be replaced at a rate of 1% would require 260,000 in addition to homes required by new households, or well over half a million homes a year with 260,000 demolitions. Then it would take 100 years to fully thermally upgrade the British housing stock.

With household numbers increasing from 26 million to nearly 32 million Britain should be aiming to replace up to 320,000 homes a year by 2031 if a 1% replacement rate were to be maintained. Even 1% is clearly insufficient as an energy policy. However the British government will be seen to meet the European Union's Energy Performance of Buildings Directive if 100% of all new homes are built to be "zero carbon", even if there are only 100,000 homes built. Maybe "eco-home" building will be reduced to 50,000 a year. Many more homes are needed, even if the replacement rate is low at 1% per annum:

• 260,000 replacement homes in 2009 for a stock of 26 million
• 320,000 replacement homes in 2031 for a stock of 32 million

To meet average annual household growth over that period 260,000 new homes are needed every year, and must be added to the replacement homes needed annually:

• Britain should be building 520,000 homes a year in 2009
• Britain should be building 580,000 homes a year in 2031

This volume of new and replacement housing will still have to be built with a Service Life of 100 years. Obviously British homes last much longer than that. They have to last longer, with vast amounts of periodic refurbishment and sporadic maintenance to address the dilapidation. The long term failure to build volume is why British housing is so old and badly patched up. People are forced to make do and mend. Also new housing has often been designed to last less than a century, and much of the more recently built housing simply has not lasted.

Of course housing need not last a century, but the quicker it needs replacing the more housing production is needed. It may not be sensible to expect housing to last 100 years. Certainly mortgage lenders seem unconcerned provided the structure will last longer than the financial contract, even with extensive repairs. If homes are only designed for 60 years the rate of replacement must be 1.666%, requiring:

• 434,000 replacement homes in 2009 for a stock of 26 million
• 534,000 replacement homes in 2031 for a stock of 32 million

260,000 new homes are still needed to meet average annual household growth, and so if the housing is only to last 60 years instead of 100:

• Britain should be building 694,000 homes a year in 2009
• Britain should be building 794,000 homes a year in 2031

No-one in government or the construction industry is talking about ramping annual housing production in Britain up to 500,000 homes a year, let alone 800,000. Britain's stock of housing is not going to last indefinitely. Failure to build at rates of over half a million homes a year, and to a quality capable of lasting a century, means that households have to live together for much longer periods, if not indefinitely, and in possibly overcrowded conditions. Meanwhile the energy inefficient housing stock ages. There is no coherence in energy or housing policy.

Housing Minister Margaret Beckett should be ashamed of herself. She manages her inability to encourage housing production because there is no opposition to the inflationary consequences of the British planning system. Like her boss, Gordon Brown, she will sit out her term in office until house price inflation revives.

She will not be waiting long. Existing homes will inflate in price while new housing production will be around a fifth of the half million homes needed every year. Anyone hoping for an affordable new home is in for a long wait in a Britain that doesn't add up.

Ian Abley 11.03.2009, updated 05.04.2009

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