A very peculiar prosperity: house prices in relation to earnings since 1938
3 June 2014
If we are becoming more prosperous, why do many young white-collar workers struggle to buy terraced houses built for manual workers in the 1900s, let alone 1930s suburban semis? In 1938 a three bedroom semi could be purchased, even in Greater London, for less than £500 and the average house cost around 2.7 times average adult earnings.
If we are becoming more prosperous, why do many young white-collar workers struggle to buy terraced houses built for manual workers in the 1900s, let alone 1930s suburban semis? In 1938 a three bedroom semi could be purchased, even in Greater London, for less than £500 and the average house cost around 2.7 times average adult earnings. Private house-building was at an all-time high and for the first time significant numbers of manual labourers were able to afford modern suburban housing.
After the War, things changed. A much tighter planning regime restricted the supply of building land and dramatically raised the cost of that land that was available. The Conservative Party won the 1951 election on a pledge to build 300,000 houses a year – but opted mainly for tower blocks - underpinned with generous government subsidies - which turned the term `estate’ into a by-word for crime, deprivation, and poor housing standards. Many had to be torn down within a few decades of their construction, accentuating the housing shortage.
By 1970 house prices had more than doubled compared to 1938 (after adjusting for inflation), but real earnings had just about managed to keep pace. Britain then embarked on the first of a series of housing booms, which saw real house prices rise by 75 per cent within three years. New development failed to keep up with demand, while a rapidly rising number of households (a product of smaller households, immigration, and - for the south - in-migration from other regions), placed increased pressure on the limited housing stock.
Owner-occupation rates continued to rise, boosted by observations that houses were a good long-term investment, the growing unpopularity of council housing in the wake of the tower block era, and mass sell-offs of council houses from the 1980s. As property values rose, owner-occupiers became increasingly hostile to new housing developments in their areas. Yet, given that they had often invested their life savings in their home, who could blame them for `NIMBYism’? A property crash in 1989 only delayed the upward path of real house prices, which tripled from 1970 to 2002 and continued to rise inexorably until the credit crunch brought a temporary halt to the housing bubble. Unfortunately, it also produced a collapse of new house-building, from an already low level.
Britain currently faces the first period of sustained decline in owner-occupation rates since records began, historically high levels of mortgage debt to incomes, and a rate of house building which does not even begin to meet current demand. The new generation of university graduates –faced with both student loan debts and high house prices – often find the bottom of the housing ladder pulled up beyond their reach. Thus, while those fortunate enough to have purchased their first home in the 1980s, or even at the turn of the century, can often look with pride at the massive capital asset they have built up, for younger people, 21st century `prosperity’ is prosperity of a very peculiar sort.
Professor Peter Scott
Director, Centre for International Business History
Professor of International Business History
Henley Business School
Housing affordability and owner-occupation rates since 1938.
Sources: house prices, 1938-97, and owner-occupation rates, 1938-61, Holmans (2000: 487-97). House prices, 2002-2010, Nationwide UK house price index, http://www.nationwide.co.uk/hpi/, based on the fourth quarter for each year. Owner-occupation rates, 1971-2010, http://www.communities.gov.uk/housing/housingresearch/housingstatistics/. Earnings for 2009: Office for National Statistics (2009: 11), using mean gross weekly earnings for full-time employees on adult rates, whose pay was unaffected by absence. Earnings for previous years estimated using the index for annual earnings in Officer (2011).
Notes: Owner-occupation rates for 1938-61 are for England and Wales, figures for subsequent years are for Great Britain; house price data are for England and Wales for 1938-61 and for the UK thereafter. House prices for 1997-2009 are based on the fourth quarter. However, when estimating house price to average income ratios, second quarter house price data were used, to make them compatible with the earnings data.