Housing Market Crisis

The houses for rent bubble in the United States grew up alongside the stock bubble in the mid-90s. The logic of the growth of the bubble is very simple. People who had increased their wealth substantially with the extraordinary run-up of stock prices were spending to find a property in U.K. based on this increased wealth. This led to the consumption boom of the late 90s, with the savings rate out of disposable income falling from close to 5.0 percent in the middle of the decade to just over 2 percent by 2000. The stock wealth induced consumption boom led people to buy bigger homes, as they got excess money to invest on property or housing. This increase in demand was momentary or for short period because the supply of housing was relatively fixed. Therefore an increase in demand led first to an increase in price and then sudden rise in the price of land in most affected areas, increased prices got incorporated into assumption.

The expectation that prices would continue to rise led homebuyers to pay far more for homes than they would have otherwise, making the expectations self-fulfilling. People believed that housing prices would never, ever go down, what they thought is that housing prices would go up in real terms, on average, over time – that housing was a good long-run investment. They knew there would be variation around that trend, but they expected the variation to be relatively mild, they didn’t expect the severe variation in prices and associated problems that actually occurred.

The gap between the number of affordable housing units and the number of people needing them has created a housing crisis for poor people. The lack of affordable housing has lead to high rent burdens, overcrowding, and substandard housing. These phenomena, in turn, have not only forced many people to become homeless, they have put a large and growing number of people at risk of becoming homeless. However, the demand for assisted housing clearly exceeds the supply, only about one-third of poor renter households receive a housing subsidy from the federal, state, or a local government. The sold property prices tend to lure more business than the income from rent. The limited level of housing assistance means that most poor families and individuals seeking housing assistance are placed on long waiting lists. The focus of the government’s response to this affordability crisis has been the help to buy scheme which provides government support to allow those who cannot afford to buy with a conventional mortgage access to a high-loan-to-value mortgage or an equity loan.

This will no doubt help some people to get on the housing ladder but it will do little to meet the needs of the low to middle income families who currently face the biggest affordability problems. It has become almost right to say that the solution to Britain’s housing problem is that we need to build more homes. But without more supply, schemes like help to buy simply risk inflating house prices as more people come onto the market in search of a home. Estimates suggest we need more than double the number of homes that we are currently building each year. But improving affordability has to be more than a simple numbers game. We need to build more homes in the right locations and of the right type and at the right price - not just more homes for sale or prime central London rental developments to meet the needs of households who currently have few option.