- Every 1% increase in the supply of new builds makes mortgage income ratios worse by 9%
- Dispels myth that more new builds would stem overall cost of ownership
New-build homes make property even more unaffordable, according to research from a leading academic shared exclusively with This is Money.
Every 1 per cent increase in the supply of new homes causes the ratio between an individual’s mortgage payments and their income to worsen by 9 per cent.
The finding of Dr Alla Koblyakova, of the real estate economics and investment research group at Nottingham Trent University, dispels the assumption that the supply of new-build properties alone helps to stem unsustainable growth in house prices.
New build, same old problem: Building more homes isn’t the magic solution to high property prices
‘The Government thinks that by increasing the supply of new homes, the overall cost of owning a property will come down,’ says Dr Koblyakova, from the university’s school of architecture, design and the built environment.
‘But this research shows us that the mortgage market behaves differently. When new housing comes on to the market, lenders relax their conditions and lend more money. And when consumers are more able to buy a property for a higher price, the price of property doesn’t come down.
‘This is a significant finding and is the opposite of what’s generally expected. It’s important, therefore, that future affordability programmes focus not only on the supply of affordable housing, but also on the supply of housing finance.’
The study – based on a sample of more than 1,700 mortgage holders between 2010 and 2014 -considered analysis that homes in the UK were categorised as ‘seriously unaffordable’ last year.
The house price to income ratio nationally was 4.6 and 8.5 in Greater London. Affordable housing is graded as 3 or less.
‘The main issue that property values in the UK go up faster than wages,’ said Dr Koblyakova.
Up and away: The ratio between house prices and earnings has risen dramatically since 1996. Source: CML
‘It’s not possible for the Government to control house prices. But it is possible for politicians to motivate lenders to offer longer mortgage contracts to reduce the size of monthly mortgage payments.
‘By increasing the duration of a mortgage to 30 years, for instance, it’s possible to make owning a property more affordable for those on average incomes.’
Bob Pannell, chief economist at the Council of Mortgage Lenders agrees that more must be done to ease affordability in the property market than building more homes.
He said ‘While new and re-invigorated government policies may stimulate housing market activity to some extent, the almost exclusive focus on boosting new construction seems an incomplete strategy for delivering a sustainable and healthy housing market.
‘Even if government policy helps to deliver the 250,000 or so homes needed in England (and 300,000 in the UK as a whole) over the next decade, 90 per cent or more of the housing stock that will exist in 2025 has already been built, and is being lived in by somebody. Government measures that nudge towards better use of the current stock could contribute materially to the supply-demand picture.’
The National Housing Federation, which speaks for housing associations in England – disagrees with Dr Koblyakova’s finding that new builds leading to worse property affordability.
Head of media and campaigns Rhys Moore told This is Money: ‘The main reason prices keep going up is that we simply aren’t building enough homes.
‘We need to build 220,000 homes a year to keep up with demand and yet last year just 143,000 were built. To turn this around we need to build tens of thousands more homes a year.’
Like Dr Koblyakova, Alistair Hargreaves from mortgage broker John Charcol says that building more homes isn’t a solution to Britain’s housing market – which he describes as ‘simply not fit for purpose’.
‘Building more homes is part of the way forward but you have to have the infrastructure around it too – such as roads, water, jobs and so on.
‘Take roads, for example. It can cost in the region of £1million to build just one mile of new road. If a new build development is going to require 10 miles of road to access it, who’s going to pay for it? The developer’s not likely to want to take £10 million off its bottom line. And council budgets are being cut.
‘There’s a perception that Britain is full. It’s not full, there’s loads of space. Britain’s just badly designed. There are homes and communities with plenty of land that could be developed but without the necessary infrastructure, there aren’t enough, or good enough, jobs and schools nearby to make people want to relocate.’
Mortgage Affordability Calculator