In this article, we will analyse the policies and systems that have contributed to the pronounced supply and demand imbalance in the UK real estate market.
Real estate, a tangible asset consisting of property and land, is subject to the fundamental principles of supply and demand, much like other assets such as stocks and bonds. The interplay between supply and demand plays a crucial role in shaping property prices. When demand rises, prices follow suit, and when supply increases, prices generally decline.
In the UK housing market, there is a notable surge in demand driven by a severe shortage of new homes. With only 140k-180k homes being constructed annually, while the national requirement stands at around 300k, the limited supply of new homes has led to soaring purchase prices and rents. Consequently, homeownership has become increasingly unattainable for many individuals, resulting in a heightened demand for rental properties.
The shortage of new housing began in the 1970s, and in the 1980s, the government shifted its focus from building to converting existing government-owned housing stock through The Housing Act 1980. This policy, a defining aspect of Thatcherism, granted council house tenants the right to purchase their homes from local authorities. Despite annual discussions on addressing the under-supply issue, successive governments have yet to take substantial measures to meet the minimum target of 300k homes per year. The current planning system is slow, and many local councils face challenges in garnering public support for new housing developments in their respective areas, which suggests limited progress in the foreseeable future.
In the context of London, the current figures indicate a demand for 80k-90k homes, while only approximately 40k-50k homes are being constructed. Moreover, 55% of these new properties are being acquired by foreign buyers. In the year 2000, a UK home cost four times the average salary, but by 2021, this ratio had doubled to eight times the average salary. Consequently, there has been a significant upsurge in demand from renters. With a population of over 9 million, London accommodates a growing pool of renters, with more than 4 million individuals currently residing in rented properties.