The UK Housing Crisis - How Deep are the Roots?

When discussing buy-to-let investment, the issue of the housing crisis enveloping the British housing market inevitably comes up, and understandably so.

It is having a seriously deleterious effect on all sectors of the market, and landlords and property investors are amongst those attracting a disproportionate share of the blame.

We have already looked at the crisis in Local Authority housing, (Local Authority Housing Crisis; Where Do We Go From Here?) In this blog we’re going to turn our attention to the broader crisis affecting housing in the UK.

With the election of a new government, with clearly stated aims, the question of fixing this problem is high on the news agenda. So what are the root causes of the ongoing crisis and how they might be alleviated? 

As long-serving property professionals, the ongoing crisis is a real concern for us and our clients. Understanding it helps us better advise our clients how to navigate its sometimes choppy waters.

What is the nature of the UK housing crisis?

The simple answer to this question is that there is a massive and endemic lack of available housing. This is why you’ll always hear politicians of every stripe asserting that their number one priority is to increase house building.

Sounds easy doesn’t it? But if it was easy why hasn’t it been fixed long before we reached this point?

The answer, rather obviously, is that solving this crisis isn’t easy. It’s not easy because to fix it requires resolving a series of interconnected problems which have bedevilled the UK for decades.

Aspen Woolf, a property investment company, has created an overview of the timeline of the UK housing crisis which you may find useful in appreciating complexity and long-term nature of the issues involved.

The Competition and Markets Authority (CMA) Scotland Summary report, published in February 2024, gives an in-depth analysis of the Scottish housing and house building market. Necessity means information from the rest of the UK is included.

Money

Building new homes demands cash – lots of cash. Obviously like any enterprise it’s expected that the undertaking will return a profit for the construction companies, but getting to the point where you see a return on your investment takes time.

Additionally, financial considerations vary depending on whether the construction is for the private or public sector.

Cost to buy

There is a continuing divergence between the cost of housing and buyers ability to meet that cost. This was well illustrated by the BBC in an online article this year. The whole article is well worth your attention, but this quote sums up the problems:

“Prof Ken Gibb, director and principal investigator of the UK Collaborative Centre for Housing Evidence, said rising property prices were not good in the long term.

“The general picture is that house price to income ratios are widening because of both rising house prices and stagnant or poor performing earnings,” he said.

“When you combine this with tight mortgage regulation and higher interest rates, we see a long-term trend against home ownership, with high deposits and prices continuing to grow when incomes are not.”

Inside Housing published an article in March of this year (2024) highlighting the delivery of affordable housing by Local Authorities and Housing Associations. It doesn’t make for comfortable reading.

Finally, Scottish Housing News highlights the disparity between official figures and their findings with regards to the gap between  available housing and what is actually required.

Private

The private sector aims to build homes and to sell them for a profit. At this level it’s a simple undertaking, but getting from the point at which you decide to commence development, to getting money in the door is often long and tortuous.

Public

The call for the expansion of local authority housing has only increased in volume as the housing crisis bites deeper. The continuing sale of local authority stock has gutted the sector, and rebuilding has failed to make good the shortfall.

That is partly to do with changes of policy, with increased emphasis on encouraging ‘social housing’ through Housing Associations and partly due to a simple lack of funds.

Local authorities have so many responsibilities and so many competing priorities that building housing is not always at the top of their list, regardless of how important they know it to be.

There has also been a failure to plan adequately to create sufficient housing to meet projected needs. The Pegasus Group wrote an interesting piece on this for those of you wanting to read further.

The new Chancellor of the Exchequer addressed these issues head-on in her first major speech. We shall have to wait to see if the government has the will to see these matters through.

Planning

In the same speech by the Rt. Hon. Rachel Reeves MP linked above, she directly addressed major changes to the planning system in the UK, along with a much more active approach to growth-based planning.

Given that planning is a devolved power, there is no guarantee that changes which might significantly affect England, for better or worse, will be reflected in Scottish legislation.

There is an argument made by many that the planning system in the UK is one of the greatest causes of the housing crisis, especially in the post-war period.

While there may be some truth in this, planning is a perennially contentious issue, there is a broader cultural issue which plays into the problem.

Most UK citizens are enthusiastically in favour of new developments; home building, commercial and infrastructure development. However, those same people are often resolutely opposed to such developments next to them.

This, combined with the way our planning system works, means that decisions can take an inordinate amount of time to be finalised. This is discouraging to private developers who may have invested in land they find they cannot develop quickly.

Additionally, since planning is a local authority responsibility, their lack of funding is reflected in underfunded and under-staffed planning departments which does nothing to expedite planning decisions.

Time will tell whether or not the government has the will to tackle the perceived and real problems with the planning system and to speed up the process freeing developers to get on with building.

Construction

The construction industry is keenly sensitive to many factors such as ongoing infrastructure development and the general economic outlook. The question ‘why aren’t they building more houses?’ has many answers.

For instance, the cancellation of HS2 had an immediate, negative, impact on house building plans for some companies. Rising interest rates, reflected in higher mortgages also adversely affected new house building.

This sensitivity to the economy is understandable and expected. House building is not just a social enterprise, it is necessary for the companies involved to turn a profit, and no-one expects them not to try.

However, like most commercial undertakings, they thrive in periods of stability, which have been noticeably missing of late.

Private Rented Sector (PRS)

The PRS, across the UK, delivers around one quarter of all homes. Like potential owner-occupiers, its ability to function effectively and to deliver affordable, quality accommodation is affected by the broader housing market.

While there have been improvements in the investment market, compared to 2023, the cost and availability of stock has restricted the ability of new and existing landlords to deliver more properties for rental.

The economic difficulties have been compounded by legislative impediments north and south of the border and there is little doubt that the market overall will benefit from a clear , medium-to-long term strategy from lawmakers.

Paul Hilton, Chief Executive of the Edinburgh Solicitors Property Center (ESPC) has some thoughts on how the new Labour government can improve matters in Scotland.

Advice from the property pros

For property investors and buy-to-let landlords the UK housing crisis is something to be navigated rather than a circumstance which they can personally affect. Depending on your mindset, that’s a good or bad thing!

From the perspective of the private rented sector (PRS) in Scotland, things are beginning to improve compared to 2023, however its ability to increase investment is hampered both by the cost of housing stock and Scottish Government policies.

The various restrictions placed on the sector over the past few years have discouraged new investment and slowed the possible pace of further investment by those already operating in the rented sector.

Given the recent General Election and change of government it is far too early to say whether or not the new administration will achieve their stated goals, and no one is expecting sudden, massive changes to the market.

Leaving aside the policy changes we are going to see, it is possible that clear direction and leadership may imbue the UK housing market with renewed confidence and that, in the short-term, could see tangible improvements.

The scope of the housing crisis in the UK, and the depth of contributing factors, means that we can only touch on some of the causes without producing something to rival War & Peace in size!

In summary…

Thank you for reading this far, we hope that you’ve found this interesting and enlightening.

While it would be nice to be able to easily address the deep-rooted issues within our housing market, the truth is that given how long the underlying problems have existed, it will take years to effect change.

Fortunately, as we have written recently, the buy-to-let market in 2024 is already showing a real improvement over 2023, hopefully this upturn will persist. We’re seeing movement in the market and a better trading environment.

Despite the UK housing crisis, there is still a healthy demand for good quality rented accommodation, and there are plenty of opportunities for those looking to invest in the property market.

If you’ve been contemplating buying into the buy-to-let market, please get in touch. With our years of experience we can assist you in making the best decisions for you and your future.

Written by Chris Wood, MD & Founder of Portolio

Get in touch on 07812 164 842 or email [email protected]