In the seventies the average house cost about 3 times the average income. Today it's closer to 6 times. Why is this, and is this progress? In my opinion there are two main problems, a restricted supply and continued wealth accumulation.
Firstly, a free market should enable the supply of competitively priced units that should not increase in relative price over time. For housing there is a finite supply of land, and one could argue this restriction has driven prices up, but the population has only increased by around ten percent in forty years so it can actually only be a small part of the overall picture.
Secondly, each generation inherits more wealth, particularly that stored up in their parent's housing. This has a one-way ratchet effect, constantly pushing demand and driving up prices. Houses come to represent layers of fossilised wealth valued for their rarity rather than intrinsic utility.
Other questions remain:
- How much has the rise of dual incomes caused the current cost/income ratio?
- Are there secret suppliers cartels in operation and how can we ensure none exist?
- Are politicians doing enough to see that land is reused and enough social housing is built?
- Are enough voters in favour of a stabilisation, even reduction, over time, of relative house prices?
- What about the impact of Buy-to-Let? Does this help or hinder supply? via Twitter.
But what do you think? Feel free to leave a few thoughts below. The image is from an Economist article that's worth reading too.