Could houses become like jets: too expensive to own?

David Miles, Professor of Financial Economics at Imperial College Business School, examines rising house prices relative to average household incomes, and highlights why home ownership may eventually become unsustainable for many.

Substantial fluctuations in the value of houses have major economic consequences. For existing home owners, fluctuations can result in huge gains or losses. For people hoping to buy for the first time, price rises far in excess of income growth can mean postponing home ownership for years; even decades. Financial regulators and central banks now have a range of policy tools (including limits on loan to value ratios on mortgages, capital weights on mortgage debt, and limits on the value of home loans relative to household incomes) that they are increasingly willing to use to try to head off the sort of fluctuations in house values that have been associated with financial instability.

But to assess whether movements in housing prices are making them over-valued or under-valued requires us to have some idea of the evolution of prices that are consistent with a sustainable path. My recent research with Professor James Sefton explores what such paths might look like, and how they are particularly sensitive to shifts in technology, land availability and household preferences.

Over the past seventy years or so, house prices around the world have risen substantially faster than the price of other consumer goods. National, real house prices (that is, relative to consumer goods) averaged across all developed countries have risen by an average of over 300% since 1945. In some countries, national house prices have, on average and measured over many decades, risen faster than incomes. By 2015, UK house prices relative to average household incomes were around double the level from the late 1970’s. In London, the rise has been greater still.