The house always wins

Over the next few years are more households going to require help with their housing costs? Or will the need for assistance decline as we get richer? The answer depends first on what happens to the overall numbers of households. Within this total more people will find it difficult to afford adequate housing if, as incomes rise, housing costs increase disproportionately and/or the distribution of income worsens.

One way of addressing this question is to look at the evidence of the past few years and of projected demands and needs. Our research has examined first how the numbers and makeup of households are likely to change; second, how prices, incomes and their relation to one another have changed over the longer term; and third, how these relationships vary between regions making it more or less difficult to afford adequate housing.

The number of households in England is projected to increase by around 3.5 million between 1996 and 2016, an increase of some 17.5 per cent in 20 years. Within this total, around 65 per cent of the additional households are expected to live in the south of England - implying a 23 per cent increase over the position in 1996. This compares to 14 per cent in the midlands and 10 per cent in the north of England.

Among households aged under 45, where most of the new entrants to the housing market are to be found, the most important factor affecting affordability is the increasing proportion of one-person households. The number of people living alone who have never married but are over 30 is expected to rise very rapidly - by over 800,000, around one quarter of the total increase. These households, by definition, have only one income and therefore face particular affordability difficulties in the market sector.

The most important determinant of affordability is the relationship between house prices and incomes. Figure 1 gives some indication of both trends and variations in house prices. It shows in particular that there has never been a time when prices have simply move in line with longer time trends - rather they are continuously volatile - making it particularly difficult to enter the market at peak times. Looking at both peak to peak and trough to trough, comparisons to determine the underlying trend suggest that prices since the war have risen by between 2 and 2.5 per cent per annum in real terms.

Over the period 1970-2000, average male full-time earnings have risen by about 1.7 per cent per annum, but the growth in median and especially lower quartile, incomes is much less, at perhaps 1.2 per cent. This suggests that male earnings, particularly among the group which is likely to have particular problems in accessing owner occupation, have risen significantly less rapidly than house prices.

On the other hand, if the trends in the earnings of men and women are combined, median earnings rose by 1.9 per cent per annum - a figure not dissimilar to that for house prices.

While this figure is not strictly comparable to couple incomes, it points up the large differences in the capacity to pay of those relying on one income as compared to dual income households. One way that owner-occupation has remained affordable overall, especially in the south of the country, is because of the proportion of first time buyer households that include two incomes.

Relative house prices across regions vary over the economic cycle. In particular in the upturn, prices tend to rise first in London and the south east and then ripple out across the country. Even so it is possible to detect a longer term increase in the disparity between London and the south east and the rest of the country, which has grown stronger over the last decade. London in particular stands out, with house prices increasingly out of line with the rest of the country.

But even excluding London, house prices in the south east are around 70 per cent higher than those in the north east.

Regional differences in earnings are far smaller than for house prices, although differentials have increased significantly over the last 20 years. Average earnings in London are perhaps 30 per cent above the national average. Those in the wider south east earn about 15 per cent more than in the north and thus face a significantly higher hurdle in obtaining adequate accommodation than households living further north.

There are also important differences in the pattern of earnings between occupations. Regional differentials in earnings are far less among those whose incomes is based on national pay scales. So public sector workers are likely to find it far harder to pay for adequate accommodation in the south and particularly in London.

Figure 2 brings together the different elements to assess the relative increase in house prices and earnings over the longer terms. At its simplest it suggests that prices have been rising by around 1 per cent per annum faster than earnings. Once quality adjustments and other factors are taken into account, the difference rages from around 0.2 per cent and 0.7 per cent across regions - with the gap considerably greater in the south.

This analysis of house prices and earnings suggests:

1) It is reasonable to expect house prices to continue to rise in the future, at a rate rather faster than earnings. This reflects difficulties in expanding total housing supply. This does not mean that there will not be periods of decline - but that over the longer term the gap will widen.

2) For prospective house purchasers with only one income, the long run increase in house prices relative to earnings would constrain access to house purchase. This is the m ore important because of the projected relative increase in the number of one-person households who, by definition, have only one income.

3) On the evidence of part trends, the gap between the increase in house prices and the increase in earnings will be the highest in southern England, where more than two-thirds of the projected increase in households is expected to occur.

4) London is a special case, with an exceptional increase in house prices. This also ripples out to higher increases in the counties adjacent to London, compared to the wider south east. Whether or not this differential continues to expand depends particularly on the levels of international migration, on the success of urban renaissance policies and on London]s role as a world city - but if it does not it is most likely to be because Britain]s economy is suffering.

5) The growing gap between rising house prices and increasing earnings is much greater for those working in the public sector where national pay scales result in much smaller regional differentials than for earnings as a whole.

6) Swings in interest rates are important in determining short run increases in house prices and in generating volatility. They are not the cause of the long-term upward trends.

7) The role of land values in the long-term upward trend of house prices particularly in southern England cannot be overstressed. More restrictive policies on making land available for housebuilding would make these problems worse.