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Why have house prices increased so much in the UK since 1995?

Ok so lets start off by pointing out 2 house price crashes (91–95/07–08) with a massive increase in between these periods. From 1995 to 2007, UK house prices have more than x3 which represents a never seen increase.

However this isn’t specific to the UK. Lets start by answering why have house prices increased so much in general in developed countries.

  • The Main reason for this huge increase (directly related to the subprime crisis) is the appearance of land booms (rapid increases in house prices) followed by house price bubbles. But why? Developed countries were going pretty well at the time, inflation was steady and wages were high. So everyone started investing in real Estate as they knew it was a great and safe investment. From Households to Asset Managers, Investment bankers and companies, everyone was on the market. Some individuals even bought more than one house as they knew the price was on the rise and they could rent it in the meantime. Banks would also give out tons of mortgages and even speculators willing to make a fast return entered the market. Everyone was Happy! I wont go into too much detail on the sub-prime crisis but this didn’t last forever and the bubble burst. However, people still see real estate as a great investment which is why prices have increased by a nice margin since 2011.

Other reasons for rising house prices:

  • Increase in the number of households. Although the UK population has risen relatively slowly, increased life expectancy, increased divorce rates and increased immigration have all contributed to a higher demand on the Estate market.
  • Supply Shortage. You can’t forever build houses. People want to live in specific places and there just isn’t space for everyone especially in big cities. Therefore as supply increases alot slower than demand, prices continue to rise.
  • Easier access to a mortgage and lower interest rates. With the deregulation of the financial sector in the 1980s, more banks than ever were on the market selling mortgages (this is less true after 2007 where mortgage availability decreased drastically). However mortgage interest rates have dropped significantly leading to a cheaper costs to finance the investment.
  • The Buy to let Market. Traditionally landlords were wealthy people who had usually inherited many properties and were renting them out. Nowadays, even middle class people can enter this market. But why? In a rising price market using a high level of gearing people can easily build up a housing empire. And how do it lead to a house price increase? Simply because, by buying more houses, these landlords reduce the supply for potential buyers, which in turn now have to rent as house prices are too high.

So these are the reasons why house prices in developed countries have risen so much. However as house prices rise globally, in the Uk they are soaring. They have increased by more than in any other country in the G7. So who is to blame?

  • Supply shortage is worse in the UK than in any other country and its worse in London than anywhere else. Especially in big cities there really isnt any space to build houses. And when there is, strict planning laws are to blame. A quarter of planning applications being rejected.
  • Rich foreign buyers, who see London as a tax-efficient investment have bought many properties throughout London. Transparency International identified 36,342 properties held by offshore companies.
  • Demand has also been stoked by “Help to Buy”, a mortgage-subsidy scheme launched in 2013.

Essentially, the UK being a small island, supply is even more critical than anywhere else. Living in London myself, I also believe there is a real reluctancy for buyers to sell their properties as they already make good money from renting them and believe the house prices will continue to rise.

Anyway, thats its from me, hope I was clear! If you have any questions put it in the comments!