So as you might have heard, houses are getting more expensive – especially in places where they were already priciest. As Cities Outlook 2016 shows, house prices in every UK city have exceeded the peak-bubble days of 2006, rising by an average of £64,000 nationally by 2014.
Less talked about than house prices, however, is the number of homes that are being bought.
In contrast to ever-rising house prices, the number of housing transactions has yet to return to pre-recession levels in any British city. Nationwide, transactions have dropped almost a third from around 1.5m in 2006, to just under 1m in 2014.
Housing transaction volume in selected geographies. Image: Centre for Cities.
Partly this is of course due to the recession. As wages stagnated, many people decided to stick where they were, while banks around the world stopped lending after the sub-prime disaster. The Mortgage Market Review (led by the Financial Conduct Authority), which was tasked with cracking down on irresponsible lending, made sure banks were more risk averse.
As a result, mortgage deposits have swelled from around 5 per cent in 2006 to today’s average of 20 per cent. Back in 2006, if you wanted to buy an average house in Cambridge, you could wander into a high street bank with a despite of a mere £13,500 (just under six months of local average wages). But in spendthrift 2014, you would need to come with £83,500 savings to get a deposit – equivalent to around three year’s wages.
In other words, higher deposits are the new normal. But rather than dampen prices, they are instead keeping housing transactions low. Even in buoyant housing markets like Cambridge there are less house sales now than the 2006 peak. But it’s worse in struggling cities – for example Burnley – where transactions dropped further and have flat lined since.
Why are we seeing this disparity across? It’s not simply because of house prices. Indeed, more houses are being sold in expensive cities than in relatively-cheap places.
To find the answer, we have to go back to housing-economics 101. Housing isn’t a “normal good”, which more people buy as prices fall. Instead, more people buy homes in places when the prices go up.
That might sound counterintuitive, but it demonstrates that we treat housing more like an investment than a consumable good. That leaves us in the strange situation where house sales in the least affordable cities are bouncing back – but in the most affordable places, they’re continuing to flat-line.
Edward Clarke is an analyst at the Centre for cities.
To find out more about the Cities Outlook 2016 report, click here.
