Why experts believe the housing ladder no longer exists

Back in the 70s and 80s the concept of the ‘housing ladder’ was born. The concept of the ladder was created from high inflation and even higher interest rates.

In previous years it was the norm to start at the bottom by buying a property with your new husband or wife around. From the equity built up from living in the first property, a couple would usually upsize into a house big enough to raise a family. Then, usually with a family, the couple would move to another larger property. This would all be achieved with a fifteen to twenty year period.

This pattern of house buying became normal. Some experts believe that this model can still be seen in an aberration of this. Although, the housing ladder itself matched the specific economic conditions within it’s time (high interest rates and high inflation). Whereas, this doesn’t sit within our current economic climate; thus it will only return if we have high interest rates and high inflation again.

By analysing 1970-90 and 1998-2018, we are able to see the breakdown in the property ladder.

1970-1990s

Between these two decades, the average rate of inflation (also known as RPI) was 10.1%. The average earnings in the up were £1,080, but these were vastly growing year on year on average by 12% until 1990. Also in these decades interest rates on mortgages were around 12% and the average first buyers house cost just short of £5,000.

For those trying to purchase their first house in Britain, it did seem a difficult transaction. In theory, couples that earned £1,620 could afford a starter property that was £3,281 with a mortgage rate of 12%; meaning, repayments would be around £405 per year. This is all on the assumption that housing prices rose in line with average earnings.

1998-2018

Within these twenty years, the RPI was 2.8%, the average price for a starts house was £93,120. Average mortgage rates were 4.5% and in 1998 the average wage was £15,100. This average grew by 3% year on year.

Theoretically, the average household income was £22,650, which allowed couples to afford a mortgage of around £472 a month. Thus making payments on a starter home around £5,664 a year.

Due to the economic climate rapidly changing, it would take families thirteen years to upsize to a larger family home. Additionally, this would mean that families were unable to upgrade their family home as quickly.

By 2018, even though families have not been able to upgrade into larger homes, mortgage prepayments are around 16.5% of their gross income; this is because of inflation rates and fluctuating interest rates.

Conclusion

Due to the lower inflation and lower interest rates experienced between 1998 and 2018, it meant it took families longer to upsize compare to 1970-1990.

The housing ladder itself depends on inflation and how fast homeowners are able to build equity to put towards their new family home. There is the key difference between the economic climates from 1970-1990 and 1998-2018, this is the ratio of pricing to earnings.

On the other hand, there still is buyers that are able to purchase the more expensive homes across the country. Generally, this is due to inherited wealth and will be out of reach for those who aren’t as lucky to inherit properties with a sizeable equity.

Jess Mitchell

I started writing for PPO back in August 2019. I particularly enjoy writing about new housing developments and upcoming property events.

About Sophia 68 Articles
I started writing for PPO back in August 2019. I particularly enjoy writing about new housing developments and upcoming property events.

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