Why are House Prices So High?

Many of us were told that house prices are so high because there are too many people and not enough houses. The reality is that house prices were pushed up by the hundreds of billions of pounds that banks created in the years before the financial crisis.

1. Banks created hundreds of billions of pounds and put it into property

In the ten years up  to the start of the financial crisis, house prices rose by over 200%. Many people think this is because there were not enough houses around, but that is only part of the picture. A major cause was that banks have the ability to create money every time they make a loan, and they put massive amounts of newly created money into the housing bubble. Over the same ten years, the amount of money banks created through mortgage lending grew by over 370%! This lending was the main driver in the massive increase in house prices.

2. House prices rise faster than wages

House prices rise much faster than wages, which means that houses become less and less affordable. Anyone who didn’t already own a house before the bubble started growing ends up giving up more and more of their salary simply to pay for a place to live. And it’s not just house buyers who are affected: pretty soon rents go up too, including in social housing.

For someone on an average salary buying an average house in 2007, the mortgage repayments would eat up nearly half (47%) of their salary over 25 years.