Even in regions traditionally regarded as cheaper - such as the North West and Yorkshire - average prices will break through the £200,000 level.
"Our report shows that continuing house price rises and the resulting housing crisis are set to stay with us for a long time," said NHF chief executive David Orr.
And while homeowners may view the surge in prices as good news, Mr. Orr did warn they carried a "sting in the tail".
"A growing number of parents will find themselves subsidizing their sons' and daughters' mortgages," he said.
"And, across the country, more and more people are going to find themselves priced out of the property market - and struggling to find a decent home."
Construction drive
In order to tackle the problem the government must press ahead as soon as possible with its plans to build more homes - and make sure an additional 70,000 social homes are built each year, the NHF report added.
The government vowed to act to tackle the country's property problems with the publication of the Housing Green Paper last month.
Among the proposals were plans for more than 70,000 affordable homes a year to be built by 2010/11.
The building drive aims to tackle housing supply problems - local government figures show there is demand each year for 210,000 homes, but only 165,000 are being built.
Copyright © 2007, BBC NEWS, MMVII
Commentary Number 1
A recent study of England’s housing market suggested a surge in housing prices in the next five years. There is a shortage because of a decrease in the supply of houses. Shortages usually lead to an increase in price. The National Housing Federation (NHF) warned prices were now almost 11 times the average wage. In order to avoid this looming crisis, the NHF urged the government to act on its promise to build three million homes by 2020. According to the report many of the people priced out of the housing market are now turning to the social housing sector causing the waiting lists to grow even more.
In the past 10 years, house prices have surged by 156% while wages have risen by just 35%. If such trends continue, prices will near the half a million mark in London by 2012, from the current average of £318,864. This trend has been seen in cheaper regions as well suggesting that the housing crises are set to stay with us for a long time.
As supply gets further behind demand, the average house price in England is increasing sharply. The fall in the supply of houses has brought about a shortage in the number of houses available, which has led to an increase in prices (FIGURE 1).
Supply and demand is perhaps one of the most fundamental concepts of economics and it is the backbone of a market economy. Demand is the quantity consumers are willing and able to buy at a given price, while supply is the willingness, ability, and propensity of firms to put goods on the market. Price, on the other hand, is a reflection of both supply and demand.
The fall in the supply of houses in England caused the supply curve (S1) to shift to the left as shown above in FIGURE 1. Thus, a shortage (Q1Q2) developed and, therefore, a higher equilibrium price1 (£500,000) was established: The price of houses in England has increased.
The law of demand states that the quantity demanded for a commodity per period of time decreases as the price rises and increases as the price falls, ceteris paribus3. There are two reasons for the law of demand: 1) the income effect4 and 2) the substitution effect5.
In our case, neither of these reasons is applicable, since the commodity we are dealing with (houses, shelter) is a pure necessity in life. Shelter, along with oil, is one of the many commodities that are a must in life. These goods are called price inelastic goods, where the quantity demanded is almost the same no matter how high or low the price is (FIGURE 2 below).
1 The price where the quantity supplied and the quantity demanded are equal. (No shortage, No Surplus)
2 The amount of commodity consumers are will and able to purchase over a specified period of time.
3 Latin for: other things being equal. The variables not addressed in the model are kept constant.
4 “The effect of a change in price on quantity demanded arising from the consumer becoming better or worse off as a result of the price change”. (Sloman, 2001, p.31)
5 “The effect of a change in price on quantity demanded arising from the consumer switching to or from alternative (substitute) products”. (Sloman, 2001, p.31)
The decrease in the quantity supplied6 caused a movement along the demand curve (D) from Q1→ Q2. However, prices are not tending to decrease.
There is a demand for 210,000 homes each year, but only 165,000 are being built, according to the local government figures. In order to tackle the problem the government must press ahead as soon as possible with its plans to build more homes. The government must also make sure an additional 70,000 social homes are built each year. The building drive aims to tackle the housing supply problems. If this succeeds, the additional demand will be tackled by an increase in supply as shown in FIGURE 3 below.
If housing prices remain high, builders might be attracted to produce more and more houses; which will increase the total market supply and therefore decrease the price on the long run. If the supply exceeds demand, house prices will decrease until the quantity demanded matches the quantity supplied and a new equilibrium price (P3) is established.
6 The amount of commodity consumers are willing and able to sell over a specific period of time.
