None of our current inflation indices register the unique house price inflation the UK has had. Had they done so in any manner comparable to Germany and the US,  there would have been far higher inflation registered across the UK under New Labour. Looking at housing  affordability indices gives us some idea of the seriousness of the real inflation being missed and an index that shows this up region by region would show a revealing story for the West Midlands.

Our house prices have changed so rapidly over the last generation in the UK  that we have adopted the practice of measuring affordability in terms of the number of years annual income one would need to buy a house. One of the most comprehensive set of figures for house prices across the regions has been compiled by the old Halifax Building Society (and its successors) since 1983.

The following chart shows their figures for 1983 for some of the ‘southern’ English regions including London.

The West Country, East Anglia and the East and West Midlands are included. I have left out the others so that the images are not too crowded. In the early years of  the Thatcher government, it is still the people of the West Midlands that find it easiest to buy their houses. The average house can be bought on the 3 times average male earnings that were the traditional lending standard. (But with a deposite also necessary).  It was London and especially the West Country where this was becoming a stretch. The full Halifax figures can be found here.

 

However look what had happened by September 1992 when the UK got kicked out of the Exchange Rate Mechanism.

It is now the West Midlands whose buying power has been erroded. The region is already on the way to being one where  a household, which not long before could be run on one income, could no longer. We were falling into what is in the USA refered to as the ‘Two Income Trap’. In the General Election of a few months before, the WM conurbation had for the first time  become the southern most sub-region to mainly vote  Labour.  The Conservative government lost here a whole Parliament before they lost the UK as  a  whole.  And even in 2010 the conurbation did not respond to David Cameron.

Under the John Major government house prices fell back and incomes slowly grew so that Labour did not actually inherit the Two Income Trap in 1997. But when the housing market peaked in 2007 we were all trapped. On the basis of traditional 3 times income lending, the whole of the UK was in the trap.  The average house required 5.86 times the average full time male wage . 2 incomes.  Most of the regions we have been particuarly looking at were slightly above that. The West Midlands had tasted this earlier than the others, but we were actually all in the same boat/trap now.How this situation will now evolve is difficult to say, but some regions will show a trend before others. Maybe it could even be that the West Midlands will show it up first. But for government to head off another wrong turn we will need to reform the way we measure inflation so that we have region by region figures that pick up housing inflation as part of the basket with other sensitive items such as food and energy.

Andrew Lydon