The gap between rocketing house prices and pay rises for workers is expected to widen for at least the next five years, with potential to continue to do so for decades to come, the government advisory body concerned with public finances has advised.
The Office for Budget Responsibility (OBR) warned that households would have to pay a greater proportion of their income on mortgage payments to meet spiralling housing values. It added that only a “historically unprecedented” house-building boom would stop loan-to-income ratios rising exponentially.
Seeking to give the government a truthful, clear indication of the shadowy route house prices were taking in the coming years, the OBR took a firm stance on the matter in hand, proposing tax increases or decreases in public spending to combat the issue. Relying on a new method which involved gathering a wide sample of property value measures, and then using these to forecast future price fluctuations, the OBR proceeded to paint a bleak picture.
A spokesman for the public body said: “The model implies that house prices will consistently rise faster than income, barring a strong and historically unprecedented response from housing supply, leading to a steady rise in household debt relative to income.”
The OBR’s findings were released in timely fashion, as many analysts and public research bodies have speculated that escalating costs of property are outstripping increases in workers’ income. Citing the disproportionate increase in the nation’s population against the slow increases in the supply of homes as reasoning, these housing critics’ perspectives are reinforced by the OBR’s data.
Through the publication of detailed tests analysing past data, in which trends are identified and inferences made, the OBR believes policymakers will be able to get an idea of how various economic factors, such as interest rate fluctuations, will affect house prices on a yearly basis.
In alternate data, released on Thursday, the OBR said increased levels of immigration could provide a solution for Britain’s ageing population, which has been identified as a growing economic strain on the public’s pocket. The OBR said the latest population prognoses could mean government parting with a hefty £80bn, which accounts for 5% of GDP, between 2017-2018 and 2063-2064 due to the enlarged number of retirees.
In its annual report on the state of public finances, the advisory body said further tax rises or substantial spending cuts, over the next 50 years, were required to tackle the mounting financial burden. Given the amount of modifications currently on the Chancellors’ agenda, the OBR’s warnings suggest macro-reforms to the system as a whole.
The percentage of the population aged 65 or over will rise to an estimated 27% by 2064 – up 10% on 17% this year. This will increase the amount afforded to pension payments, healthcare and personal carers, according to the OBR.
‘Slightly less unsustainable’
OBR chairman, Robert Chote, stated: “Compared to last year, the latest population projections suggest there will be fewer people of working age, more people in their 80’s and 90’s, and roughly the same number of children. So the ratio of workers to non-workers is lower, which increases fiscal pressures.”
“As a result, some additional fiscal tightening is likely to be needed after the current crisis-related consolidation has been implemented.”
In controversial comments, given the discontent surrounding the issue felt amongst British workers in recent times, Chote suggested higher levels of immigration would alleviate the financial affliction the UK faces over the next 50 years.
“This is because inward migrants are more likely to be of working age than the rest of the population. So we avoid the cost of educating them and some will leave before we have to finance them in old age. But the impact may be less beneficial over a longer time horizon as more inward migrants retire,” he reasons.
Chote described the long-term outlook on public finances as “slightly less unsustainable” compared with the previous year’s forecast. On account of government perpetuation of spending cuts for an extra year, to 2018-2019, coupled with the linkage of the state pension age to rising life expectancy, government has ensured a saving of around £14bn at today’s prices.
George Osborne, said: “The report from the OBR provides further evidence that the government’s long-term economic plan is working and the country’s hard work is paying off. It shows that as a result of the decisions we have taken over the past year, in the next 50 years, debt as a share of our national income will be two thirds of GDP lower than it would have been.”