14 June 2025

The £39bn housing paradox

Rachel Reeves’ sensible policy could risk being undone by factors beyond the market.

he two big winners of this week’s spending review were the NHS and housing. Spending on the health service will rise by three per cent in real terms, which means that by the end of the decade it will account for 40 per cent of all current spending. Housing received a £39bn commitment over ten years, as well as funding from higher social rents. This is, as Megan wrote on Wednesday, a testament to the negotiating power of Angela Rayner, but it’s also one of the most important decisions this government has taken. To Rachel Reeves’ great credit, she has made a very significant long-term investment that will benefit the country and for which a future chancellor will probably take credit. A long period of lots of housebuilding would cool Britain’s overheated market. But this very sensible policy also risks being undone by other factors.

Two days before Reeves stood up to announce her spending review, representatives of some of the country’s biggest lenders went to Downing Street to call for a loosening of mortgage rules, to allow them to take on more first-time buyers with smaller deposits and lower earnings.

Lenders say this change would bring “meaningful societal benefits” as it would allow more first-time buyers to enter the market, but the UK has spent decades trying to solve this problem with finance. The result is that the average age of a first-time buyer in the UK is 33, and the average length of a new mortgage is now 31 years. This means a person entering the housing market today will be paying off a mortgage for their entire working life. Two out of every five new mortgages are issued to borrowers who will still be paying them off beyond retirement age.

This represents a significant shift in the relationship most of the population has with their home. At the beginning of this century, the median first-time buyer was 29 and only a tiny fraction of the mortgage market used terms over 25 years (mortgages with periods of 25-29 years made up 0.1 per cent of the market). A typical buyer would enter the market in the expectation that they could celebrate their 60th birthday as someone whose home was entirely paid for. Today, first-time buyers are signing up to mortgages which imply that their home may never be entirely theirs.

Of course, very few people actually stick with a mortgage for its whole term. The latest data from the FCA shows that 94 per cent of mortgages are issued at fixed rates. Most buyers clearly expect to be able to move to shorter terms as they earn more in later life, or inherit money from their parents. Those who don’t will face paying a great deal more for their homes; a £250,000 loan paid off over 31 years (at the current average rate for a 5-year fix) incurs almost £50,000 more interest than the same loan over 25 years.

The housing market will also continue to be inflated by immigration. The gap between housing supply and net migration became very stark in 2023, when there were 194,650 dwellings completed and net migration of 906,000 people. Immigration has been shown to reduce house prices at a local level, as a high number of migrants moving to an area leads existing residents to move away. But it follows that these people will move somewhere else, which causes prices to rise in other areas. The Migration Advisory Committee says a one per cent rise in the population due to immigration results in a one per cent rise in house prices overall; MHCLG has said house prices go up two per cent for every one per cent increase. The most recent ONS projection is that immigration will grow the UK population by 7.3 per cent in the ten years from 2022-32; this implies that immigration could add tens of thousands of pounds (very roughly somewhere between £20,000 and £40,000) to the average nominal house price over a decade.

That’s before the wider pressures on the market – energy prices, materials, a lack of skilled workers – make themselves known. But this is where the paradox comes in: making something more affordable can also make it more expensive. If the government tries to use cheaper finance to keep a flow of first-time buyers in the market, as previous governments have done, it risks inflating prices still further. There is a very difficult balance to be found here: many more houses are obviously needed, but that won’t fix the issue unless the government also takes other policy decisions to cool the market.