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Northern Ireland people benefit from a more affordable market than in most other parts of the UK

Economy Watch


Northern Ireland is cheaper than most parts of the UK

Northern Ireland is cheaper than most parts of the UK

Getty Images/iStockphoto

Northern Ireland is cheaper than most parts of the UK

Many aspects of economic analysis fail to enthuse the non-economist. Talk of GDP or productivity or balance of payments rarely make for engaging after dinner debate.

If economics does come up the data that people will know and relate to is likely to be share prices or house prices. Possibly average earnings but people like to keep that data to themselves.

House prices and share prices are both easy to understand and most people have a personal stake in how both of them perform. Recent work on incomes and spending carried out by Mark Magill and Marguerite McPeake in the research centre has led me to think a little more about house prices and housing policy.

How important is an affordable housing market? If it is becoming less affordable should policy makers intervene, and if so in what way?

The story of Northern Ireland house prices is well-known: an unrealistic bubble followed by sharp correction and a very slow recovery thereafter.

There was clearly major damage caused by this boom and bust and many businesses and individuals are still suffering the effects but the current housing market is certainly more appropriate given the level of wealth in the region.

Today the average house price stands at £124,000, 45% down on the highs of 2007 and over 40% lower than the UK average (though a more sensible comparison is 32% lower than the UK excluding London). To determine how affordable this is we should look at disposable incomes but regional data is not produced.

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Using wages is only partially helpful as it ignores many of the other expenses people have to pay, for example, health care or household taxes but it does give a rough guide to affordability.

In 2016 average house prices were 4.7 times median full time wage levels, a far cry from the frankly ridiculous 10.2 in 2007.

On this crude measure Northern Ireland is the most affordable of the UK regions, similar to the levels in Scotland, Wales & the North East of England. When you factor in all the other perks of living in Northern Ireland, such as, no prescription charges, low university fees, limited need to avail of private health or education, low household rates, free travel for over 65s then it is clear people's salaries are able to go further than they can elsewhere.

This is evident in an analysis of the things people spend their money on. Using the Living Costs and Foods survey, the work by Mark and Marguerite shows housing costs account for 28% of people's spending in London, 22% in the UK as a whole and just 12% in NI. Comparing the 10 things people in NI spend proportionately more on relative to the UK average and the 10 they spend proportionately less on, is extremely revealing.

The data appears to suggest there is more money left to spend on non-essentials and what we might think of as luxury items, cars, clothing, holidays, TVs etc. This is an interesting finding for a region in which the focus is often on the low GDP per head or relatively low average salary.

But is a 10% wage differential as big an issue when housing expenditure, which is such a large part of spending, is 10 percentage points lower than UK average, as a proportion of total household expenditure?

This comparison is helpful but care needs to be taken before drawing any firm conclusions.

There are proportionately more people on low incomes in Northern Ireland who do not own houses and spend the majority of their income on items, such as food and fuel, that do not have a favourable price differential.

They do not enjoy the benefits of a competitive housing market demonstrating there are nuances below the headlines. In addition, it could be argued that although housing is a big proportion of spending in other parts of the UK it helps increase wealth in a region and therefore in absolute terms the ability to spend across categories is higher. In other words, we spend a bigger slice of a smaller cake on 'nice' things.

I find this thought process interesting as we have recently spent a long time in the centre discussing NI's position at the top of happiness and quality of life rankings in the UK and I do wonder whether affordable house prices play a part in this outcome?

A more interesting question is whether policy could and should intervene if house prices began to move at a different pace to wages?

The recent data would suggest fast rising house prices is more of a thought experiment at present.

Looking at headline wage data in Northern Ireland (and there are limitations with this data set for time series comparisons) shows that in the last three years house price growth has exceeded wage growth in each year and has been more than 5 percentage points faster in two of the three years.

If in the future there was to be a rapid escalation in house prices homeowners are unlikely to want any policy intervention and the construction industry would clearly like to see an improvement in prices, but is there a point at which policy would step in?

History suggests not and the experience currently in the Republic shows that in the face of an acute affordability problem the response has largely been to help people borrow more, rather than any interventions to impact on price directly. How could local policy intervene? We do not have devolved control over stamp duty (perhaps we should) so that is not currently an option.

Directly impacting supply is a possibility but has a long lead time and though there is some flexibility around changing the domestic rating system this has not been used in the past.

I suspect that a strong housing market would be considered a sign of health and there would be a reticence to intervene. Perhaps it would be the job of commentators to speak more loudly than during the last bubble to call for action.

The data shows that NI people benefit from a more affordable market than in most parts of the UK, if only we did not have the scars from the 2007-2012 roller coaster we might see this in a more positive light.

In next week's Economy Watch we hear from Danske Bank economist Conor Lambe