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The housing market on polling day: how has it changed?


Published: 7 May 2015 | Author: Bernard Clarke

Voters go to the polls today in an election that commentators have found difficult to predict. The longest election campaign in UK history has also been one of the most closely contested, with few expecting any party to have an overall majority, as in 2010. 

This election has also seen an unusually large number of electoral pledges affecting housing and mortgage markets. Many, if enacted, would have far-reaching consequences for existing and aspiring home-owners, and for those in the private and social rented sectors. 

Many of the proposals seek to address affordability problems facing aspiring buyers and tenants, and would therefore have their biggest impact on housing demand. On the key issue of the supply, most of the parties have announced a target to improve housing construction rates, which remain near a post-war low. But few have provided much detail of how they might achieve their target.

In our own manifesto, A housing market to be proud of, we set out our views on the housing needs in this election for the young, older people and "in-betweeners," across different tenures. But the issues evolve over time, so today we look at conditions in housing and mortgage markets – and the challenges facing governments – in some earlier elections.

1979 – Thatcher’s victory paves the way for radical reform

Margaret Thatcher won the first of three general elections after a series of industrial disputes during the final months of the previous Labour government, which became known as the winter of discontent. After losing a confidence vote in the House of Commons by a single vote, Labour went on to lose the election to the Conservatives, who formed a government with a majority of 44 seats.

The Labour government had been elected in 1974, and had seen a pronounced housing market downturn in its early days, with a year-on-year decline in gross lending during its first year in office. However, the market then rebounded strongly. So, the annual volume of lending grew by more than 160% over the five-year term of the government, from £4 billion to £10.7 billion – albeit during a parliamentary term in which the rate of inflation was the highest in UK history. 

Nonetheless, lending volumes were small by today’s standards, with the annual total in 1979 equivalent to only around two-thirds of what lenders advance monthly today.

Chart 1: Growth of mortgage lending, UK

7.05.2015 - gross mortgage lending

Source: CML Economics

Over the term of the Labour government, the average house price also rose strongly, according to the Nationwide index, from £10,100 in 1974 to £19,100 in 1979 (or by almost 90%).

The affordability of monthly payments for borrowers varied considerably over the course of the parliament, with borrowers having to cope with volatility in interest rates that would be unimaginable to modern consumers. Between 1974 and 1979, the Bank of England base rate fluctuated between 5% and 14%. During this period, however, borrowers were cushioned from the full impact of borrowing costs by mortgage interest tax relief. And they also found that the high rate of wage inflation quickly eroded mortgage debt.

Prospects for first-time buyers were challenging at the beginning of the Labour government’s term, and they were not helped by restrictions on credit availability that effectively rationed mortgages. In 1974, the number of first -time buyers declined to fewer than 200,000 – a depth that was not plumbed again until the financial crisis in 2008.

1987 – Thatcher’s third term

Margaret Thatcher won her third and final election with a reduced majority of 102 seats, but was forced to stand down as prime minister before the end of the parliament. Under her premiership, however, there had been major reforms in housing policy and a liberalisation of financial markets, which transformed mortgage provision into something recognisable to consumers today.

Those reforms included the removal of the building society cartel, which had prevented banks form participating in the mortgage market. The Conservatives also began to phase out mortgage interest tax relief, while the 1988 Housing Act introduced assured shorthold tenancies in the private rented sector.

One of the most significant reforms was the introduction of the Right to Buy, implemented in the 1980 Housing Act. Thirty-five years later, the policy remains in place and, so far, almost two million homes have been purchased under the initiative. But it had its greatest impact in the 1980s. By the 1987 election, more than 800,000 purchasers had exercised the Right to Buy, with a peak annual total of more than 167,000 in 1982-3.

The policy helped bring about a dramatic change in the balance of tenure. In the four years between the 1983 and 1987 elections, the number of owner-occupiers increased by 10% from 13 million to 14.3 million, (and the total grew by a further 10% – to 15.8 million – by the 1992 election.)

The housing market in election years since 1974

  Average house price (£) Annual gross lending (£ billion) Bank of England base rate (%) Annual first-time buyer numbers Average first-time buyer house price (£)
1974 (November): Labour majority: 3 10,148 4.0 11.5 197,500 7,619
1979: Conservative majority: 43 19,075 10.7 13.0 320,200 13,081
1983: Conservative majority: 144 27,386 21.3 10.0 477,600 17,021
1987: Conservative majority: 102 42,987 53.6 9.0 523,700 24,211
1992: Conservative majority: 21 52,663 53.7 10.5 447,600 38,249
1997: Labour majority: 179 58,403 77.2 6.0 501,500 44,000
2001: Labour majority: 167 87,638 160.1 5.25 568,200 63,278
2005: Labour majority: 66 157,494 288.3 4.75 363,800 111,111
2010: Conservative/Liberal Democrat majority: 78 168,719 135.3 0.5 199,400 136,363


Source: Nationwide Building Society, Bank of England, CML

The Right to Buy contributed to a buoyant housing market in the 1980s, although house price growth between the 1983 and 1987 elections was lower, at 57%, than between 1974 and 1979. According to Nationwide, the average house price rose from £27,400 in 1983 to £43,000 in 1987. Over the same period, there was another strong rise in annual gross lending, from £21.3 billion to £53.6 billion (152%).

First-time buyer activity was also strong in 1987, as it had been since recovering in the early part of the decade. In that year, there were more than 520,000 first-time buyers, and a similar annual total was sustained thereafter until affordability pressures began to bear down on numbers in 2002. 

In some ways, it was easier for first-time buyers to access the market in the late 1980s than it is today. The average deposit size was smaller – and so was the loan-to-income ratio – but borrowers had to cope with continuing interest rate volatility which affected the affordability of monthly repayments. In 1987, the average first-time buyer was aged 27 and purchased a house for £24,200. On average, first-time buyers had an income of £11,300 and paid a 5% deposit.

Chart 2: Number of first-time buyers, UK

7.05.2015 - first-time buyers

Source: CML Economics

1997 – the dawn of a new era

In 1997, the new Labour prime minister, Tony Blair, won the first of three general elections with a landslide victory and a majority of 179 MPs. Within five days, his chancellor, Gordon Brown, had handed operational responsibility for setting base rate to the Bank of England. It was a decision that, over time, was to have a significant impact on the housing market as it contributed to the transition to lower and more stable interest rates. 

The four preceding terms of Conservative government had seen a huge growth in home-ownership, with the number of owner-occupiers rising by around 40% to 16.6 million. Initially, home-ownership continued to grow strongly under Labour governments before reaching a plateau and then beginning to decline as affordability pressures intensified. And the decline in home-ownership has continued under the Conservative/Liberal Democrat coalition government since 2010.

The housing market correction in the early 1990s meant that house prices rose by only 11% over the period of John Major’s government from 1992 and 1997. In contrast, the average house price rose by 50% (from £58,400 to £87,600) over the four years up to the next election in 2001, according to Nationwide. In the same period, the annual volume of lending more than doubled, from £77 billion to £160 billion.

2005 – Blair’s third term

The election of Tony Blair as prime minister in 1997 was preceded the year before by the emergence of buy-to-let lending. At the time of his re-election in 2001, the number of buy-to-let loans had grown to 185,000 and, by the 2005 election, the total stood at 700,000. 

The growth of buy-to-let lending contributed to the first significant growth since the second world war in the number of people living in privately rented accommodation. Between 2001 and 2005, while home-ownership continued to grow, the number of people renting privately increased by almost 30%, from 2.4 million to 3.1 million.

During the same period, a long-term transition to low and stable interest rates contributed to continuing strong growth in house prices. According to Nationwide, the average price rose from £87,600 in 2001 to £157,500 in 2005, or by 80%.

2010 – the coalition government

An inconclusive outcome to the 2010 poll saw the election of the first peacetime coalition government in the UK since the formation of the second National ministry following the 1935 election. Five years ago, the election was held during a deep recession following the financial crisis of 2008, which had brought huge changes to housing and mortgage markets.

By 2010, the number of housing starts had collapsed to 139,000, according to the Department for Communities and Local Government – a level not seen since the immediate post-war years. In 2005, the number of starts had stood at 224,000, an annual rate that had been sustained for much of the preceding 40 years. 

The volume of lending halved between 2005 and 2010, from £288 billion to £135 billion. Over the same period, the number of people renting privately continued to grow strongly, from 3.1 million to 4.5 million. And the policy response to the financial crisis saw the Bank rate reduced from 4.75% to 0.5%.

Today’s election

As voters go to the polls today, the mortgage market is showing significant signs of recovery since 2010. Lending last year totalled £204 billion, 50% higher than annual advances at the time of the last election. But there is a persistent shortage of housing supply, and signs of continuing affordability problems for many would-be home-owners.

Housing supply has not expanded in response to a sharp increase in population growth. Having grown by just 7% to 60.4 million in the 30 years to 2005, the UK’s population increased by another 8% to 64.1 million in just eight years to 2013. But housing starts had only edged up from 139,000 in 2010 to 149,000 in 2013. 

The financial crash in 2008 contributed significantly to the lack of responsiveness of construction rates to the growth in population. It also partly explains the relatively modest growth in house prices across the UK as a whole during the last decade. 

According to Nationwide, the average house price stood at £157,500 at the time of the 2005 election and had grown by just 7%, to £168,700, by 2010. Since then, it has risen by a further 12%, to £188,600. But rate of house price growth has varied considerably across the UK in recent years, with sharply higher prices in London in particular and much more subdued growth in much of the rest of the country.

The challenges ahead

Whichever party, or combination of parties, forms the next government will face major challenges in the housing sector. The challenges extend across tenures, and will have to be addressed by a government operating under significant fiscal constraints. 

As we said when publishing our manifesto last autumn, there is much that the mortgage market can and will do to promote a healthy housing market. This article shows that the challenges for policymakers evolve over time, but it will be important for the incoming government to implement a long-term, strategic policy for housing that is clear and deliverable. We hope our manifesto can help shape the development of practical ways of delivering the right type of housing in the right locations, supported by the necessary funding.