Is Britain's affordability crisis down to its productivity?

A report out this week by the Resolution Foundation highlighted that the average weekly wages in the UK have risen by just £16 a week in real terms since 2010. In that period, according to data from the Land Registry, the average house price has increased by 68% from £167,469 in 2010 to £281,373 today.

The think tank found that sluggish gross domestic product and productivity growth since the global financial crisis of 2008 have weighted on improvements to average living standards in the UK. The report also suggests that if wages had grown at the same rate as in Germany and the United States, the average British worker would be £3,600 a year better off, which equates to nearly £70 a week. Although most prosperous countries have been afflicted by slower-than-normal growth in real wages since the global financial crisis, the deceleration has been more marked in the UK.

An average German and American homebuyer in full-time employment would need 6.5 to 6.0 times their yearly salary to fund a home purchase. Compared with 8.3 time their earnings in England.

One key difference distinguishing Germany, the US, and the UK is their "productivity." As the graph below highlights, the average worker in the US and Germany produces 20% more than their counterparts in the UK. Before the global financial crisis, the difference was 11.5%. The gap has almost doubled since 2010.

From 2010 to 2022, the annual average growth in UK GDP per hour worked was just 0.5%, with little sign of improvement in recent years. Even doubling the current productivity growth rate—from 0.5% to 1% a year—over the next 12 years will only be sufficient to achieve the same rate of GDP growth as in the past decade. The past decades' growth has not been very impressive either, with the average annual GDP increasing by 1.54% annually over the past 13 years.

So, what has caused productivity and wages to fall behind so much?

The simple answer is a lack of investment, both private and public. When Conservatives took charge in 2010, the government led by David Cameroon embarked on austerity, or, in other words, reducing public expenditure. It led to cutting school budgets by the largest amount in 40 years, cutting the number of police officers by 30%, a £37 billion cut in the NHS budget since 2010. As the graph below highlights, the private and public sector investment fell with it and has stayed well below the peak in the early 1990's and early 70's. 

The graph below shows a link between private and public sector investments and their impact on wages. As the graphs above and below show, wages, along with private and public sector investment, have been stagnant for the last 13 years. 

We have stifled business investment through excessive regulations:

Governments in the UK have focused too heavily on regulations, which has led to stagnating business investment. Even today, the political debate centres more on over-regulation than a free market, which stifles new business entry, reduces competition and hampers growth. UK must shift from over-regulation to fostering market competition by enabling businesses to operate freely.

This further leads to fewer job creation. Because people have less choice to move into higher-paying roles, people's wages remain stagnant, and they produce less. This has been the case in the UK over the last decade and a half.

The issue of housing affordability is more complex than building more and regulating the Private Rental sector to make things affordable. That will once again reduce supply and increase prices. The new government must focus on growing labour productivity by encouraging business investment through free market competition. More regulations and taxation will only, in the long term, decrease wages and affordability. The only way to increase affordability is to encourage investment into the sector by deregulation and we must focus on that.