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“At the Tony Blair Institute, we’ve been thinking hard about what this moment truly demands. In our recent paper, Disruptive Delivery, we surveyed over 12,000 voters across the UK, US, Australia, Canada and France – and the results were sobering. Across every country, a deep sense of decline cuts across political lines. Most strikingly, just 26% of people in the UK believe children born today will be better off than their parents, the lowest figure of any country surveyed. That’s not just economic pessimism; it’s a crisis of belief in progress itself.”

This widespread despair isn’t merely about statistics—it’s about the erosion of hope in what the future can bring.  But, it depends how you see “a deep sense of decline”.

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When Shrinking Isn’t Doom – and Inflation Falls, Too

Let’s explore an intriguing counterargument: if the economy shrinks, prices in general should also fall, leaving affordability little changed – or even improving – particularly when incomes and prices move in tandem.

To assess whether a smaller economy might correlate with improved affordability, let’s examine the post-war 1950s, a period of dramatic change:

Between 1951 and 1963, wages increased by 72%, while prices rose by just 45%, giving workers meaningful purchasing power.

These numbers suggest that in that period, even as the economy grew, wage gains outpaced inflation — the essence of improved affordability.

Regarding housing:

• In 1954, the average UK house cost about £1,863,
• In the 1950s, house prices cost 2 to 3 times annual earnings – compared with today, where affordability ratios hover around 7–9 times income.

So, in the past when the economy was smaller than now houses were more affordable than today.  But is “affordable” in today’s terms.

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So: Does a Shrinking Economy Mean More Affordable Housing?

Not necessarily – but under certain conditions:

1. If Incomes don’t fall as fast as prices affordability will improve.
2. But we have yet to find out what will happen to housing markets as the economy shrinks.  How will future governments react to an increasing number of owners with outstanding mortgages insufficient to cover the value of their houses?
3. What will happen to mortgage markets which used to operate in the growing economy, where buying a house was seen as an investment.  Will Building Societies survive in a shrinking economy?

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In Victorian times (roughly 1837–1901), house purchase and mortgage finance were very different from today. Mortgages certainly existed, but they were far less common, the lending market was tightly regulated by social class, and large deposits were generally required. Most ordinary working families rented, while home ownership was largely restricted to the middle and upper classes until the late 19th century. Here’s a breakdown:

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1. Early Victorian Period (1837–1870s)

• Mortgages were rare for the working class.

• Property was generally purchased outright by the wealthy or financed through private arrangements, often within families.

• Where mortgages were available, they were provided by:

  • Solicitors (private lawyers acting as moneylenders)

  • Wealthy individuals

  • Occasionally landed estates for long-term tenants buying freeholds.

• Loan-to-value ratios were low: lenders were conservative, typically offering up to 50% of the property’s value, sometimes less.

• Deposits of 50% or more were common for those who borrowed.

• Repayments were usually interest-only, with the capital repaid at the end of the term.

This meant most artisans, labourers, and low-income families had no access to mortgage finance at all and remained lifelong tenants.

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2. Rise of Building Societies (1850 onwards)

By the mid-Victorian period, building societies began to transform the mortgage market, particularly for the emerging middle class and better-paid skilled workers.

• Early building societies were terminating societies:

  • A group of members pooled savings until there was enough to build or buy each member a house, after which the society dissolved.

• By the 1870s, permanent building societies became widespread, offering ongoing mortgage finance.

• Building societies offered smaller loans, but on slightly better terms than solicitors.

• Typical deposit requirement: around 20%–30% of the property value, sometimes more for riskier borrowers.

• Repayments were usually repayment mortgages rather than interest-only, which made home ownership possible for clerks, teachers, shopkeepers, and better-off artisans.

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3. Late Victorian Period (1880s–1901)

By the late Victorian era, mortgages became more widely available as the middle class expanded and suburbs grew.

• Building societies dominated the lending market, and competition slightly improved terms.

• Deposits of 10%–25% were possible for reliable borrowers, but 25%–33% was more typical.

• Loan terms were short by modern standards, often 10–20 years.

• The interest rate tended to be 4–6%, relatively stable because Britain was on the gold standard.

• Nevertheless, most working-class families still rented, especially in cities. Home ownership remained aspirational until well into the 20th century.

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4. Key Differences from Today

 

Summary

• The Tony Blair Institute underscores a deep-seated belief crisis about future prospects.
• A shrinking economy can lead to lower prices—and theoretically preserve affordability—but it’s a fragile dynamic that requires incomes to fall at a slower rate than house prices – the opposite of what happened when the economy was growing..
• In the 1950s UK, real income growth outpaced price rises, preserving affordability—though this was a time of growth, not contraction.
• Real affordability hinges on the interplay between income, prices, and access to credit.

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Key data points: