10 years on the credit crunch is still shaping the UK housing market

28 July 2017

On August 9 2007, citing ‘a complete evaporation of liquidity’, BNP Paribas froze three funds.  A month later, £1 billion was withdrawn from Northern Rock in a day.  The global financial crisis, an event that has fundamentally altered the shape of the UK housing market, had begun.

The effects of the crisis were dramatic and swift.  The average UK house price dropped 20 per cent in the space of 16 months and transactions, which had averaged 1.65 million over the previous 10 years, crashed to 730,000 in the 12 months to the end of June 2009.

In a new report, The Global Financial Crisis – 10 years on, property adviser Savills analyses the immediate and lasting impacts of the events of 2007 and 2008.  While many segments of the market have recovered peak values, the reverberations of the GFC continue to affect existing and aspiring home owners across the UK.

First time buyers are still heavily dependent on help from the Bank of Mum and Dad or Help to Buy to access home ownership, existing owners struggle to trade up the market, and the private rented sector has come into sharp focus as it becomes for many a much longer term housing solution.

The market is also more divided at a regional level than ever before and a huge gap has opened up between London and the rest of the UK.  Since 2007, price growth in London has totalled 78 per cent, double that seen in the South East and East, and at least four times that seen in all other regions. The average house price now stands at £478,142 in London, more than double the £209,971 UK average. Wales, Yorkshire & Humberside and the North West are just into positive price growth ten years post credit crunch, while values in the North East remain on average -9 per cent down.

“This has huge implications for mobility across the UK and also leaves affordability particularly stretched in London, with parallels in cities such as Oxford, Cambridge and Brighton,” says Lucian Cook, Savills head of residential research.  “Lower value commuter towns such as Slough, Stevenage and Harrow have also seen high price growth, as investors and homeowners have looked to stretch their equity.”

Savills has identified four key ways the GFC continues to shape the housing market: 

1. Equity trumps debt:  The quantum and nature of lending has changed and cash now plays a much larger role in a lower transaction market.  A total of £312 billion was spent on house purchases in the year to the end of March 2017, some £30 billion less than in 2007, but 57 per cent of this total was cash. 

Lending at 90 per cent loan to value now accounts for just 3.9 per cent of all new mortgages, down from 14.1 per cent in 2007, and only 1.2 per cent of all lending is interest only, down from 32.5 per cent just ten years ago.

“Lending constraints look set to be a lasting legacy of the credit crunch, meaning the market will continue to favour more valuable, equity-rich markets,” says Cook.

2. Bank of Mum & Dad – a major lender:  Constraints on mortgage lending means the deposit hurdle is very much higher now than it was in 2007.  The average deposit raised by a first time buyer has more than doubled (+109%) to £26,224 across the UK as a whole.  In London, it has more than quadrupled (+360%), to £97,513.  

First time buyer deposits totalled £10.2 billion in the year to the end of March 2017, an increase of 85 per cent over 10 years.  Savills estimates that £4.2 billion (ca 41%) comes from parental or government-backed funding.  “Without the help of the Bank of Mum & Dad and Help to Buy, home ownership would be beyond the reach of a great many more aspiring home owners,” says Cook.  “We do not envisage this changing.”  

3.  Fewer rungs on the ladder:  A more constrained mortgage lending environment means that fewer home owners are able to trade up the ladder.  In 2007, 1 in 15 existing home owners moved home, a figure that has fallen to 1 in 27.  Over the past 10 years there have been some 3.8 million fewer such home moves by those needing a mortgage than in the previous decade.

“Long gone are the days when interest-only borrowing would allow home owners to make frequent moves up the ladder.   Over one in three mortgages in 2007 were interest only – some 343,200 – but they have now all but disappeared, down to just 8,000 in the past year.”  

4. Squeeze on buy to let:  In the year to March 2016, buy to let lending was effectively back to where it was pre credit crunch, as landlords saw an opportunity in rising house prices and growing demand from those excluded from home ownership.  Increases in stamp duty and restriction on tax relief on interest payments have curtailed investor appetite and borrowing has halved.  “In buy to let, as with all other sectors of the market, cash will remain king,” says Cook.

Beyond 2017 In the short term, Savills expects the market to be driven by sentiment, with price growth continuing to be suppressed by the prevailing political and economic uncertainty.  As rates rise, affordability will be squeezed further, particularly in London, and stress testing of borrowing will act as a drag on house price growth. 

Cook again: “Thanks to more prudent lending, the underlying affordability of existing mortgage debt is unlikely to become an issue, so we expect continued slowing of price growth rather than a price correction and a return to more of a needs-based market over the next two years.”  

 

 
 

Key Contacts

Lucian Cook

Lucian Cook

Director
Residential Research

Savills Margaret Street

+44 (0) 20 7016 3837

 

Sue Laming

Sue Laming

PR Director
Press Office

Savills Margaret Street

+44 (0) 20 7016 3802