Latest figures on mortgage lending from the Council of Mortgage Lenders show that buyers of homes are continuing to borrow more relative to their income. We expect mortgage regulation to limit this in the future, but to understand what this means for different parts of the housing market it is important to understand levels of equity relative to debt.
We know from our analysis of the total value of homes in the UK that levels of equity have risen significantly more than levels of borrowing over the past five years. Total privately held housing equity now stands at £5.1 trillion.
In five years this equity has risen by £1.65 trillion, while mortgage borrowing has only increased by £106 billion. But the benefits of rising equity gains have been unevenly spread. Almost six out of 10 homes (57 per cent) are now mortgage free, meaning that mortgage borrowing is spread across just 43 per cent of all privately owned homes.
Across England and Wales borrowing totals around £1.2 trillion, which equates to an average of around £132,000 per mortgaged household. That figure has risen by £18,500 over the past five years as existing debt has been concentrated among a smaller number of home owners.
While at a regional level there is relatively little variation in the percentage of homes with an outstanding mortgage, average levels of outstanding debt vary enormously from region to region, as the below table shows.
Source: Savills Research
It’s no surprise that London has the highest outstanding mortgage debt, equivalent to almost £110,000 per home. But given that many homeowners own outright, the actual average outstanding loan for those with a mortgage stands at £243,000. However, despite much higher levels of outstanding debt in London, the equity held by those with a mortgage is also greater than in any other region, reflecting the capital’s high house price growth over the past decade. Just five years ago the average outstanding loan to value for a property subject to mortgage stood at 49 per cent in the capital. It now stands at 42 per cent, the lowest of any region.
This gives home-owners a significant store of wealth and lenders an equity cushion. Instead it will be the debt relative to a borrower’s income that will act as a constraint on people’s ability to trade up or get on the housing ladder and this is likely to slow house price growth in the capital.
The South East and East rank second and third to London in terms of average outstanding mortgage on homes with borrowing, at £167,608 and £145,620. Here levels of equity are high without quite the same debt constraints.
At the other end of the scale the North East has the lowest average borrowing for homes with a mortgage, at £78,500 and loan to income ratios are not a huge constraint here. But it also has the highest outstanding loan to value ratio, at 56 per cent, meaning a lack of equity for home-owners is a bigger consideration.
This lack of equity is a very real constraint in some markets that have seen very weak house price growth over the past 10 years. For example, in markets such as Blackpool, Blackburn, Burnley and Middlesbrough outstanding loan to values exceed 70 per cent, making it difficult for those looking to move to take on more debt on competitive terms.
This article first appeared in Estates Gazette on 2 March 2017.