The Global Financial Crisis

Global Financial Crisis
 
Side effects

27 July 2017, by Savills Research

Four ways the Global Financial Crisis continues to impact the housing market

 

For the UK property market, the short-term effects of the Global Financial Crisis (GFC) were dramatic and swift. The average UK house price fell by 20% in 16 months. Transaction levels, which had averaged 1.65 million a year in the previous 10 years, fell to 730,000 in the 12 months to the end of June 2009.

Ten years on, the crisis and its consequences have dramatically changed the property landscape. It was not until May 2014, for example, that the average UK house price recovered to its pre-credit crunch level, while transactions have only once risen above 1.3 million.

And, as we explore here, those events continue to have four significant impacts on the market and will shape it for many years to come.

 

In the year to the end of March 2017, the total spend on house purchases was £312 billion. Given persistently reduced transaction levels and changes in how they are made up, this is £30 billion less than was seen 10 years ago.

The amount funded by debt has fallen by even more, some £47 billion (see graphic, below). Now, debt accounts for just 43% of house purchase funding, with cash and accumulated equity the dominant source of funding.

This largely reflects the mortgage regulation measures that were introduced because of the credit crunch with the aim of preventing another debt-driven housing market boom.

FIGURE 1

Debt and equity The source of funds for house purchase and the change over the last decade (10 years to March 2017)

 
Figure 1

Source: Savills Research using CML and HMRC

 

With limits on the amount people can borrow, the high deposit required by a first-time buyer presents a significant barrier to younger households buying their first home.

That said, the amount of equity put down by first-time buyers exceeded £10 billion in the year to the end of March 2017, an 85% increase on 10 years ago. A lot of that, some £4.2 billion in England alone, is provided by the Bank of Mum and Dad or Help to Buy. Parental funding and government support are now heavily relied upon to help younger generations to get on the housing ladder. It is unlikely to change.

Occasionally, we read about the return of the 95% or 100% mortgage. However, gross mortgage lending at loan to values above 90% is still less than one-fifth of the £52 billion it was in 2007. Now, it represents less than 5% of mortgage lending.

A further consequence of this has been continued growth in the private rented sector. More people, across an increasingly wide social spectrum, are renting for longer. The demands on that sector will continue to evolve.

 

The debt taken on by home movers, which exceeded £112 billion 10 years ago, now stands at just £70 billion, a 37% decrease. This reflects a situation where people are trading up the housing ladder less frequently.

Compared to the preceding decade, when households could aggressively trade up the housing ladder, there have been 3.8 million fewer such moves by those needing a mortgage in the past 10 years. Any recovery in these numbers has been muted, suggesting this is likely to become a permanent feature of the market.

Long gone are the days where an interest-only mortgage would facilitate a move to a bigger, better property. Interest-only mortgages – which accounted for one-third of all new loans in 2007 – now represent just 1.2% of all lending to home owners.

Not only must home movers factor in the cost of capital repayments when they consider the affordability of making their next move, they also need to have paid off more of their existing mortgage debt and spent longer accumulating equity in their current home.

 

The army of small buy-to-let investors are now also within the scope of mortgage regulation. Portfolio landlords will follow shortly. This has come on the back of more politically motivated increases in stamp duty charges and restrictions of tax relief on interest payments.

Some thought that the combined effect of these measures would result in an exodus from the sector, with landlords cashing in. Instead, it has curtailed buying activity of those needing a mortgage to fund their next (or first) investment.

In the year to March 2016, buy-to-let lending was effectively back to where it was in 2007. Now it is at half those levels. This effect is likely to become even more entrenched as the progressive reduction in tax relief combines with rising interest rates to squeeze affordability.

Much like the rest of the market, cash has become king. With the Bank of England recently acting to ensure that mortgage regulation will be consistently applied by all lenders, across all aspects of the market, that is likely to be the lasting legacy of the credit crunch.

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