Residential Property Focus

Residential Property Focus 2015 Issue 2
 
Post-Election Prospects

24 June 2015, by Lucian Cook

Will we see a surge of demand back into the housing market?

 

The UK housing market slowed in the early part of 2015. Transactions and mortgage approvals in the first quarter of the year were 5.4% and 11.9% lower than in the same three-month period of 2014. Given the general election in May, it would be easy to put this sobriety entirely down to uncertainty regarding the political backdrop in the early part of the year.

However, the housing market survey from RICS indicates that new buyer enquiries had started to weaken as early as the middle of 2014, suggesting other forces have also been at work.

The Nationwide house price index supports this view, indicating that in the nine months to the end of May of this year UK house prices rose by a total of just 3.1%. Furthermore, three- month-on-three-month house price growth (which irons out monthly price fluctuations but still gives a reasonable snapshot of where the market is at any given point in time) slowed to just 0.9%, quashing claims that the stamp duty reform introduced in the pre-election Autumn Statement would cause a bounce in mainstream house prices.

"Different generations increasingly view house price growth differently"

Lucian Cook, Savills Research

Behind the slowdown

These numbers undoubtedly reflect the fact that the Bank of England, keen to avoid another debt-driven housing market boom, has imposed more regulation on mortgage lending. By requiring lenders to stress test affordability in different interest rate scenarios since April last year, they have sought to prevent the prolonged period of low interest rates fuelling unsustainable price growth that might cause borrowers and lenders problems further down the line.

The Bank’s own credit conditions survey shows the impact of that regulation, with a corresponding contraction in the availability of secured credit in the third quarter of last year and first quarter of this. This has been accompanied by a consistent fall in the proportion of mortgage applications being approved, despite loan defaults among existing borrowers falling and expectations that interest rates are likely to stay at historic lows for longer (and only rise gradually when they come off of this base).

The flipside

The flipside is that this has also limited, and will continue to limit, access to home ownership. This creates a tension between the Bank’s desire to minimise risk in the housing market and politicians’ desire to get people onto the housing ladder, in order to provide them with a means of attaining financial security.

This desired financial security includes the aspiration that households will be able to reduce housing costs over time and eliminate them in retirement by progressively paying down mortgage debt.

This is something that has served the baby boomer generation well. For example, our analysis shows that average annual housing costs where the head of the household is aged 65+ average just over £2,000 per year across England and Wales, the bulk of which relates to the minority who never realised the dream of home ownership. For those between the ages of 50 and 65 that cost averages £4,400 per year.

By contrast, the average for households under the age of 35 is just shy of £8,900, with rents paid to private landlords making up 57% of this sum. In London, where housing affordability is most stretched, that rises to £15,700 on average of which two thirds is made up of private rent.

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FIGURE 1

Average annual cost of housing

 
Figure 1

Source: Savills Research

Changing perceptions

This means different generations increasingly view house price growth differently: at one end of the scale as a wealth generator, at the other as a barrier to home ownership which causes rent to make up a higher proportion of their lifetime housing costs.

These figures should be a reminder to politicians that there are major structural issues in the housing market that cannot be ignored – a widening gap between different generations and regional differences that are no longer confined to a simple north-south divide given the extent to which the London market appears to have become dislocated from the rest of the country.

Whatever the policy response, these issues will change market behaviour. It will affect where people are able or choose to live, how often they move, how far they commute and their propensity to downsize in retirement.

But none of this seems likely to dampen the nation’s obsession with house prices.

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FIGURE 2

Mainstream markets: Five-year forecast values

 
Figure 2

Source: Savills Research

Whether or not price growth is considered a good thing, it seems inevitable that it will continue in what remains a fundamentally undersupplied market. As things stand, the medium term capacity for house price growth has increased as interest rate rise expectations have softened.

However, while greater political certainty provides a platform for that growth, the extent to which it is realisable is likely to be constrained (to a degree at least) by the mortgage regulation already imposed.

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