Residential Property Focus

Residential Property Focus
Swimming Against The Tide

5 November 2015, by Neal Hudson

Reversing falls in homeownership will present a major challenge for the Government.


Homeownership may be in decline but the majority of households in the UK still own their own home. The Government is now focused on reversing the decline through policies such as Right to Buy and Starter Homes. However, this will require balancing the interests of existing homeowners against those of prospective buyers. The result of this balancing act will determine the future shape of the housing market.

"Rather than creating a nation of homeownership, it appears we have created a generation (or two) of homeowners"

Neal Hudson, Savills Research

Homeowners and housebuilding

Large numbers of older households have benefited from over two decades of house price growth and many now hold substantial amounts of housing equity. This creates an incentive to preserve house prices at existing levels or higher. Unfortunately, those high house prices also create a barrier to new buyers, particularly through the size of deposit they need to obtain.

Meanwhile, housebuilding is below the levels required to meet housing need, putting further pressure on existing homes and affordability. Private sector housebuilding is constrained by capacity in the sector, the availability of land and the scale of demand at current price levels. The Government’s policies should go some way to resolving these issues but substantially increasing delivery to a level that reverses the decline in homeownership will be a significant challenge for the Government.

Scale of the challenge

Recent work by the Council of Mortgage Lenders shows the scale of the challenge the Government faces. Analysis of homeownership by age cohort shows that around 64% of households born in either 1960 or 1970 owned their own home by the age of 35. For those born in 1980, the figure falls to 44% and they predict that only 39% of those born in 1990 will own their home by the time they reach 35 years old. Rather than creating a nation of homeownership, it appears we have only created a generation (or two) of homeowners.

However, the financial realities of the housing market mean that many will be unable to take advantage, reflecting the fact that the housing market is closely interlinked with our low inflation and high debt economy. Tackling just one or two parts of the housing market is unlikely to be sufficient and may even end up in worse outcomes for some people. Even with Starter Homes contributing to higher private sector new build supply, house prices are likely to remain high relative to incomes. This means deposit requirements will remain a substantial barrier to prospective first-time buyers in many parts of the market.


Homeownership by age cohort

Figure 3

Source: Council of Mortgage Lenders


Under this scenario, housing market turnover will remain constrained by mortgage availability with cash-only buyers a significant proportion of the market (currently 36% of transactions). We therefore forecast turnover to be constrained to around 1.3 million transactions per year by 2020.

Meanwhile, the social rented sector is coming under renewed pressure and looks set to shrink further as people transfer into owner-occupation. This suggests the private rented sector will continue to grow in coming years as it remains the only option for those priced out of homeownership but not qualifying to live in the shrinking affordable housing sector.

This presents a continued opportunity for investors. However, the ability of debt-laden, buy to let investors to take advantage of it will be limited by a combination of increased interest rates and reduced tax relief on the resulting costs of servicing a mortgage.

This means we need to both continue building new homes across the full spectrum of housing tenures and encourage large-scale institutional investment. Ultimately that would help to ensure that all people have somewhere affordable to live and give them a better chance to save a deposit that may one day turn them into homeowners.


Forecasts for change in transaction numbers over five years and distribution in 2020 in the UK

Figure 4

Source: Savills Research

Forecasting Rents

Traditional rental demographic will continue to grow

Rental affordability is already very stretched for many households and so the prospects for rental growth are largely limited to underlying wage growth. Households living in the private rented sector already pay more as a percentage of their income than those living in other tenures. Many are reliant on housing benefit or live in larger household groups to make the tenure more affordable.

Rental markets that are heavily dependent on housing benefit tenants such as some of the seaside towns along the south coast and parts of the northern urban belt will come under renewed pressure due to Government policy (our rental forecasts are for non-housing benefit dependent tenancies).

The traditional rental demographic of sharers and young professionals looks set to continue growing as the cost of buying limits the number able to make the move into homeownership. These groups are likely to benefit most from the forecast wage recovery and this will drive the majority of rental growth in coming years.

However, in some high demand – low supply rental markets, we may see more people living in larger household groups and this could contribute to higher rental growth, albeit for properties that have the flexibility to allow for this.


Mainstream rental growth forecasts

Figure 5

NB: These forecasts do not apply to housing benefit dependent tenancies. They also only apply to average rents in the second hand market. New build rental values may not move at the same rate
Source: Savills Research


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