So, what do falling house prices, the growth of negative equity, a shortage of mortgage funding and larger deposits for home-buyers mean for long-term aspirations to home-ownership? These – and other – questions were answered by our head of research, Bob Pannell, in a presentation he gave earlier this month at the annual conference of the National Housing and Planning Advice Unit.
Four years ago, we published research showing that the number of first-time buyers was declining, partly as a result of sharply rising house prices and the need for larger deposits, and that this could have profound consequences for the wider housing market and long-term tenure patterns.
Over the last 18 months or so, we have, of course, seen a sharp fall in house prices – of approaching 20%. On the face of it, that should have made it easier to buy a first home but the reality is that there has been no improvement in the underlying affordability position of first-time buyers. That is because for these buyers the benefits of falling house prices have been fully offset by more restrictive lending criteria. Since we published our research four years ago, the typical deposit required by a first-time buyer has risen from 10% to 25%.
In recent years, more than half of all first-time buyers have been aged under 30. By studying their incomes and making assumptions about their likely ability to save towards a deposit for a house, we can make a reasonable assessment of the numbers of first-time buyers that could have been expected to have saved a deposit from their own resources and those that are likely to have received financial help, usually from parents or another relative.
As recently as 2007 – before the start of the market correction that has dramatically reduced house prices – we concluded that around 40% of young first-time buyers were relying on parents or other relatives for financial support. A year later, that had nudged up to around 50%, and now it stands at 80%.
At a time when lower house prices are likely to have reduced both the desire and the ability of many parents to tap into their own housing wealth to help their children buy a home, it is not difficult to understand why first-time buyer number haves slumped. In 2008, there were just 200,000 first-time buyers – the lowest total for at least 40 years.
Somewhat surprisingly, however – given the squeeze facing prospective first-time buyers – our figures show that their overall share of house purchase transactions has actually climbed a little over the past two years, from 35% to 39%.
Total property transactions last year were barely half the level of 2007, and the turnover of the private housing stock is now almost certainly at a post-war low. The housing market is not in a healthy state – it is difficult to form and complete chains of transactions, and there is a dearth of property sales, meaning that reported house price movements are volatile and that, in itself, exacerbates and feeds market uncertainty.
The phenomenon of negative equity is another reason for the current low turnover of housing stock. Many households appear to be responding to the re-emergence of more widespread negative equity in exactly the same way as many did in the early 1990s – by sitting tight and not moving, but carrying on paying their mortgage and making efforts to increase their savings. That is not disastrous, but not without a degree of pain either. It is, however, part of the process of reducing household debt.
Some commentators are now suggesting that the current tightening of housing supply – driven by scaled-back construction plans – will contribute to a sharp upturn in the housing market. But we do not believe that this is the most likely scenario.
While the worst of the economic recession now appears to be behind us and there will be a steady recovery in due course, its pace is likely to be tempered by a need to address the fiscal shortfall and scale back credit support measures in the medium term.
The UK mortgage market has, of course, experienced a significant loss of lending capacity. We believe, however, that funding conditions will progressively improve, although probably only in line with – rather than ahead of – a gradual improvement in the wider economy. We also expect structured finance to re-emerge in due course, although not on the same scale as before.
All of this reinforces our central view that there will be a tentative, relatively weak recovery in the housing market in due course. Indeed, there has already been a pick-up in buyer interest – although some of it is seasonal, some from cash investors who believe prices are near their floor, and some from overseas purchasers benefiting from the weakness of sterling.
We are going through a challenging and difficult transition, and lenders, developers, planners and households are all affected. The result may be that the base of home-ownership is a little narrower than in the recent past and the prospects of capital gains from home-ownership somewhat more modest.
We have, however, been asking households about their tenure preferences for many years. What their answers show is that in the short term preferences for home-ownership – particularly among young adults – ebb and flow in line with housing market conditions. But as the chart shows, underlying, long-term aspirations to home-ownership have been remarkably resilient for a very long time – including through earlier difficult times.
