Rent not buy - the new normal for the housing market
Follow @PwC_NIBy Rachel Lund, PwC Economist
Like much of the rest of the economy, growth in house prices has stalled. The two leading indices of house prices (the Nationwide and the Halifax) show that in June house prices were slightly down on a year earlier, although the rate of decline in prices has slowed in recent months. The volume of transactions in the housing market remains well-below pre-crisis levels.
Projecting house prices is very difficult, particularly given the volatility of the economic situation. Our central projection shows house prices remaining broadly flat in 2012 and 2013 taken together, before growth starts in earnest later in the decade (see Table 1 below). However the range of uncertainty around any such projections is large.
Economic uncertainty and difficulty in obtaining credit is deterring buyers at present, with high loan-to-value and low interest mortgages now a rarity. Sellers are also steering clear of the housing market and this, in all likelihood, is keeping prices higher than they would otherwise be. With low interest rates and lenders willing to forebear, the pressure to sell is low. Added to that the number of houses coming to the market is low because potential sellers don’t want to realise a loss by selling a house at a lower value than the purchase price (this so-called ‘loss aversion’1 is a frequently observed human behavioural trait seen in many different contexts). However should further turmoil in the Eurozone lead to a widespread credit crunch, more households could be forced to sell, whilst demand for houses collapses. That could lead to double digit declines in house prices in such a downside scenario.
Despite the problems caused by short-term uncertainty; investors, businesses and policy makers should be preparing for the medium term. A shortage in the supply of houses has been a perennial problem in the UK and, once people start wanting to buy houses again, a lack of houses on the market could drive prices up quickly. Since 2009 the number of houses per person in the UK has actually shrunk as house-building ground to a halt during the recession. Even before then the rate of growth in the housing stock had been slowing for some time. Moreover, our analysis shows that houses were not being built in places where demand was highest (for a variety of political and regulatory reasons), leading to localised pressure on prices. This means that the effects of a shortage of housing supply in the medium term will be most severe in those areas with high growth prospects and limited land available to build on. For the investor this presents an opportunity to make strategic investments in houses, whilst for the policy-maker and the business considering where to locate this presents a challenge.
In the long run house prices will likely remain high relative to income by historic standards (Figure 1), although growth is likely to be restrained by the difficulty in getting credit. The new normal for the housing market will likely see fewer high loan-to-value ratios and access to mortgage finance for first time buyers becoming more difficult as a result – this will have a big impact on young aspiring house owners. Our calculations suggest that either young people will have to wait until their mid-to-late thirties to buy a house on their own, or they will have to become increasingly reliant on their families or partners to help out – an option which has become increasingly popular - according to research by the Council of Mortgage Lenders 84% of under 30s in 2010 who bought houses had assistance from family.
Either way, young people are likely to be saving and renting for longer and that means that serious investment (private and public) will need to go into the UK rental market to ensure it can meet this increased demand.
[1] This was first rigourously documented by Kahneman and Tversky. Kahneman, D. & Tversky, A. (1979). Prospect Theory: An Analysis of Decision under Risk. Econometrica 47, 263-291
This post is a summary of an article published in the July 2012 UK Economic Outlook, which can be found on our website.
Contact: Rachel Lund via email or +44 (0) 20 7213 3930
