The UK housing market: A ‘new normal’ for first time buyers?
05 May 2015
It seems not too long ago that many commentators were expressing concerns about the possibility of another dangerous bubble forming in the UK housing market. Rapidly increasing prices in London, and a “structural shortfall” in the number of homes being built were just two of the factors combining to lend credibility to the view that the market was in danger of overheating.
From media coverage it would be easy to reach much the same conclusion. Column after column and webpage after webpage were devoted to speculation about rising house prices, the best areas too buy and how first time buyers were being locked out of the market.
However, if we consider metrics such as average loan to value ratios and the proportion of income spent on servicing mortgage debt we see that these are still relatively low compared to the last bubble. This in itself is suggestive that the market could support further price increases. The market’s more prudent approach to lending (no more 95% to 110% mortgages as standard!) should also help reduce the risk of a bubble forming by limiting the potential for prices to be driven up by “easy” finance,
But where does all of this leave the beleaguered first time buyer? Those that now need to find a larger deposit than at most points since the eighties and who have also seen houses become increasingly expensive when compared to average wages?
In contrast to previous generations today’s first time buyers are increasingly reliant on assistance to get on the property ladder. Whilst the importance of the “bank of mum and dad” continues to grow the Government’s Help to Buy schemes have also been instrumental in boosting the number of first time buyers over the last year. Parental largesse coupled with Help to Buy mortgage guarantees and equity loans have allowed those buyers to secure mortgages that would otherwise be unavailable to them. But just how sustainable is this situation?
Absent a catastrophic collapse in house prices and/or hyperactive wage inflation it appears safe to say that the affordability of housing (vs average salary) is unlikely to improve significantly in the medium term. The scarcity of 95%+ mortgages coupled with the end of the Help to Buy equity loan scheme in 2020 will therefore hit first time buyers struggling to save ever increasing deposits. If that wasn’t bad enough the expected increase in interest rates will also see the monthly costs of servicing a mortgage increase even as the Help to Buy mortgage guarantee scheme draws to a close in 2016.
Over the medium term the situation facing first time buyers therefore has the potential to be more challenging than perhaps at any other time in the last 30 years. The question we are then forced to ask is could the last three decades turn out to be an aberration or could we be headed for a ‘new normal’ in the housing market?
Could we see the numbers able to “self-finance” continue to contract and a market evolve where shared ownership, government guarantees and loans and parental support become standard? Will the new pension freedoms see more parents cannibalising their retirement savings to help their children onto the property ladder?
Are we about to enter an era where people take their first step onto the property ladder increasingly later in life and where mortgage terms of over 25 years become more prevalent? Or could we see a slow but steady structural decline in the home ownership rate in the UK, with home ownership becoming little more than a distant dream for the young? Could this also see a corresponding increase in the demand for high quality rented accommodation from private landlords, Housing Associations and perhaps even Local Authorities?
It would be foolhardy for me to make any firm predictions but it’s certainly worth asking the question about what a “new normal” might look like. Not just because of the role that home ownership plays in the UK psyche but also because of the wider economic implications of any such evolution in the market.