Housing market activity has picked up significantly this year with every month bringing a fresh batch of bullish data. Mortgage lending, house prices and transactions are all beginning to show signs of life, even outside the bright lights of London. This raises the question of whether this is the start of a meaningful recovery or a short-lived bounce similar to that seen in 2010?
Most indicators are now at or above the levels seen in 2010 during the early bounce back from the downturn. Average house prices are up 4.1% over the year according to the Nationwide index, while transaction levels are at their highest since October 2008. At 625,000 a year, annual mortgage approvals for house purchases are at their highest since July 2010.
Yet despite all the apparent record breaking, all three of these indicators are substantially below their longer-term pre-crunch averages. Behind the average statistics, the market remains fragmented with parts of the country still experiencing price falls.
Debt and equity
The post-credit crunch housing market has been characterised by low mortgage rates and homebuyers’ struggle to raise a deposit. Mortgages offering high loan-to-value ratios, popular in the noughties boom, are now scarce. Lenders’ demand for bigger deposits coupled with high house prices, means buyers are now required to save at least 70% of their income (120% in London).
Affordability and mortgage constraints have pushed many into the housing market’s overflow tank – the private rented sector. Although the private rented sector has been growing for the last decade, demand for rental homes has accelerated since 2009 and has been most acute in London where the economic recovery has been strongest.
In areas where house prices have fallen significantly, the scarcity of high loan-to-value mortgages have created a generation of mortgage prisoners who would be unable to buy or remortgage their existing home in the new lending environment.
But not everyone in the market has suffered. The substantial drop in base rates and hence mortgage repayments has allowed many existing homeowners to ride out the recession in relative comfort. Some have even taken advantage of low rates to pay off their debt. This has created a bigger split between equity rich homeowners, usually older generations, and those struggling to get a foot on the housing ladder.
Government intervention
The plight of first-time buyers has prompted the Government to launch a number of schemes over the years aimed at improving activity in the housing market. Most have focussed on the new build sector and have had a limited impact overall.
The latest scheme, Help to Buy, goes further than any of its predecessors and is aimed at all buyers, not just first timers.
But the main driver of the current improvement in activity this year has been the Bank of England’s Funding for Lending Scheme (FLS). The primary purpose of FLS is to provide banks with below market rate funding while they restore their capital positions. The side effect of increased lending has fed through to the housing market rather than business lending.
The biggest effect of FLS has been to drive down mortgage rates across all product types, including mortgages at higher loan-to-value ratios. While overall, mortgage rates are not as cheap as the market leading deals that are advertised, actual borrowers’ rates are down substantially.
Blowing a bubble?
Inevitably the prospect of rising house prices has led people to question whether we are seeing the beginning of another bubble. But behind the headlines, the increase in market activity has been due to increased turnover of existing debt rather than the creation of new debt.
Overall, the improvement in market activity is a welcome sign as increasing turnover will contribute to economic growth and hopefully rising incomes will allow housing market affordability to rebalance over the medium to long term.
However, looking ahead, although we are unlikely to see any increase before 2015, interest rates rises could dampen the housing market recovery. After four years of official rates at the current unprecedented low of 0.5%, higher borrowing costs will place a heavy burden on homeowners who stretched themselves when rates were low. The affordability squeeze may act as a brake on future house price growth.
Source: Savills
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