Financial crisis ‘still shaping UK housing market’ decade later, says report

The global financial crisis triggered a transformation in the housing market in the United Kingdom and is still shaping it a decade later.

So says a new report from property company Savills who suggest that the aftershocks of the credit crunch will continue to be felt in the UK housing market for years to come.

housing market - house keysA decade after the credit crunch, home owners are trading up less frequently in the UK housing market, says a new report. Image: pixabay-2368389

Savills say that the global financial crisis started when international banking group BNP Paribas froze three funds on 9 August 2007, followed a month later by £1 billion in one day being withdrawn from Northern Rock.

The report says the crisis wrought major changes in the UK housing market.

In the last 10 years, there has been a dramatic drop in total spend on house purchases, first-time buyers have become heavily reliant on parental and government help, and home movers are struggling to trade up-market.

There is also a greater demand on the private rented sector as it becomes a long-term solution for many.

The report also highlights a “huge gap” between London and the rest of the UK.

Fall in total spend

At £312 billion in the year ending March 2107, the total spend on house purchases was £30 billion less than it was 10 years ago, reflecting a reduction in transactions and dramatic changes to how they are made up, says the report.

The amount of total spend on house purchasing funded by debt fell even further, by some £47 million. Cash and equity have become the dominant source of funding, with debt now accounting for less than half (43 percent).

Savills suggest that this shift from debt-dominant to equity-dominant house purchasing “largely reflects” the new mortgage regulations that were brought in following the credit crunch to prevent another debt-driven boom in the housing market.

First-time buyers

The make-up of transactions involving first-time buyers has changed dramatically since the credit crunch.

The amount of equity they put down to buy their first house has risen by 85 percent in the past decade and has reached an annual total of around £10 billion.

A lot of first-time buyer equity, say Savills, comes from “the bank of Mum and Dad,” or from the government’s Help to Buy scheme. In England alone, this totalled some £4.2 billion in the year up to March 2017.

Young people wanting to get on the housing ladder are likely to continue to rely heavily on financial help from parents or the government, notes the report.

In 2007, loan values at over 90 percent of the house price accounted for around one-fifth of the £52 billion of mortgage lending. Today, such loans account for less than 5 percent.

Meanwhile, average first-time buyer deposits have more than doubled over the last decade, from £12,556 to £26,224, while average first-time buyer income has increased by only 17 percent (from £34,200 to £40,002).

Such trends have also driven growth in the private rented sector. More people across the “social spectrum” are renting longer, say Savills.

Home owners

There has been a considerable drop in the debt taken on by existing home owners moving up the ladder: this now stands at £70 billion, a 37 percent drop from the £122 billion of a decade ago.

Home owners are also trading up less frequently.

Interest-only mortgages today account for just 1.2 percent of new loans, a considerable drop from the one-third of loans that they represented in 2007.

“Long gone are the days where an interest-only mortgage would facilitate a move to a bigger, better property,” notes the report.

Most home owners must now pay off more of their existing mortgage and spend longer building up equity in their current home before they can think about moving.

Private rented sector

The mortgage regulation that was introduced following the credit crunch also affects small buy-to-let investors, while new rules coming into force soon are expected to cause major headaches for landlords who own four or more mortgaged buy-to-let properties, the so-called “portfolio landlords.”

The new rules mean that every time a portfolio landlord wishes to buy a new property or refinance an existing one, they will have to submit details about the income and borrowing on all their other properties.

This will result in extra paperwork not only for landlords but also for lenders, and may cause some to withdraw from the sector altogether.

By March 2016, buy-to-let lending had climbed back to the level that it was before the credit crunch in 2007. But now, it has fallen to half that level. Savills say this unlikely to change as “progressive reduction in tax relief combines with rising interest rates to squeeze affordability.”

Regional divide

Savills report that while house prices have risen in most regions of the UK in the past 10 years, the housing market is now “more divided at a regional level than ever before.”

Since the credit crunch, the growth in house prices in London has been double that of the South East.

After analyzing data from the Land Registry and other sources, Savills say that house prices in London have risen by an average of 78 percent. This is in stark contrast to other regions, some of which have even seen prices fall over the last decade. For instance, in the North East, they have fallen by 9 percent.

In London, house buyers are stretching their borrowing to over four times their income levels, and this is pushing them to seek properties in areas they might not have considered before the crisis.

House prices in lower-value commuter towns like Harlow, Slough, and Stevenage have shot up by 50 percent in the last 10 years.

Other urban regions, such as Brighton, Cambridge, and Oxford, “have parallels with London, both in
terms of the price growth and the affordability issues they now face,” say Savills.