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The UK housing market is broken and in need of urgent treatment
Global Banking & Finance Review®
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By Colin Bell, Co-Founder and COO, Perenna
The growing house price bubble is a worrying sign that something is broken within the market. House prices are spiralling while stock is dwindling, and with further changes to affordability stress testing to reflect rising cost of living on the near horizon, the prognosis is pretty bleak for prospective buyers. We will need to rid ourselves of these pressure points if we are to change this. Building new housing stock while addressing the cost-of-living crisis will be no small feat and is long overdue, but it will be crucial to helping would-be buyers. But first, let us delve into the industry’s ailments in more depth.
Market temperature check
House price growth has dominated the news agenda for many months now and remains a huge cause of concern for aspiring homeowners. The latest figures from Halifax affirm that house prices continue to defy broader economic conditions, growing by another 0.5% in February.[1] This equates to an average of £370 per week.[2] Strong house prices can be good news – in terms of the options they open to existing homeowners, and the reassurance that they offer to the market – but not when they are out of control. The reasons behind this recent growth are complex and hotly contested, but many would agree that pent-up demand from the pandemic and changing consumer priorities go some way to explain the uptick.
The long-standing imbalance between housing supply and demand also has a lot to answer for. The latest data from the Department for Levelling Up, Housing & Communities revealed that 216,490 net additional dwellings were added to England’s housing stock in 2020-21, a drop of eleven percent on 2019-20.[3] Despite all the complexity surrounding other factors, we quite simply need to build more properties if we are to house more would-be buyers. The boost in supply should also help to subdue house price inflation, unlocking doors for those with smaller budgets. The cost-of-living crisis, record inflation, and rising interest rates also offer fresh challenges to the market. The long-term impact of these developments is yet to be seen, but their existence has prompted some would-be buyers to pause their purchases for the time being. We also need to reconsider the stamp duty position which is affecting people’s desire to sell and up trade, preferring to enhance and save stamp duty – this also locks the market.
Bleak outlook for first-time buyers
These market developments all culminate in creating a bleak outlook for first-time buyers. As such, the average age of a first-time buyer is now 34, up from 32 in 2020.[4] To put this into context the average age of a first time buyer in the 1960’s was 23 – a number which has slowly increased since.[5] The research, commissioned by Keepmoat Homes, suggests that would-be buyers had to cough up a deposit of just £595 for their first home in 1960, the equivalent of around £12,000 today.[6] With estimates of the average deposit needed today varying between £50-65,000,[7] the generational gap is clear to see. As such, more than two-thirds of under-25s are renting properties, up from less than half twenty years ago,[8] giving rise to the term ‘Generation Rent’.
Could the Bank of England’s consultation on stress testing be a suitable treatment?
The Bank of England’s announcement of a consultation to withdraw its affordability test hit the headlines last month and has been offered as one solution to the UK housing crisis. Loosening the stress testing requirements may be key to helping borrowers to access a larger mortgage or their first mortgage. Indeed, the Bank of England estimates that the current affordability test is restricting around 30,000 borrowers to smaller mortgages each year.[9] However if the Loan to Income test (LTI) remains in force it will likely offset any general affordability improvement.
This move does pose various problems, concerns have been shared around the boosted accessibility and how it might stretch the high demand and property prices that would-be buyers are already battling. It is also worth remembering that the affordability test was introduced to ‘guard against a loosening in mortgage underwriting standards which could lead to a material increase in… the number of highly indebted households.’[10] Clearly, given the threat of rising inflation and rising living costs, the threat of more indebted households is particularly concerning.
Looking for solutions overseas
Perhaps the solution lies overseas, in countries such as Denmark, that offer a simple, low-fee mortgage framework that offers long-term security, with the flexibility to switch if you so wish. Long-term fixes, naturally, allow a borrower to fix and stretch the repayments over a greater period, making each monthly payment smaller. This can lower the risk of missed instalments, boosting the confidence of the lender and borrower. Periods of high inflation also remind us of the value in the peace of mind offered by fixed repayments – as such, we believe 2022 will be a watershed year for borrowers locking in for longer.
Revisiting LTI criteria and offering more 95% Loan to value mortgages will also be a significant help to many underserved borrowers, particularly those who have spent a large portion of their savingson renting. Perenna is aiming to address both these issues by supporting first-time buyers in purchasing a home worth up to six times their household income, with only a five percent deposit.
To conclude , the housing market is broken, but certainly not beyond repair. Curbing inflation, boosting our housing stock and, crucially, introducing more long-term fixed rate mortgage products will all bring the dream of homeownership closer to reality for many. It is fantastic to see market activity retain its strength, now let’s ensure it is accessible to would-be buyers.
[1] https://www.theguardian.com/business/2022/mar/07/uk-house-prices-rise-at-fastest-rate-in-15-years-says-halifax
[2] Ibid.
[3] https://assets.publishing.service.gov.uk/government/uploads/system/uploads/attachment_data/file/1035653/Housing_Supply_England_2020-21.pdf
[4] https://www.ftadviser.com/mortgages/2022/03/15/covid-pushes-up-average-age-of-first-time-buyers/
[5] https://www.independent.co.uk/property/first-time-buyer-age-increase-1960s-housing-market-cost-property-ladder-a8244501.html
[6] Ibid.
[7] https://home.barclays/news/press-releases/2022/03/number-of-first-time-buyers-doubles/
[8] https://www.ftadviser.com/mortgages/2021/03/17/how-to-turn-generation-rent-into-generation-buy/?page=2
[9] https://www.bankofengland.co.uk/paper/2022/withdrawal-of-the-fpcs-affordability-test-recommendation
[10] Ibid.
A mortgage is a loan specifically used to purchase real estate, where the property serves as collateral. Borrowers repay the loan over time, typically with interest, until they fully own the property.
Affordability stress testing is a process used by lenders to assess whether a borrower can afford mortgage repayments under various economic conditions, including interest rate increases and changes in income.
A first-time buyer is an individual or couple purchasing their first home. They often face unique challenges, such as higher deposits and limited access to affordable housing.
Stamp duty is a tax paid on property purchases in the UK. The amount varies based on the property's price and is typically paid by the buyer at the time of purchase.
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