Two recently published housing market surveys highlight the beginning of change in the UK housing market. The effects of tighter mortgage lending criteria and the broader economic situation have filtered through to household behaviour as shown by the English Housing Survey and a report from the National Centre for Social Research (NCSR).

Ultimately, we believe the extent of these changes could be far more influential than the ‘right to buy’ introduced by Margaret Thatcher in The Housing Act 1980. The report published by the NCSR concluded that, given the size of the deposit now required to obtain mortgage finance, for 64% of current non-homeowners the prospect of home ownership is unrealistic.

Changes to the cycle

Offering plenty of supporting evidence, the English Housing Survey results show fewer households are currently forming. Those that do are now more likely to move into private rental accommodation than become owner-occupiers. For existing households, for the first time in at least a decade, there has been a net movement out of owner-occupation and into private renting.

A reduction in the number of those moving within the owner-occupied sector completes the picture. The mechanisms by which equity flows into and through the housing market are now only partially functioning, although this varies by location and sector of the market.

Impact on equity flows

Equity in the housing market comes from two main sources: savings and the sale of a previous property to fund the next one. Currently 38% of homeowners use savings and 55% use sale proceeds to finance their main residence.

Among first time buyers, the ability to raise a deposit through savings is heavily hampered by the current levels of deposit required, the low return on any existing savings and the struggle to save in the prevailing economic environment.

It is no surprise that for 67% of current non-homeowners, raising a deposit is regarded as a significant barrier to home ownership. Only 14% of these non-homeowners are actively saving towards a deposit.

This is undoubtedly a contributory factor to the formation of 55% fewer new owner-occupier households in 2009/10 than seen on average between 1999 and 2008. Conversely, the number of new households entering the private rented sector rose by 21%.

Other factors

The limited ability to accumulate savings or repay mortgage debt only partly explains the retreat of owner-occupiers into the private rented sector. During 2009/10, those who moved into private rented accommodation in England outnumbered those taking the more traditional route from private renting into home ownership by 72,000.

This is partly due to rising repossessions as a result of the recession. More fundamentally, they reflect a lack of recent house price growth, which has left some potential ‘upsizers’ with an insufficient equity cushion to encourage them to make the next move up the
housing ladder.

Consequently, terms such as ‘double renting’ and ‘let to rent’ have entered the housing market lexicon.

The future role of equity

The prospect of ongoing mortgage lending constraints raises the question of how equity will flow into, and through, the housing market in the future.

Some sectors of the market are able to function normally. The injection of overseas equity into prime central London, combined with new domestic wealth generation (particularly from the financial and business services sector), is compounding the already high levels of equity circulating in the prime markets.

The capacity for equity to be injected into UK mainstream markets is immediately more limited, however. This market depends on owner-occupiers repaying mortgage debt or transferring wealth from the older to younger generations. There is some evidence of mortgage debt repayment occurring, though it is likely to be a gradual and drawn-out process.

Bridging the equity gap

It seems the passing of housing equity down the generations will be critical to the future functioning of the housing markets, whether this is in the form of parents funding their children’s housing deposits or supplementing the equity built up by the children of the 1970s.  

Across the housing market as a whole, less than 6% of homeowners have used a loan or gift to finance the purchase of their current residence and less than 3% have used inherited money (see Graph 1.1).

Home ownership will come later in life for many future households because of the slow transference of housing equity. All of which means further increases in the private rented sector and a permanent structural change to our housing market.

Taken from:
Residential Property Focus, Q3 2011