This issue describes a UK housing market that is diverse and fragmented, where conflicting signals on activity and price growth confuse those who are trying to put together the jigsaw puzzle of house price forecasts. Download here.

While house prices inevitably catch the headlines, transaction levels arguably have much greater significance to the structure of the housing market.

They reflect peoples willingness and ability to get on, move up or step down the housing ladder. They impact on the capacity to absorb new housing supply both across the market as a whole and within individual subsectors. They dictate the demands on the private rented sector.

Overall in the year to the end of the second quarter of this year housing transactions were 39% below the 15-year pre-credit crunch average. Never before have we seen such a prolonged period of such low sales. Nor have we seen such a divergence in the transaction levels between the most and least affluent housing markets.

An improvement in those transaction levels is heavily dependent on an improvement in the availability of mortgage finance. Cash transactions, which account for 35% of all sales, are relatively buoyant being within 16% of the long run pre-crunch norm.

First-time buyer trends

Within the mortgaged market, the number of first-time buyers transactions had fallen prior to the credit crunch, reflecting a structural change in the housing market that has been exacerbated by the mortgage rationing that has followed.

Greater barriers to home ownership, most notably the cost of deposits relative to income, meant that in the five years pre credit crunch the number of mortgaged first-time buyers were 23% below those 10 years before.

Relative to that immediate pre-crunch number, current transaction levels in this sub-sector are suppressed but not as much as one might expect. This reflects the fact that the first-time buyer market had already become the domain of wealthier younger households, typically with the backing of older, equity rich generations.

Consequently, on average, the growth in the private rented sector averaged 217,000 households in the period from 2003 to 2007, most of which was absorbed by the 145,000 buy to let mortgages being granted on average each year in this period.

Slaves to the mortgage

The real beneficiaries of the pre-crunch credit boom were the mortgaged home movers, who were able to aggressively trade up the housing ladder. In the five years pre-crunch transaction levels of this subsector were 41% higher than in the 10 years before.

Since the credit crunch the mortgaged home movers have been hit particularly hard, with transaction levels down 57% on the five years pre-crunch and 50% down on the long run average.

Help to Buy

Against this historic context, the capacity for cash transactions to rise is most limited unless a new and much expanded downsizer market develops. The constraints faced by younger households in the mortgaged sector could provide the incentive for them to do so, with increased pressures for housing wealth to be passed between generations.

Otherwise the much maligned and misunderstood Help to Buy scheme represents one of the few other opportunities for deposit shy households to buy.

There are issues to overcome for those looking to plug into it. Exactly how keen lenders are to embrace it, remains unclear. The costs of servicing an interest and capital repayment mortgage where interest rates are at a premium to lower LTV products, will mean that it will be cheaper in the short term to rent.

For those already on the ladder but with little accumulated equity, the relatively high interest rates will mean the additional monthly outgoings will substantially increase where such households do make the move to trade up.

Furthermore, not all households with an aspiration to buy will be able to meet the bank and building society’s lending criteria.

This suggests that the curtains of the bank of Mum and Dad will still be twitching when there is a knock on the door. That is not to say that Help to Buy will not have an impact.

Indeed, we believe some 325,000 transactions could be facilitated by the mortgage guarantee element of Help to Buy in the next three years, as those buyers with a strong aspiration to build up their housing wealth and the income to do so take advantage of the scheme.

This is critical, as we expect the underlying growth in transactions to be limited to around 27% over five years, leaving transactions some 24% below a pre-crunch fully functioning market. Cash buyers will retain the upper hand.

The major beneficiaries of an increase in net mortgage lending are likely to be existing home movers, particularly those with a pot of existing equity.

Relationship with renting

There is little doubt that the private rented sector will continue to grow. Here is perhaps the biggest issue. The fall in buy to let lending means meeting this demand will fall to the cash rich investor and the institutions.

They could, if they are brave and receive sufficient government support, be on the cusp of revolutionising the provision of private rented housing. This will be critical in the polarised housing market of the next five years.

Taken from
Residential Property Focus Q4 2013

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